Legislature(2007 - 2008)TERRY MILLER GYM
06/05/2008 09:00 AM House RULES
| Audio | Topic |
|---|---|
| Start | |
| HB3001|| SB3001 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | HB3001 | TELECONFERENCED | |
ALASKA STATE LEGISLATURE
JOINT MEETING
HOUSE RULES STANDING COMMITTEE
SENATE SPECIAL COMMITTEE ON ENERGY
June 5, 2008
9:03 a.m.
MEMBERS PRESENT
HOUSE RULES
Representative John Coghill, Chair
Representative John Harris (AGIA Subcommittee, Chair)
Representative Anna Fairclough
Representative Craig Johnson
Representative Ralph Samuels (AGIA Subcommittee)
Representative Beth Kerttula (AGIA Subcommittee)
Representative David Guttenberg
SENATE SPECIAL COMMITTEE ON ENERGY
Senator Charlie Huggins, Chair
Senator Bert Stedman, Vice Chair
Senator Kim Elton
Senator Lyda Green
Senator Lyman Hoffman
Senator Lesil McGuire
Senator Donald Olson
Senator Gary Stevens
Senator Joe Thomas
Senator Bill Wielechowski
Senator Fred Dyson
Senator Thomas Wagoner
MEMBERS ABSENT
HOUSE RULES
All members present
SENATE SPECIAL COMMITTEE ON ENERGY
All members present
OTHER LEGISLATORS PRESENT
Representative Bob Buch
Representative Mike Chenault
Representative Sharon Cissna
Representative Harry Crawford
Representative Nancy Dahlstrom
Representative Andrea Doll
Representative Mike Doogan
Representative Bryce Edgmon
Representative Les Gara
Representative Berta Gardner
Representative Carl Gatto
Representative Mike Hawker
Representative Lindsey Holmes
Representative Kyle Johansen
Representative Reggie Joule
Representative Scott Kawasaki
Representative Wes Keller
Representative Mike Kelly
Representative Gabrielle LeDoux
Representative Bob Lynn
Representative Kevin Meyer
Representative Mark Neuman
Representative Kurt Olson
Representative Bob Roses
Representative Woodie Salmon
Representative Paul Seaton
Representative Bill Stoltze
Representative Bill Thomas
Representative Peggy Wilson
Senator Con Bunde
Senator Bettye Davis
Senator Johnny Ellis
Senator Hollis French
Senator Gene Therriault
Senator Gary Wilken
COMMITTEE CALENDAR
HOUSE BILL NO. 3001
"An Act approving issuance of a license by the commissioner of
revenue and the commissioner of natural resources to TransCanada
Alaska Company, LLC and Foothills Pipe Lines Ltd., jointly as
licensee, under the Alaska Gasline Inducement Act; and providing
for an effective date."
- HEARD AND HELD
SENATE BILL NO. 3001
"An Act approving issuance of a license by the commissioner of
revenue and the commissioner of natural resources to TransCanada
Alaska Company, LLC and Foothills Pipe Lines Ltd., jointly as
licensee, under the Alaska Gasline Inducement Act; and providing
for an effective date."
- HEARD AND HELD
PREVIOUS COMMITTEE ACTION
BILL: HB 3001
SHORT TITLE: APPROVING AGIA LICENSE
SPONSOR(s): RULES BY REQUEST OF THE GOVERNOR
06/03/08 (H) READ THE FIRST TIME - REFERRALS
06/03/08 (H) RLS
06/03/08 (H) WRITTEN FINDINGS & DETERMINATION
06/04/08 (H) RLS AT 9:00 AM CAPITOL 120
06/04/08 (H) Heard & Held; Assigned to Subcommittee
06/04/08 (H) MINUTE(RLS)
06/05/08 (H) RLS AT 9:00 AM TERRY MILLER GYM
BILL: SB 3001
SHORT TITLE: APPROVING AGIA LICENSE
SPONSOR(s): RULES BY REQUEST OF THE GOVERNOR
06/03/08 (S) READ THE FIRST TIME - REFERRALS
06/03/08 (S) ENR
06/03/08 (S) REPORT ON FINDINGS AND DETERMINATION
06/04/08 (S) ENR AT 10:00 AM TERRY MILLER GYM
06/04/08 (S) Heard & Held
06/04/08 (S) MINUTE(ENR)
06/05/08 (S) ENR AT 9:00 AM TERRY MILLER GYM
WITNESS REGISTER
LESA ADAIR
Muse Stancil & Co.
Addison, Texas
POSITION STATEMENT: Continued her presentation titled
"TransCanada Gas Pipeline and Storage Assets."
DAN DICKINSON, Certified Public Accountant (CPA), Consultant
Legislative Budget and Audit Committee
Alaska State Legislature
Anchorage, Alaska
POSITION STATEMENT: Provided his presentation titled "Some
things to look for and ask about in the AGIA License
Determination."
JOHN NERI, PhD, Consultant
Benjamin Schlesinger & Assoc., Inc.
Bethesda, Maryland
POSITION STATEMENT: During hearing, answered questions.
BARRY PULLIAM, Consultant
Econ One Research, Inc.
Los Angeles, California
POSITION STATEMENT: During hearing, answered questions.
ACTION NARRATIVE
REPRESENTATIVE RALPH SAMUELS called the joint meeting of the
House Rules Standing Committee Subcommittee on AGIA and the
Senate Special Committee on Energy to order at 9:03:17 AM.
HB 3001-APPROVING AGIA LICENSE
SB 3001-APPROVING AGIA LICENSE
REPRESENTATIVE SAMUELS announced that today Ms. Adair would
continue her presentation titled "TransCanada Gas Pipeline and
Storage Assets."
9:04:00 AM
LESA ADAIR, Muse Stancil & Co., reviewed the matters that she
would discuss today as specified on slide 33 of the presentation
titled "Financial Assessment of the Impact of the Alaska Gas
Pipeline." Referring to slide 34 titled "TransCanada Gas
Pipeline and Storage Assets", Ms. Adair related that the table
on this slide is from the TransCanada Alaska Company, LLC
(TransCanada), web site and the numbers presented from 2006
aren't that different than those for 2007. The table
illustrates that TransCanada has significant gas throughput on
its systems. She emphasized the need to keep in mind when
reviewing these numbers that some of these systems feed into
other systems. Therefore, one can't view each [of these
throughputs] as individual modules of gas that are independent
of one another. There is double counting, she highlighted. For
instance, some of the gas that comes on the Alberta System may
also flow into the Canadian Mainline system. Ms. Adair informed
the committee that TransCanada has both wholly owned and
affiliated interests in pipelines. It's certainly the case that
for some of these affiliated systems there are multiple owners,
she noted. TransCanada also owns TC PipeLines, LP, which is a
publicly held limited partnership that owns some of the
affiliated interests as well. She then relayed that the
appendix of the handout includes more detailed information with
regard to individual systems and their origin and termination
points. Referring to slide 35 titled "Canadian Gas Pipelines,"
Ms. Adair reviewed that the Alberta System gathers natural gas
for the Canadian Mainline and connects to the BC System, the
Foothills System, and other pipelines in the area. The Canadian
Mainline extends into Eastern Canada and delivers natural gas to
Northeastern U.S. She informed the members that Foothills is
bringing natural gas from Alberta to markets in the U.S.
Midwest, Pacific Northwest, California, and Nevada. Ventures
LP, she related, supports natural gas demand in the oil sands
region while TQM transports from the Canadian Mainline to Quebec
City and connects to the Portland system.
MS. ADAIR, referring to slide 35 titled "Gas Storage Overview,"
explained that the yellow triangles on the map represent the gas
storage projects owned by TransCanada, which amounts to about
one-third of the natural gas storage in Alberta. The two large
projects [in Alberta] are the Edson and Crossalta facilities,
which are well located to support demand in the area. "Gas
storage is really there to makeup the difference between what
the pipelines can deliver and demand in high-demand seasons -
Alberta in the winter especially," she said. The Canadian
storage being discussed doesn't include the Michigan project,
although it's affiliated with [TransCanada's] operations in the
ANR Pipeline.
MS. ADAIR then turned to the gas production forecast. The
numbers that will be shown are based on the National Energy
Board (NEB) and other publicly available sources, such as the
Energy Information Administration (EIA). She then directed
attention to the chart on slide 38 titled "Production by
Province," which illustrates that currently most of the natural
gas comes from Alberta and will continue to do so in the future.
Although there is some production in the eastern provinces, it's
relatively small. Following Alberta, the next largest source of
production is British Columbia.
9:09:52 AM
REPRESENTATIVE GUTTENBERG inquired as to the location of the
Yukon production on the chart [on slide 38].
MS. ADAIR relayed that it's probably a small slice that's
difficult see. Therefore, she offered to pull the numbers out
later for discussion.
9:10:15 AM
MS. ADAIR, continuing with slide 39 titled "Western Canada
Natural Gas Production Outlook," remarked that folks like to
review the various sources and the sorts of technologies
required to extract oil and gas, given the types of reservoirs
being exploited. The chart on slide 39 illustrates that
conventional drilling is the most common. She then directed
attention to the swath representing coal bed methane (cbm), and
added that there's a large amount of cbm development in Wyoming
and Montana. Coal bed methane development is a large trend that
is continuing to develop throughout North America. The chart
also illustrates that shale[production], although not large in
Canada, is huge in the Central U.S. For instance, in Texas the
Barnett shale was producing almost no natural gas at all, but is
now producing over 3 billion cubic feet a day (Bcf/d). Most of
that production came online in the last three years and the
trend is now extending west to the Texas pan handle and north
into Louisiana and Arkansas. Some forecasts project that there
could be 4 Bcf/d from northern Louisiana in another three to
five years. In British Columbia the shale play is just
beginning, as indicated by a recent [gas prospects] lease sale.
She related that there have been about five discoveries of the
magnitude of 6-10 trillion cubic feet (Tcf) per discovery.
Although how that shale play is going to develop in British
Columbia is still a question, the gas will compete for capacity
and the new discovery isn't included in the forecast being
presented.
9:12:38 AM
MS. ADAIR then highlighted that the NEB is forecasting that
Mackenzie will come on stream in 2015 with about 1.2 Bcf/d.
Turning to slide 40 titled "Western Canada Gas Demand," she
pointed out that the total gas demand by province is well below
the production available from Canada in the timeframe of the
forecast through 2030. Ms. Adair opined that although Alberta
demand has been strong and it's believed that it will continue
to grow, there are many energy improvement projects. Even with
respect to the oil sands, there are efforts to conserve natural
gas, she related. Still, there will be plenty of gas produced
to meet the demand in Canada. In response to Representative
Samuels, Ms. Adair confirmed that the demand is for total demand
and included the usage of tar sands, not just power generation.
Moving on to slide 41 titled "Alberta Gas Demand," she pointed
out that the chart illustrates that there is huge industrial
demand in Alberta of which oil sands is a large portion. Coal
gasification is becoming more prevalent and will likely be
adopted more for use in the oil sands going forward, and
therefore it's included in the forecast [presented on slide 41].
MS. ADAIR, referring to slide 42 titled "Alberta Hub and Export
Capacity," reminded legislators that the hub is a large market
area, not a single point in the pipeline. The supply to the hub
today comes from production in Alberta and British Columbia.
The total export capacity out of Alberta is about 11 Bcf/d,
which is post-conversion of TransCanada's Mainline capacity that
will be put into crude oil service. There are new supplies from
Mackenzie and Alaska gas coming into Alberta at Boundary Lake.
Therefore, she opined that there is about 11 Bcf/d take away
capacity available. Slide 43 titled "Proposed Alaska Gas
Pipeline Route" illustrates where the pipeline will hook into
the system. There will be some new build pipe required, she
noted. She then highlighted that basically the gas will come
in, pass through the hub, and be available to move to almost all
the markets in the U.S.
MS. ADAIR, referring to the chart on slide 44 titled "Alberta
Gas Supply Forecast," informed the members that the forecast of
the Alberta production and what's coming out of British Columbia
and Mackenzie gas results in excess capacity in the system.
This excess capacity is available before and after Alaska gas.
Only during startup does there pose a bit of an issue to try to
move all the gas through existing capacity. She emphasized that
the timing of when AGP [Alaska Gas Pipeline] starts up and when
some of the other projects come on line and how the decline
occurs in various areas over time are factors. One must keep in
mind, she opined, that NEB's forecast is about $7 per thousand
thousand British thermal unit (MMBtu) equivalent Henry Hub
price, although gas prices are higher than that today. The
aforementioned may stimulate additional drilling and production,
which might create tighter capacity utilization here. However,
if the Alaska gasline project slips at all, there may be no
problem with capacity. Ms. Adair said, "We feel very
comfortable that we're in a good situation, with respect to that
gas coming in and that if there are changes that need to be
made, they're not going to be big changes. You should be able
to handle all that gas through the Alberta Hub."
9:18:07 AM
MS. ADAIR, referring to slide 45 titled "Future Performance of
TransCanada's Canadian Gas Assets," informed the members that
Muse Stancil staff who work primarily in oil sands and gas
projects performed a study late last year regarding how many of
the announced projects were likely to go forward. At that time,
the thought was that about two-thirds of the announced projects
would move forward and become productive. Since that time oil
prices have increased, and therefore it's possible that it would
be an even higher percentage of projects that would move
forward. Most of those projects, she projected, will move
forward in the near- to medium-term. Ms. Adair then turned to
CO sequestration and reminded members that Canada has signed the
2
Kyoto Accord. Canada, she relayed, is working through its
federal government to try to implement changes to the system
that would adhere to the Kyoto Accord. In February 2008 British
Columbia did unveil a carbon tax program. For most of the
places for which there is concern [regarding CO], including
2
Alberta, British Columbia, and even perhaps Alaska, there are
existing developed geologic reservoirs. From a technological
standpoint, COcan be removed by injecting it into reservoirs.
2
In fact, she recalled working on a project in the 1980s in which
a 1950s process to take gas off of boilers to be injected into
the ground for miscible flooding was used in order to increase
oil recovery. Although this is nothing new with regard to
technology, it comes at a cost. Ms. Adair said it remains to be
seen when the [Kyoto Accord] mandates will be implemented and
the technology that will evolve to minimize the cost associated
with the disposal or minimization of green house emissions. In
terms of announced projects, the aforementioned isn't viewed as
being a big problem.
9:21:20 AM
REPRESENTATIVE NEUMAN asked if by 2018, when both the Denali
Project and TransCanada propose to be running, ConocoPhillips
Alaska, Inc. (ConocoPhillips) and BP will have need to replenish
the reserves and will there be the market demand to ensure that
Alaska's gas goes into the market.
MS. ADAIR explained that all of the forecasts for natural gas
demand include growth. For example, "T-Electric" (ph) in Texas
tried to certificate new coal burning capacity. However, T-
Electric wasn't certificated because of the air quality concerns
with regard to burning coal. "Natural gas does not have those
kinds of issues, yet, because ... we haven't made big moves to
limit natural gas electrical generation," she pointed out. She
also pointed out that many projects are being developed to meet
the increased demand. The future seems to hold continued
demand. In fact, the current demand in the U.S. is being met
with imports from Canada. She projected that those Canadian
imports will continue to be needed as well as liquefied natural
gas (LNG). Ms. Adair opined that there will definitely be
demand. The question is regarding what is the most economic
source, Alaska gas or LNG.
REPRESENTATIVE NEUMAN asked specifically if there will be enough
demand to use Alaska's gas.
MS. ADAIR answered that the best information available today
says that there will be enough demand to use Alaska's gas.
However, there is always the possibility that prices could rise
so high that the elasticity of demand would result in customers
cutting back as was recently seen in Juneau. Ms. Adair,
returning to the presentation and slide 47 titled "Evaluation of
Natural Gas Storage and Outlook," said that there have been a
lot of gas storage projects developed in the U.S. over the last
five years. The reason for that is as the U.S. relies more
heavily on imported supplies and supplies that are located
farther and farther from the large demand centers, gas storage
helps balance out the available supply through the pipelines
with the instantaneous demand in the large-use markets.
TransCanada's two projects are well positioned to do the
aforementioned. Those two projects have been profitable and
provide a vital service to the region, which she opined will
continue. Furthermore, the future demand for storage will be
good as gas supplies and development occur farther away from the
demand centers.
9:26:11 AM
MS. ADAIR reviewed slide 49 titled "TransCanada's Canadian Gas
Assets Without Alaska Gas Supply" and slide 50 titled
"TransCanada's Canadian Gas Assets With Alaska Gas Supply." As
the chart on slide 50 relates, the Alaska gas supply provides a
significant increase in net income.
9:28:23 AM
REPRESENTATIVE GATTO, referring to the chart on slide 50, asked
if the y-axis that is labeled "Millions of U.S. Dollars" refers
to the tariff on the pipe or value.
MS. ADAIR responded that it refers to value, net income. She
explained that it's taking the tariff as revenue and netting out
TransCanada's costs.
REPRESENTATIVE GATTO surmised, then, that the chart projects out
to 2028 as if the price of gas in the year 2028 is known. He
characterized that as "quite the prediction," particularly given
the view that nothing counts more than the price of gas.
MS. ADAIR clarified that the chart is relating TransCanada's
service. She explained that TransCanada doesn't own gas, and
therefore the chart shows the revenue TransCanada would generate
from operating the pipeline. She further clarified that the
chart relates tariffs net of cost.
9:29:51 AM
MS. ADAIR, referring to slide 53 titled "TransCanada Other Gas
Pipeline Assets," noted that some of TransCanada's assets are
integrated with the Canadian assets. She then informed the
committee that in 2007 TransCanada acquired ANR, which is a
large system that transports gas from the U.S. Gulf Coast to the
Midwest. Ms. Adair characterized ANR as a great asset that also
provides useful storage. The GTN System links Foothills Pipe
Lines Ltd. ("Foothills") and moves gas south out of Mexico. The
Great Lakes also serves through the Midwestern U.S. Iroquois
delivers gas from the Canadian Mainline to New York State. She
also mentioned the Portland, Tamazunchale, Transgas, and Gas
Pacific projects. The aforementioned projects illustrate that
there are lots of gas transportation assets in the portfolio.
9:31:12 AM
SENATOR THERRIAULT recalled slide 29, which refers to supporting
the expected supply shortfall in petrochemical feedstock. He
inquired as to what petrochemical is being referenced.
MS. ADAIR said that it's referring to the ethane demand. Ethane
crackers and derivative chemicals manufacturing in Canada. In
further response, Ms. Adair clarified that it was meant to say:
"If the Alaska gas comes in, that's one of the things that
flowing that gas through TransCanada would give you access to
those markets."
SENATOR THERRIAULT then turned attention to slide 53, and noted
that some have said that the Alaska pipeline will swamp the
market, and it would be a poor
business decision for TransCanada to develop a pipeline that
kills the market for one of its other assets. Therefore, he
requested that Ms. Adair discuss overall demand and whether this
business enterprise places any other branch of the enterprise at
risk of losing the market.
MS. ADAIR explained that with the available capacity of 11 Bcf/d
at the Alberta Hub there isn't much of a bottleneck once
Alaska's gas is laid in. She pointed out that is looking at the
take-
away capacity today coming out of the hub and connecting to some
of the different pipelines for distribution of gas. Although
there may be a few pinch points, the capacity seems to be
adequate. However, there may be issues with a gas system like
ANR as there may be gas on gas competition. When the
aforementioned happens, typically the market redistributes the
gas such that some of the ANR gas jumps off the system and flows
east sooner while pushing imports out from the East Coast.
9:34:07 AM
MS. ADAIR moves on to slide 55 titled "Power Segment Overview,"
which specifies the locations of all the power generation
facilities in TransCanada's portfolio. TransCanada has a lot of
assets in Alberta and the U.S. Northeast. When it comes to fuel
sources for generation, TransCanada has a lot of diversity. She
pointed out that TransCanada's portfolio even includes some
wind, hydro, and nuclear power. To the extent TransCanada's
assets are natural gas, those assets tie in well with the
natural gas transmission and storage business the company has.
She noted that the appendix includes a summary of the
characteristics of the various markets. TransCanada does have a
lot of power development projects in its formula as well. In
fact, as related by slide 58 titled "Power Projects in
Development," TransCanada has four good size projects underway
with several in the development phase. Some of those projects
tie into existing [projects]. Three projects are in the
advanced development stage such that the company is close to
committing capital for them.
9:35:45 AM
MS. ADAIR, referring to slide 59 titled "TransCanada's Keystone
Crude Pipeline Project," related that Keystone will be the first
crude oil pipeline in the portfolio. The initial phase of
435,000 barrels a day is to be expanded to 590,000 barrels a
day. [Shippers] have already subscribed for 495,000 barrels a
day of capacity with an 18-year contract life. ConocoPhillips
is a partner with TransCanada. As related by slide 59 titled
"TransCanada's Keystone Crude Pipeline Project," the project
should be in service by the end of 2009.
MS. ADAIR, referring to slide 60 titled "LNG Terminal
Development Assessment of Projects (continued)," reminded
members that in late 2000 and early 2001 gas prices spiked and
there were a large number of LNG projects announced. In fact,
she recalled the announcement of the construction of over 30
projects in the U.S. in which import terminals were built with
the hope that people would deliver LNG as well as terminals that
were aligned with large gas deposits overseas. However, the
aforementioned never happened. There are two new projects on
the U.S. Gulf Coast. Although there haven't been a huge amount
of LNG imports, TransCanada has announced the following two LNG
terminal development projects: Broadwater Energy and Cacouna
Energy. Broadwater Energy, in particular, has some fairly
compelling economics because it will be able to address the
large capacity constraint issues for those going into the New
York - Connecticut area markets. The Quebec project, Cacouna
Energy, is stalled at the moment.
MS. ADAIR opined that LNG terminal development has been impacted
by capital cost escalation, uncertainty of available gas supply,
public opposition to terminal site development, and the
inability to obtain commitment from foreign reserves to the LNG
projects. The U.S. natural gas prices, she noted, haven't been
high enough to induce a lot of gas to come this way on the
water.
9:39:24 AM
MS. ADAIR, referring to slide 63 titled "North American Gas
Supply and Demand Impacts on TransCanada," related, in regard to
ANR [development along the U.S. Gulf Coast], that there has been
a longer lead time on deep water development. Furthermore, from
a supply standpoint ANR has experienced development that has
been farther west or farther east in the Gulf of Mexico relative
to the ANR mainline. However, ANR is well located to take
supplies from these new shale plays, including the Barnett shale
and the Louisiana shale plays. Therefore, she expected ANR's
supply basins to shift from the Gulf of Mexico to shale in the
future. There is reserve development and competition in the
U.S. Rocky Mountains. When more gas comes from the U.S. Rocky
Mountains it will compete with gas from elsewhere, which may
result in gas-on-gas competition and reshuffling in traditional
supply patterns.
MS. ADAIR opined that LNG terminal development will continue and
will likely be in niche locations and serve specific markets or
along the U.S. Gulf Coast. Over time there will probably be
plenty of capacity available for that, although most of it will
likely be on the U.S. Gulf Coast. The impact on ANR may not be
large as ANR turns more to shale gas. Furthermore, depending
upon the location of the terminals, some gas may
switch to ANR as capacity in the east is filled with LNG
supplies.
9:42:43 AM
MS. ADAIR, referring to slide 65 titled "Impact of Alaska Gas
Supply on TransCanada's Future Earnings," discussed the
potential financing, debt and equity, return on equity.
Financing should be available for the Alaska gasline project
assuming sufficient risk allocation to other parties and barring
unforeseen environmental credit constraints. However, the risk
must be allocated such that credit risk would go to the firm
transportation (FT) shippers. She then emphasized the
importance of the health of the capital markets. With regard to
debt and equity, TransCanada has a demonstrated track record.
She mentioned that TransCanada may take on partners, which can
enhance the value of the project. In fact, sometimes debt
holders encourage such. She highlighted that the availability
of non-recourse project debt will be a function of project risk
allocation and how it's viewed by debt holders. However, no
matter who the project developer is, there will be a high level
of risk management and allocation.
MS. ADAIR, referring to slide 66 titled "Alaska Project Capital
Requirements," emphasized the importance of realizing that the
check isn't written on the first day but rather the funds are
spent over time. Slide 66 illustrates a profile of the capital
requirements, excluding the [gas treatment plant] GTP. The GTP
will likely come into play during the last year or two of the
build.
9:46:22 AM
REPRESENTATIVE NEUMAN referred to slide 65, which relates the
assumption that there is sufficient risk allocation to other
parties. He then inquired as to the incentives TransCanada
would offer to the other parties and who would the other parties
be.
MS. ADAIR said that usually it's part of the negotiation. When
an entity prepares to build a project, request for proposals are
issued to different people for different aspects of the project.
Part of the commercial terms will be the allocation of risk. In
further response to Representative Neuman, Ms. Adair specified
that one of those parties would be an engineering and
construction contractor. She reiterated that typically [risk
allocation] is part of the negotiated commercial terms.
9:47:32 AM
MS. ADAIR returned to her presentation. Referring to slide 67
titled "TransCanada Financial Forecast," she relayed that the
Canadian pipelines and U.S. pipelines are reviewed separately
while taking into account the difference in the two markets.
The financial forecast would review a forecast of the energy
segment of the business while also taking into account the
current projects as well as those in construction. The forecast
would recognize the future for development and take into
account Keystone, Mackenzie gas, and any LNG development. A
forecast based on the aforementioned elements resulted in the
forecast presented on slide 68 titled "Net Income Without Alaska
Gas." Slide 69 titled "Net Income With Alaska Gas" illustrates
that the addition of the Alaska gas pipeline is significant,
although it's not as significant as when only compared to the
earnings of the Canadian gas assets.
9:49:04 AM
REPRESENTATIVE ROSES asked whether the chart on slide 69, which
is a TransCanada projection with Alaska gas, includes the
decrease in tariff in the Canadian portion of the lines
TransCanada owns. He related his understanding that once
Alaska's volumes come in, it raises the capacity and thus the
tariffs decrease. Is the aforementioned included in the chart,
he asked.
MS. ADAIR said that should be included because a volume kick is
included; there is additional volume but a decrease in the
tariff.
9:49:48 AM
SENATOR THERRIAULT recalled that although there has been some
concern with regard to TransCanada's ability to participate in
this project, Ms. Adair related yesterday that TransCanada is a
sound, capable company that could participate. He further
recalled hearing last week that although the project taxes the
company while it's in development, it strengthens the company.
MS. ADAIR confirmed that to be the case, adding that the company
receives a significant contribution in net income from the
project. She then opined that this is a huge project that will
stress any [company].
REPRESENTATIVE GATTO observed that the net income declines from
the first gas as the project proceeds, and yet some of the debt
is being paid back. Therefore, he questioned why the net income
declines rather than grows.
MS. ADAIR explained that the net income is declining because
there is probably some long-term decline in the numbers. Also,
there is going to be an increase in operating cost over time.
Furthermore, if the tariff is a negotiated rate, there might be
some "squeezing" in the margin. She reminded members that [this
analysis] is being performed at a very high level without much
detail. She suggested that Mr. Pulliam likely has a better
forecast of that number. In further response to Representative
Gatto, Ms. Adair reminded the members that TransCanada doesn't
own any gas and thus it's only tariff revenue and costs.
9:51:39 AM
REPRESENTATIVE KELLY, recalling Ms. Adair's comments on the
Ravenswood project, said that he took away a more negative slant
than from the [administration's presentations] in Anchorage.
However, he related his understanding from reading about the
project that when the new asset was added, the credit watch was
normal for the size of the acquisition. He asked if the intent
was for there to be a more negative presentation of the
Ravenswood project than occurred at the Anchorage presentations.
MS. ADAIR said that since she wasn't in Anchorage, and thus
couldn't comment on that point. However, she confirmed that
Ravenswood is a sizable project for [TransCanada] and the
initial read is that the project isn't as good as some of the
other projects TransCanada has taken. She opined, "The jury is
out ... to wait and see what TransCanada is going to do with
this asset." She mentioned that there are some options for
repowering [Ravenswood] and making it more efficient, things
that could enhance the value of it over time.
REPRESENTATIVE KELLY asked whether TransCanada is sorry it
acquired that asset.
MS. ADAIR deferred to TransCanada.
DAN DICKINSON, Certified Public Accountant (CPA), Consultant,
Legislative Budget and Audit Committee, Alaska State
Legislature, offered his understanding that in Anchorage the
administration was discussing specifically the credit issues
while Ms. Adair was discussing the response in the equity
markets.
MS. ADAIR reiterated her earlier comment that the jury is still
out on the Ravenswood project because it depends upon what
TransCanada does with that asset. She offered that her power
people in Houston, Texas, believe that the Ravenswood project
may be dilutive to earnings in the beginning. However, there
are options to enhance the value of that project and the
location is fantastic.
REPRESENTATIVE KELLY expressed the desire to review the
Ravenswood project more.
9:54:52 AM
REPRESENTATIVE HAWKER expressed concern about what he termed
"false precision" that is built into these conversations; that
is the presumption that what is presented in these charts and
graphs will occur. He pointed out that Ms. Adair isn't privy to
the private corporate financial information, and therefore these
are an outsider's estimate of a linear projection. There has
been some controversy over the issue of the past partner
liability. What has been quantified by some to be $8-$9 billion
of liability was minimized by the attorneys last week who said
that it's not a real risk. Therefore, he opined that the
situation is headed for a cataclysmic legal debate. He asked if
any such cost contingencies have been included in Muse Stancil's
cost projections.
MS. ADAIR replied no.
9:56:44 AM
REPRESENTATIVE DOOGAN asked whether TransCanada would be on the
state's list of companies to consider hiring to build the Alaska
gas pipeline. He further asked if there's a better partner
available.
MS. ADAIR, speaking from the perspective of a project engineer,
said that generally she doesn't rank those from whom she would
consider request for proposals (RFPs) until the commercial
proposal is available. Ms. Adair answered that she believes
TransCanada would be on the list, especially in light of the
markets the state is trying to serve as well as the fact that
TransCanada has existing assets geographically situated to
reduce the cost of the build to get the gas to the Lower 48.
9:58:02 AM
REPRESENTATIVE GARDNER asked whether BP and ConocoPhillips, as
was related yesterday about TransCanada, already have assets in
Canada and the Lower 48 that would benefit this project.
MS. ADAIR responded not that readily come to mind. However, she
acknowledged that BP and ConocoPhillips have production in these
areas and are shippers. She recalled that there has been a
question as to how much gas ConocoPhillips and BP own that
already moves on TransCanada's system. Although she couldn't
readily foresee a large asset that BP and ConocoPhillips could
attach to the downstream side, on the upstream side there may be
integration opportunities with existing facilities at Prudhoe
Bay. For example, compression and treating can result in added
value and reduce the overall risk and cost of the project.
9:59:51 AM
SENATOR WIELECHOWSKI asked whether Ms. Adair can give any value
to TransCanada's claim that it has the rights-of-way. He also
inquired as to TransCanada's relationships in dealing with the
First Nations in the past.
MS. ADAIR said she doesn't have any personal knowledge on that.
10:00:32 AM
REPRESENTATIVE GARA questioned whether ExxonMobil Corporation
("ExxonMobil"), ConocoPhillips, and BP, who hold the gas leases,
are negotiating by sending a message that they might withhold
their gas from an independent pipeline project, such as
TransCanada's project. He asked if there is any other
circumstance in the world in which those holding the gas have
tried to withhold it from an existing pipeline.
MS. ADAIR replied no, adding that she couldn't think of any such
situation off the top of her head.
REPRESENTATIVE GARA surmised then that whenever there has been a
pipeline in other parts of the world, companies have eventually
sold their gas. Therefore, he asked if one could surmise that
would occur in Alaska as well.
MS. ADAIR cautioned against assuming that such happens all the
time. She offered that generally it's not uncommon for
producers to review different options. In fact, she recalled a
case in southwestern Wyoming where, because of timing and cost
issues associated with the project, two companies built separate
facilities.
10:02:41 AM
REPRESENTATIVE HAWKER recalled his involvement in the six-year
process that has culminated into where the legislature is today.
The presentations thus far seem to indicate to the public that
there are only two choices. He then asked if TransCanada is the
only entity that has Canadian assets that could be used to bring
Alaska's gas to market.
MS. ADAIR ventured that if one were to look at TransCanada's
portfolio in Canada, particularly through the Alberta Hub,
TransCanada is the best existing entity. However, that's not to
say that there aren't new build opportunities or ways to move
part of the gas on TransCanada and use other options. She
opined that it depends upon all of the commercial alternatives
and their ranking, while taking into account which markets are
desired and the best economic solution given the available
capital and time. A great thing about TransCanada's assets is
that many of them are already in the ground. Therefore,
TransCanada is probably at the top of the list.
10:05:35 AM
REPRESENTATIVE GUTTENBERG, recalling that Ms. Adair has already
testified that TransCanada is capable of doing the engineering
of this project, asked if TransCanada is capable of pulling this
off in terms of the financial obligations and technicalities.
MS. ADAIR surmised that whoever manages the project will have to
go outside and pull together sufficient human capital. The size
of the project would likely overload any [company], particularly
in light of the fact that the oil industry is very busy.
Although TransCanada has many core competencies as well as
experience in cold environments, likely all of the engineering
and construction will be done by third parties. The key is in
how those contracts are negotiated and structured. She
predicted that there will be more than one construction
contractor and perhaps even more than one engineering
contractor. Therefore, the large issue for the project
developer is being able to negotiate and manage all the
contracts to execute the project.
REPRESENTATIVE GUTTENBERG said that he saw TransCanada's ability
to negotiate both regulatory agencies as an asset.
MS. ADAIR acknowledged that TransCanada has experience with both
regulatory officials.
10:08:37 AM
SENATOR BUNDE said that if he were the producers, it would seem
logical to want to have some vertical integration in order that
the producer could be a producer, shipper, and owner of the
pipeline. The aforementioned, he noted, is basically happening
with the Trans-Alaska Pipeline System (TAPS) now. In such a
situation the producers would be strongly motivated to eliminate
other competition in order to have vertical integration and
increase the bottom line. He asked if there is a scenario in
which it would be more advantageous for a producer's bottom line
to deal with a pipeline company rather than create its own
pipeline company.
MS. ADAIR highlighted the complexities of the commercial aspects
of operating pipeline companies. For example, accounting, fuel,
keeping up with the tariffs, ownership, and allocation of gas
requires much "back room infrastructure." To the extent that
someone could be hired to do that and spread those costs for the
systems and the people over a lot of volume is really helpful.
Also, to the extent that these are common carrier systems, there
isn't the opportunity to block out the competition. She
informed the members that the Federal Energy Regulatory
Commission (FERC) ensures that there is open access to the
pipeline and thus a common carrier has to let in others. Most
oil companies recognize that and account for and leave room for
those common carrier systems because they don't want to be tied
up with all the accompanying legal matters. Therefore, she said
she didn't believe that's much of an issue. From an operations
standpoint, it can be helpful to integrate operations for
operating personnel, safety, maintenance coordination, and other
such day-to-day operations. However, all the aforementioned
commercial matters have to be taken care of as well. If the
company doesn't already do that and doesn't have a large
operation to do so, it might be better to let another entity
take care of the commercial details.
10:12:01 AM
REPRESENTATIVE NEUMAN asked whether it would even be a "blip in
the screen" if Alaska were able to attract an industry to build
a gas-to-liquids (GTL) processing plant. He then inquired as to
how Alaska's finances would be impacted by a proposed gasline,
including the added-value products. Representative Neuman
related his understanding that the GTLs are much more valuable
than the methanes or other components.
MS. ADAIR, referring to what she termed the multiplier effect,
said she can't address the number of jobs that would be created.
However, she informed the committee that several years ago Muse
Stancil did perform a study that reviewed alternatives besides
shipping the gas to Alberta. Although a small percentage of the
volume is taken out in terms of the liquids, it overwhelms the
demand in Alaska. Therefore, there has to be a determination as
to whether those will be recovered in Alaska. To make retail
products, it's a huge capital investment and then it still has
to be exported. She remarked that if only natural gas liquids
are going to be made, perhaps there's a scenario by which some
of those can go down TAPS. The aforementioned would, however,
require a determination as to which can be kept, how they can be
stored and exported as opposed to letting those liquids pass
through the pipeline and transferred to a point at which there
is an existing world scale petrochemical industry that wants the
product. The economic analysis revealed, she related, that it
makes more sense for those who own the liquids to take them to
the existing markets.
MS. ADAIR, regarding TransCanada's earnings for [liquefied
propane gas] LPG or [natural gas liquids] NGLs, pointed out that
TransCanada doesn't own the liquids but rather they belong to
the shippers. Therefore, each individual shipper can make a
decision for its own account regarding what to do with the NGLs.
She reminded the members that if the state wants to process some
of the gas and recover liquids for in-state use, it could be
done and the rest of the producers could ship their gas to
existing facilities in Alberta.
10:16:13 AM
REPRESENTATIVE NEUMAN highlighted that the Ted Stevens
International Airport is the busiest freight airport in America
and the third busiest in the world. Therefore, Alaska is in a
position to export those gas liquids [to Alberta]. He indicated
that [the exportation] offers the development of jobs and the
ability for Alaska to expand its dependence from more than one
pipeline for 90 percent of its resources. He requested that
such be reviewed.
SENATOR STEDMAN offered that there was quite a discussion over
the past few years on the common carrier issue and dealing with
gaslines rather than oil lines.
MS. ADAIR relayed that her experience is as a producer and a
shipper. When there is open access and parties have difficulty
entering, they can appeal to FERC. The purpose of the common
carrier system is to make capacity available to everyone. If a
system is oversubscribed, capacity is allocated based on
nominations. The actual details of the process are probably
best addressed by FERC representatives.
SENATOR STEDMAN surmised, then, that FERC would control that
rather than the oil company.
MS. ADAIR said that typically the operator of the pipeline will
publish tariffs as set out in the tariff document. If the
pipeline is not complying with its published tariff or if it's
viewed as restrictive in terms of competition, appeals can be
made to FERC to change the tariffs and create access.
10:19:15 AM
REPRESENTATIVE SEATON related his understanding that under AGIA
and this contract proposal, there's a requirement that every two
years [the company] will solicit and will expand to any
reasonable engineering increment without going through the FERC
process. "That term is not contained in any non-AGIA pipeline
proposal. And is that correct so that there is ... a definite
difference between having to ... have a new supplier going
through FERC for a mandatory requirement for expansion versus
AGIA that has a requirement that this proposal had to have those
voluntarily done," he asked.
10:20:32 AM
JOHN NERI, PhD, Consultant, Benjamin Schlesinger & Assoc., Inc.,
clarified that natural gas pipelines are contract carriers, and
therefore the shippers enter into long-term contracts and
reserve capacity on the pipeline. With respect to pipeline
expansions under the Alaska legislation, he said FERC can
require the Alaska pipeline to expand if there is interest on
the part of the shippers. However, that's not generally the
FERC policy. He related his understanding that the overall FERC
policy doesn't require pipelines to expand.
REPRESENTATIVE SEATON pointed out that under the AGIA process
there was a provision that the pipeline would have to expand
under any reasonable economic or engineering expansion proposal
and there would have to be a solicitation every two years.
Although under FERC for a normal pipeline, there could be a
request for a mandatory expansion, which could be a much longer
process than the voluntary expansion required under AGIA. He
asked if Dr. Neri understands the situation in the same way.
DR. NERI offered his understanding that under AGIA, the pipeline
is [required] to test the market every two years by having an
open season. The open season is basically the pipeline asking
shippers if there is any interest in expanding the system. If
there is interest, the FERC will go through the standard
certificate process. The pipeline would present a proposal,
hold an open season, enter into contracts with the expansion
shippers, and then the pipeline would file an application for
certificate at the FERC. The only difference is that under
AGIA, the pipeline is required to test the market every two
years.
10:23:25 AM
SENATOR THERRIAULT noted that Ms. Adair is using the term
"common carrier" and a few other terms that seem more applicable
to an oil pipeline not a gas pipeline. He further noted that
there are fundamental differences in the way an oil pipeline
versus a gas pipeline work.
MS. ADAIR concurred.
SENATOR THERRIAULT, recalling yesterday's testimony, said, "The
net present value (NPV) of the ... potential up to $500 million
contribution that the state gets, just in the reduction of the
tariff that has a net present value to the State of Alaska,
we'll actually make money on that." With regard to the other
must-haves, such as expansions, he said, "The fact that if ...
there is a request for an expansion, but contractually this
pipeline will be at FERC supporting the expansion, not
contesting it." He noted that since there can be an application
to the FERC, there can be opposition to it. The hope is that
the pipeline wouldn't do that under AGIA. He asked whether
there is separate value to that beyond the NPV received from the
reduction of the tariff.
MS. ADAIR surmised that would best be answered by Mr. Pulliam as
he has performed more modeling of the pipeline economics.
10:25:05 AM
BARRY PULLIAM, Consultant, Econ One Research, Inc., relayed that
the value obtained from the tariff reduction on $500 million is
about $.05 per thousands thousand British thermal units (MMBtu).
Under AGIA, one must solicit bids for expansion, and if there's
[room for expansion] AGIA requires expansion in reasonable
economic increments, assuming the contracts required can be
obtained on a rolled-in basis. He related his understanding
that under a normal situation, FERC wouldn't require either of
the aforementioned. Furthermore, FERC wouldn't require the
pipeline [owner] to affirmatively go forth and offer to expand
whereas that's one of the things accomplished under AGIA. From
a pipeline standpoint, the pipeline is interested in making
money, which it does by getting gas down the pipe to increase
revenues. Therefore, pipeline [owners] are generally interested
in expansion so long as it's revenue enhancing. Mr. Pulliam
identified the difference under AGIA as the fact that [the
expansion process] is an automatic process versus having to seek
it separately through FERC.
SENATOR THERRIAULT acknowledged that the return to the state
from the reduction in the tariff can be quantified. However, he
surmised that the state, as a sovereign, is receiving other
things of value to which a dollar amount can't be assigned.
MR. PULLIAM opined that such things would fall under the
category of intangibles. Scenarios could be offered and there
could be attempts to quantify them. Assuming that the expansion
was economic, but the pipeline [owners] were resisting it, one
could quantify the value of having the automatic expansion.
Without those base assumptions, they're intangibles.
10:28:02 AM
REPRESENTATIVE SAMUELS related that Shell, for instance, in the
Beaufort Sea could have exploration offshore that's very good
for the private sector. However, if the expansion for Shell gas
resulted in an increase in the tariff, the state's royalty gas
could potentially be worth less. He asked if it's possible to
run models on the various different scenarios that would provide
value to the legislature.
MR. PULLIAM said that although it may be of some value, it would
require a large effort. The results will be dependent upon the
assumptions of the gas that's put in the pipe. He noted his
agreement with Representative Samuels that if the gas is largely
offshore federal gas, then having additional volumes in the
system would be beneficial the state, particularly if it's
decreasing the tariff. However, if the state isn't receiving
any other royalty or tax benefit from the volumes on those
federal lands, it will receive the benefit of the lower tariff
on the netback on state lands. If [the additional volumes]
increase the tariffs beyond the initial rates, there's the
potential to drive down the value to the state. There is a
separate piece, which is the impact on the economy in terms of
jobs and so forth. What also has to be factored in, he said,
is the amount of the upstream piece from the new gas placed in
the pipe.
REPRESENTATIVE SAMUELS said he didn't want to request something
from Dr. Neri if it's not of value to other members.
10:31:57 AM
SENATOR THOMAS opined that initially the desire was to create a
different situation than what exists with the TAPS, which is now
at a third of its capacity. The notion was that development
would be encouraged if there was something with the certainty of
a timeframe for expansion. Therefore, he questioned the
certainty that exists if the owners of the gasline are the
producers versus if the owners of the gasline under AGIA are
required to have regular, recurring expansions as it relates to
FERC's process of allowing expansions when a pipeline owner is
opposed to expansion, save for their own purposes.
10:33:30 AM
DR. NERI offered a hypothetical situation in which the producers
pick up all of the capacity on the pipeline and it turns out
that a fourth entity wants to enter the pipeline. Under AGIA,
the pipeline would be required to hold an open season every two
years. He related his understanding that if the pipeline
[owners] don't want to expand, the fourth producer can file a
protest with the FERC, which will act on that protest.
SENATOR THOMAS clarified that he wasn't speaking of AGIA
expansion but rather of an expansion outside of the AGIA plan
because of the failure of AGIA, which causes the state to
proceed with the Denali Plan. He asked if the response would be
the same in the aforementioned non-AGIA situation.
DR. NERI related his belief that the Alaska Natural Gas Pipeline
Act would still provide the fourth producer, in the
aforementioned example, the ability to file a complaint with
FERC. In further response to Senator Thomas, Dr. Neri said that
at that point FERC would make a determination as to whether it
would require the pipeline to expand.
MR. DICKINSON highlighted that the federal law specifies that
the Alaska pipeline is an open access pipeline. Furthermore,
for the first time, Congress has said that FERC has the
authority to mandate expansions. He acknowledged that it's an
untried process. However, under this law FERC can mandate the
expansion.
10:36:21 AM
SENATOR WIELECHOWSKI recalled that a few years ago Econ One
Research, Inc., did a report that showed the upstream rates of
return for a natural gas pipeline were high under almost every
circumstance. He asked whether Mr. Pulliam has seen anything in
the analysis that would change the aforementioned opinion.
MR. PULLIAM replied no, adding that Econ One Research, Inc.,
hasn't tried to recreate those analysis under the new costs and
prices. Furthermore, he said that he hasn't seen any changes
that would change his view on the returns, which he opined
should be healthy.
10:37:16 AM
The committee took an at-ease from 10:37 a.m. to 11:09 a.m.
11:09:46 AM
REPRESENTATIVE SAMUELS announced that now members would hear Mr.
Dickinson's presentation.
11:09:58 AM
MR. DICKINSON reviewed his assignment as laid out on slide 2 of
the presentation titled "Some things to look for and ask about
in the AGIA License Determination." He then turned to slide 3
titled "Part 1. Major Reasons Given to Vote for TransCanada
License," which specifies that there are enforceable
commitments, "dazzling" amounts of money for everyone,
guarantees the state's must-haves, and provides the best way to
get LNG export and meet in-state gas needs. Referring to slide
4 titled "Another Reason to Support a TransCanada License," Mr.
Dickinson said he would argue that voting for this license
probably won't harm the prospects for a line and, in fact, may
strengthen the prospects.
MR. DICKINSON moved on to slide 5 titled "Item #1. What are the
Enforceable Commitments in the License?" He explained that per
AGIA the license has 20 must-haves of which 7 are procedural
issues related to obtaining a license, 3 are pre-sanction
commitments, 5 are tariff commitments, and 5 pertain to local
commitments.
11:15:36 AM
MR. DICKINSON, referring to slide 6 titled "7 License
Procedurals," said that the aforementioned seven license
procedures include filing a timely application, providing a
thorough description of the project, describing the gas
treatment plant, proposing a reimbursement plan, waiving the
right to appeal the license decision, describing the applicant
in detail, and demonstrating readiness to implement the project.
Mr. Dickinson noted that the description of the gas treatment
plant includes some rate commitments. He explained that the
central compression plant on the North Slope currently places 9
Bcf/d back into the ground. If this project is built, not
nearly that much gas will have to be put back into the ground as
some of the compression may come over and become part of another
project. The idea is that the aforementioned won't be included
in the rate base as if it were new. Generally, the GTP would be
described and a reimbursement plan proposed. Under the
TransCanada proposal how to get up to $500 million from the
state for performing the initial work is achieved by spending
about $112 million to be matched. Moving on to slide 7 titled
"3 Pre-Sanction Milestones," Mr. Dickinson explained that it's
an interstate project, it's regulated by FERC whereas if it's an
intrastate project, it will be regulated by the Regulatory
Commission of Alaska (RCA). The notion is that an open season
will be held within 36 months, the pre-filing procedures created
for an Alaska gas project will be used, and a certificate of
public convenience and necessity (CPCN) will be applied for by a
date certain. The second must-have in the pre-sanction area is
that the market will have to be assessed every two years, which
will continue after the pipeline is running.
11:18:06 AM
MR. DICKINSON, referring to slide 8, emphasized the need to
realize that there isn't an enforceable commitment to build a
pipeline. Nothing in AGIA commits the party obtaining the
license to build a pipeline. The aforementioned was emphasized
by TransCanada Vice President Tony Palmer's statement at the
February 6, 2008, House open caucus in which he said, "We are
not obligated to build a pipeline. That is not what AGIA
requires." He suggested that any time such an obligation is
expounded, questions should be asked. Mr. Dickinson, referring
to slide 9, explained that one of the must-haves in AGIA
specifies that one must "conclude by a date certain, that is not
later than 36 months after the date the license is issued, a
binding open season ...." In its application TransCanada says
it will comply with AGIA, and therefore if the license is
granted this summer, the expectation is there would be an open
season no later than the summer of 2011. However, in its
contract TransCanada said that it would hope to have the open
season by September 2008. He pointed out that one place in the
contract specifies that TransCanada commits "subject to the
license being issued by April 2008 to conclude an initial,
binding open season within 18 months after the issuance of the
AGIA license." As everyone is aware, no license was awarded by
2008, he noted. Referring to slide 10, Mr. Dickinson pointed
out that the contract also says "TransCanada commits to conclude
a binding open season by September 30, 2009." while another
provision of the contract says "TransCanada would conduct the
open season within 18 months following the date the license is
issued." Therefore, one would ask if there's a binding
commitment for an open season earlier than 36 months, and if so,
what date is it. Mr. Dickinson related that his understanding,
from some informal discussions, is that before there is an open
season, there was the hope to have two seasons of field work.
If the 2008 open season is lost, would the open season be
September 2010 or would it be in 2011. Therefore, he questioned
whether there is a binding commitment for an open season earlier
than 2011.
11:22:00 AM
MR. DICKINSON, referring to slide 11 titled "Reminder: What
does an Open Season accomplish?", explained that during an open
season those underwriting the project, the customers, say that
if a line is built they will ship on the line or pay as though
they are using the line. Such a commitment allows the line to
be built. The question that should come to mind in these
discussions is whether a pipeline will be built without FT
commitments. Furthermore, there should be a question as to what
a company is doing beyond the open season if they don't have an
FT commitment. The commitment in the license, per AGIA, is that
the applicant will apply for a FERC CPCN by a date certain. The
date certain would be specified in the application by
TransCanada. The [application] specifies, as mentioned earlier,
that TransCanada commits subject to the license being issued by
April 2008, to apply for a FERC CPCN by December 2011. The
[application] also specifies that TransCanada commits to apply
for a FERC CPCN by December 30, 2011. Therefore, what is the
date certain and is it conditional upon the license having been
issued by a date it wasn't issued. The question becomes what
are the enforceable commitments necessary.
MR. DICKINSON turned to slide 14 titled "Item #2 What kind of
money does everyone make?"
11:25:15 AM
REPRESENTATIVE LEDOUX related her belief that there seems to be
a bit of ambiguity in some of the dates.
MR. DICKINSON, speaking as a lay person, said that he doesn't
know what is meant by an enforceable commitment.
REPRESENTATIVE LEDOUX questioned whether it would be prudent to
clarify some of these ambiguities prior to possibly entering
into litigation.
MR. DICKINSON said that no contract is being signed, but there
is a license that will grant certain things. He explained that
first one looks at AGIA to find out what's there, then the
[request for applications] RFA issued under AGIA is reviewed,
and ultimately the application and all of its clarifications are
reviewed to determine what is being granted in the license. In
further response to Representative LeDoux, Mr. Dickinson opined
that clarity could be achieved by asking questions.
REPRESENTATIVE LEDOUX indicated the need to put it in writing
versus merely asking questions.
MR. DICKINSON said he's suggesting that is a question to ask the
administration or TransCanada.
11:27:28 AM
REPRESENTATIVE DOOGAN pointed out that over the course of Mr.
Dickinson's slides the terms application, license, and contract
have been used. He inquired as to Mr. Dickinson's understanding
as to upon what the legislature is being asked to vote.
MR. DICKINSON apologized if he used the term "contract," which
he said was a misstatement. He then clarified that the way to
determine what is in the license is to review the following:
the statute, the RFA issued pursuant to that statute, and the
application that went through the process and was submitted to
the legislature. As a part of the application review, the
questions and responses used to clarify the application should
also be reviewed.
11:29:07 AM
REPRESENTATIVE DOOGAN surmised, then, that the applicant's
answers to questions in the RFA would be reviewed, and those
answers would be what the applicant is obligated to do were the
state to issue a license.
MR. DICKINSON, speaking as a lay person, answered that's how he
would read that.
REPRESENTATIVE SAMUELS relayed that Mr. Dickinson was asked to
go through the three phases and suggest what questions should be
asked.
11:30:15 AM
REPRESENTATIVE GARA, referring to slide 12, related his
understanding that the contract doesn't become unenforceable if
a license isn't issued by 2008, but rather that was the proposed
schedule when TransCanada filed in November. He asked if there
are any legal opinions that say that the contract isn't
enforceable.
MR. DICKINSON replied no. He added, "As a lay person, if it
says if X, then Y and if not X, then I'm just questioning what Y
is."
11:31:07 AM
MR. DICKINSON, referring to slide 13, highlighted the question
of how does the project move forward if FERC approves a project
without funding. He then recalled that during one of the
[administration's] sessions in Anchorage there was a question of
how cost overruns can be mitigated. The [response] was that as
soon as FT commitments are made, orders are placed and early
commitments for labor and materials occur because once there is
a project and the customers are committed to it, the certificate
will be received. "The notion," he relayed, "was companies were
willing to start spending money to build a pipeline as soon as
they had the FT commitments; it was that that made the
difference, not the getting of the certificate."
11:32:34 AM
MR. DICKINSON returned attention to slide 14 regarding the
notion that the cash flows are so extraordinary that everyone
should "sign on." He clarified that "everyone" refers to three
parties. He then explained that when there is a pipeline there
are shippers, which everyone assumes will be the producers. The
fact is that those who have the right to sell the gas have to
get the gas to a market where they can sell it. The owners of
the gas are taking a commodity price risk and as a consequence,
they will pay production taxes, income taxes, and royalties
directly to the state. The deal, he reminded members, is that
the state has turned the gas over to the companies to sell and
as a consequence, the owners of the gas pay royalties to the
state. The state, then, collects those taxes and royalties and
the U.S. and Canadian authorities collect some taxes. The state
is in the position of taking a portion of the economic rents, he
stated. TransCanada is a carrier and can make a regulated rate
of return [shipping contracted gas]. He highlighted that the
income and property taxes TransCanada receives can be included
in the tariff. The well-established FERC policy is that there
is an allowance for income taxes in the rate of return and the
property tax is merely another operating cost that's passed on
to the shippers. He noted that there are other taxes, including
the federal taxes, Canadian federal taxes, and Canadian
provincial taxes, all of which will be passed on in the tariff
to the shippers.
11:34:32 AM
MR. DICKINSON reminded the members that the graph presented on
slide 15 was part of TransCanada's application in January 2008.
He reviewed the graph, which specifies that the Alaska
producers' netback, after taxes and royalties, was $183 billion.
He emphasized that these were undiscounted values. The State of
Alaska's share of the rents from this would've been $115
billion. The federal government would've received $46 billion,
and TransCanada's return on equity would've been $16 billion and
the Yukon, British Columbia, and Canadian federal governments
would've received a [total] of $8 billion.
MR. DICKINSON expressed concern with the graph on slide 16 in
terms of how the costs were treated. When TransCanada reviewed
its calculations of taxes, it surmised that after the producers
receive the netback, they will have to pay to deliver the gas to
the transportation facility. The costs in Prudhoe Bay for such
would be minimal while the costs in Point Thompson would be much
larger. TransCanada used a $1.50 on average. When one
multiplies that through to determine how much the producers will
have to spend to get the gas to the pipeline, it amounts to
about $108-$109 million. Therefore, about $75 billion is left
that is cash flow to TransCanada. In a similar situation,
TransCanada will receive $109 billion, of which $93 billion will
be operating costs that go out. Yet, if all the cash flows are
summed, the number will be the same as the result of the
calculation of how much gas and extracted liquids multiplied
times the expected price. The graph on slide 16 relates where
every dollar goes, the darker sections illustrate what the
entity specified will receive while the red sections illustrate
the out-of-pocket costs.
11:37:57 AM
REPRESENTATIVE SEATON asked if, in the cost section, anything is
allocated as credits that the state gives on the upstream costs.
At these high prices, basically half of the upstream costs are
borne by the state. He inquired as to how that's addressed in
the graph.
MR. DICKINSON specified that in slide 16, TransCanada's
methodology is being used, which is a situation in which
TransCanada takes a $1.50 and doesn't [take into account] the
credits. Therefore, [slide 16] doesn't include the credit. Mr.
Dickinson opined that TransCanada's focus was on midstream
issues rather than upstream issues. The graph presented on
slide 17 illustrates who ends up with all the cash and the cash
flows. The graph illustrates, he highlighted, that the State of
Alaska is the large piece as the state receives $115 billion
with the producers following with receipt of $74 billion. What
the federal government and TransCanada receive remain
essentially the same.
11:39:22 AM
SENATOR STEDMAN requested that Mr. Dickinson elaborate on the
impact the credits create.
MR. DICKINSON explained that in Prudhoe Bay there is a central
gas facility and a central compression plant. Currently, the
central compression plant is performing many things that would
have to be done to prepare gas for the pipeline, but not all of
them. The central compression plant takes the gas, strips out
the water, and puts it back into the ground in order to keep the
oil field under pressure to produce oil. When a stream of gas
comes off, say 4 Bcf/d, sulfuric acid and carbon dioxide have to
be removed from it. He pointed out, "The minimal capital
improvements will have to be made when those are made under
current law to those facilities. If they're not transportation
facilities, but they are part of the upstream facilities those
will be deductible from a producer's income tax and if they are
capital investments there will also be a 20 percent credit that
can be taken over two years." However, the Point Thompson field
will be a green-field development for which there will be
billions of dollars spent, regardless of whether it is to
produce oil, gas, or address liquids. If hydrocarbons are being
produced, it will qualify for credits and deduction from the
producer's income taxes. For example, Exxon could be producing
oil from Prudhoe Bay at $130 per barrel, which is a fair amount
of taxable value. If that money is spent in Point Thompson to
develop that field, the taxes the [producer] is paying is
lowered. Therefore, it's a deduction from the money that's
being made on the larger fields such as Prudhoe Bay.
Furthermore, after calculating all the taxes, 10 percent of the
investment can be subtracted in the first year and 10 percent
can be subtracted in the second year. He related his belief
that billions of dollars will have to be invested at Point
Thompson before any hydrocarbons come out.
11:43:01 AM
REPRESENTATIVE NEUMAN offered his recollection that the state
projected that it would make approximately $226 billion versus
the $115 billion presented on the graph on slide 17.
MR. DICKINSON reminded the committee that the graph on slide 17
presents the analysis from TransCanada. The graph on slide 19
titled "Who makes money in Black and Veatch May 2008 Version?"
relates [that the state will make] more that twice what is
presented by TransCanada.
REPRESENTATIVE DOOGAN pointed out that this graph, as have the
others, treats the money as if it's all paid out at the same
time. Given the number of entities receiving money, he asked if
the timing of the payment makes any substantial difference in
regard to what they receive.
MR. DICKINSON informed the committee that upcoming slides relate
Black & Veatch undiscounted dollars and discuss why they would
be discounted and why the opportunity cost of capital is 15
percent while the state's is 5 percent.
REPRESENTATIVE DOOGAN interjected that there is an assumption.
MR. DICKINSON concurred.
11:44:42 AM
The committee took an at-ease from 11:45 a.m. to 1:06 p.m.
1:06:09 PM
REPRESENTATIVE SAMUELS reviewed the agenda for the remainder of
the day.
1:07:32 PM
MR. DICKINSON, continuing his presentation, turned attention to
slide 18 titled "Who makes money in Black & Veatch May 2008
Version?". The graph is a reproduction of a diagram by Black &
Veatch. The information on slide 19 relates the expected cash
flows extrapolated from the graph on slide 18. Under the May
2008 Black & Veatch analysis, the total dollars received are as
follows:
Canadian government - $3.5 billion
U.S. federal government - $114 billion
State of Alaska - $257 billion
TransCanada - $57.5 billion
Producers - $154 billion
MR. DICKINSON pointed out that per AGIA, Black & Veatch
discounted the aforementioned numbers. He offered that his
explanation of why discounting occurs is related to opportunity
costs. If one looks at an investment, one must review what more
would be made, the added value, with the investment versus
merely placing the funds in the bank. Therefore, one would
discount [the total dollars] at 2.5 percent to determine the
additional value of the project. He opined that the state has a
negative time value of money. The point is, he emphasized, that
it's perfectly appropriate for it to be low. In some analysis,
the rate of return earned by the permanent fund is used. He
highlighted the discount rate for the various entities under the
Black & Veatch May 2008 version. For instance, the discount
rate of 10-15 percent. The point is that if an oil company
doesn't use the money on this project, it can invest in a place
where it can receive a much higher return than if the state
doesn't spend its dollars. That's why the discounting exists,
he said. Slide 19 illustrates, under the Black & Veatch
analysis, how much better off the various entities will be. For
instance, the Canadian governments will be $700 million better
off and the U.S. federal government will be about $30 billion
better off. He then turned attention to slide 20 titled "How do
the Black and Veatch May 2008 Analysis and TransCanada Jan 2008
Analysis of 4.5 bcf/d, 25 year project compare?" Looking at the
total dollars number, it's apparent that in general they more
than doubled. Discounting the TransCanada streams produces the
same type of movement, although the percentage increases are
smaller. The percentage increases are smaller because the
dollars that are further out have increased the most, he noted.
He then pointed out that the graph on slide 21 provides a sense
of the order of magnitude difference.
1:14:55 PM
REPRESENTATIVE DOOGAN recalled previous testimony that both
ConocoPhillips and BP are buying back their stock, which
indicates they won't receive the rates of return being used in
the discount rates. He asked if that makes any difference about
the assumptions that the legislature should be making about the
producer's discount rates.
MR. DICKINSON replied yes, and related that the aforementioned
indicates they can't find all the opportunities. He said he
would argue that a discount rate of 10-15 is below the
opportunity cost of the companies. Generally, a large oil
company has [amassed] lots of cash over the last few years, and
generally the oil companies can't find opportunities that
provide that rate of return if prices don't continue to
increase. Therefore, he opined that the best way to pass on the
bonus to shareholders is by repurchasing stock. Repurchasing
stock indicates the capital can't be employed in a manner that
would bring higher returns.
MS. ADAIR noted her agreement. She added that the rate of
return will remain high because the oil companies are investing
in those projects already on their balance sheets and they
aren't investing in projects with lower rates of return. In
effect, the oil companies are increasing ownership in those by
buying back stock for the shareholders.
1:17:14 PM
SENATOR FRENCH inquired as to how Mr. Dickinson analyzed the
differences in the Black & Veatch analysis and the TransCanada
analysis.
MR. DICKINSON said he should answer that in the upcoming slides.
1:17:45 PM
MR. DICKINSON, continuing with slide 21, related that the
biggest driver is the price. He then highlighted the changes
that occurred in the producer's and the state's netbacks, the
upstream values. The aforementioned occurred because the
state's and producer's money flows from the value of the gas.
Moving on to slide 22, Mr. Dickinson pointed out that generally
the Black & Veatch base case forecast and the Wood Mackenzie
Alberta Energy Company (AECO) forecast are in the same place.
He then continued to review the graph on slide 22. Black &
Veatch has put forward very aggressive prices, which he reminded
members are nominal prices that one would expect to pay in
today's dollars. He explained that the price that TransCanada
used is below any of [Black & Veatch's] estimates; they are
below the 10 percent range. The exact numbers are specified on
slide 23 titled "How do the forecast prices Black and Veatch
used compare with those TCC used?" He recalled that in
discussions with Mr. Pulliam, it came out that the long-term
TransCanada has said that AECO prices would be $.75 below Henry
Hub. However, [the Black & Veatch] information relates that
AECO will sell at a premium to the Henry Hub prices and thus one
would add to the Henry Hub prices.
1:21:26 PM
MR. PULLIAM interjected that the Wood Mackenzie AECO forecast
reviews flows in and out of the entire North American grid.
With those flows in mind, they are trying to predict a
difference between Henry Hub and AECO. He opined that because
of declining production from Canada, the differential will
tighten over time. "They actually see, as you get out beyond
Alaska gas flowing, some premium for AECO over Henry Hub.
Others don't see a premium, but do see a tightening of the
differential," he related.
1:22:24 PM
SENATOR FRENCH surmised then that slide 23 relates that
TransCanada is predicting a gas price that is about half of what
Black & Veatch forecasts.
MR. DICKINSON replied yes, which is why there's a difference
between the [state's expected cash flow] under the two analyses.
SENATOR FRENCH pointed out that the TransCanada application
predicts it will make more money than under the Black & Veatch
analysis, although TransCanada projects a much lower gas price.
MR. DICKINSON stated that's because what TransCanada makes has
nothing to do with the gas price.
1:23:15 PM
MR. DICKINSON moved on to slide 24, which illustrates a flat or
slightly declining line that represents TransCanada's take.
TransCanada only modeled it's return on equity. Therefore, when
TransCanada goes into service in 2018 and for the first time
receives revenues from the project, what of those tariff
revenues are defined as return on equity, he asked. Under
TransCanada's model even though the tariff is levelized, within
the tariff one can still build out the amount of return on
equity. As depreciation occurs, the amount of equity decreases
and the return also falls. Referring to slide 25 titled "Is
State harmed or helped by delay in project?", he pointed out
that the Black & Veatch analysis indicates the state is helped
by delay. As the project proceeds in time, the state's NPV
increases. In the base case of $64 billion, a delay increased
the state's NPV by $1.8 billion. Upon further review, he
determined that the NPV increase is due to the production tax.
He explained that as price increases, higher progressivity is
triggered. In the tax, the progressivity rate is increased over
all of the payments, over all of the value. Therefore, as one
reaches high gas prices, the state's take is increasing at a
rate that is much faster than the 5 percent at which it's
discounting. In other words, for every year of delay
progressivity increases, as does the base and the tax. "You
knock off 2020, and you add on a year at 2044 and you've picked
up $2 billion," he highlighted.
1:27:27 PM
SENATOR FRENCH related his understanding that slide 24 relates
that Black & Veatch looks for a higher return for TransCanada
than TransCanada estimates. However, that doesn't coordinate
with slide 20.
MR. DICKINSON clarified that slide 20 relates that TransCanada
shows $16.4 billion coming in while Black & Veatch shows it at
roughly three times that, $57.5 billion. The graph on slide 24
shows a difference of about one-third [between the Black &
Veatch model of TransCanada cash flows and TransCanada's model
of return on equity], he said.
1:29:06 PM
REPRESENTATIVE GARA, returning to slide 25, recalled three years
ago when the former administration presented one of the reasons
to accept its proposal was that the sooner the pipeline was
[built] more money would be made; the NPV was larger the sooner
the pipeline [was built]. However, this analysis presents that
if there is a progressive gas tax, the later [the pipeline is
built], the better. "I have a hard time accepting any of this
at this point," he said.
MR. DICKINSON, referring to slide 27, relayed that three days
ago the current administration said "that state investment buys
progress and delay costs the state; intrinsic value because of
deferred revenue from gas commercialization." Traditionally, as
one thinks about a world with lower prices, the aforementioned
is the thought. He related his assumption that the Black &
Veatch report wasn't presented in time to impact the thinking
and presentations of others.
REPRESENTATIVE GARA related his frustration with regard to the
conflicting analysis, but added that he isn't going to pursue a
project that he would try to delay.
MR. DICKINSON pointed out that using a lower price assumption,
consistently shows that delay harms. However, a higher price
assumption coupled with progressivity shows that the delay
helps. As illustrated on slide 26, if the producers have a 15
percent discount rate, a higher rate, it results in a 10 percent
decrease if there is a delay of a year. He acknowledged
Representative Gara's frustration, which he remarked should
drive questions about why [Black & Veatch's] numeric model
presents an answer that's different than what people have
assumed for many years.
REPRESENTATIVE GARA related that he feels mislead a few years
ago and the legislature should've been told, if someone knew,
that the NPV could be increased with a delayed pipeline by
having a progressive tax.
MR. DICKINSON suggested that if anyone had come forward three
years ago and asked the legislature to base its analysis on $27
gas, the legislature would've rejected that. He highlighted
that even in the special session three months ago when the "bend
over point for progressivity" was at $97.5, the notion that
would be $40 below price was inconceivable. He further
suggested that folks are having a hard time keeping up with the
price changes.
1:33:09 PM
SENATOR WIELECHOWSKI, continuing the discussion regarding delay,
opined that specifying 2044 assumes the gas stops then. He
suggested, however, that the analysis should factor in that
there will be continuing gas, beyond 2044.
MR. DICKINSON noted his agreement, but remarked that the
analysis is cut off at 2044 for comparative reasons. The cut-
off point is, roughly speaking, at the 35 Tcf, which is now
known, and "15 yet defined." As it proceeds further out, it may
be that the state may make more and some thought should be given
as to what expansions mean in that context. Mr. Dickinson then
reiterated that the NPV analysis is a critical part of the
formal decision-making process of the administration.
1:34:32 PM
REPRESENTATIVE SAMUELS recalled that a couple of years ago Mr.
Pulliam ran the cost of the delay to the state, in terms of the
tax rate and making the NPV the same. "And you ran the number
at ... 7.25 and a three-year delay, you would've had to raise
the tax rate by about 40 percent. It was up to 10.75 to get the
same net present value, with just a three-year delay," he said.
MR. PULLIAM confirmed that was the analysis. However, he
reminded the committee that the analysis back then was for rates
that didn't have progressivity. It's important to keep in mind
that these are fairly low discount rates to analyze these cash
flows, he opined. Anything over 5 percent produces a more
intuitive result, which is that delay costs the state in terms
of NPV. He recalled that the discount rates used in the
analysis from a few years ago was in the range of 8-10 percent.
1:36:16 PM
REPRESENTATIVE LEDOUX remarked that she isn't interested in
delaying, even if it may result in an economic benefit.
MR. DICKINSON said that a model is as good as what it's trying
to review and show. The administration properly took a fixed
period and reviewed what happens within that period and what
happens if that period is shifted. Clearly, when [the
administration] is reviewing the NPV to the state, the four
major sources of cash flow are being reviewed not the secondary
effects, the multiplier effects, and other effects that could be
of concern.
1:37:38 PM
MR. DICKINSON, returning to his presentation, directed attention
to slide 28 titled "How robust is the assumption of rising real
prices over life of project?" From 1965 to the mid 1980s, there
were real rising prices as there wasn't a Henry Hub or AECO
price to which to return. Then there was another 20-year period
in which there was falling real prices. Since 2006 there has
been dramatically rising real prices. When there are rising
prices, there are supply effects such that "people come out",
there is an oversupply, and the price decreases. Mr. Dickinson
said there's no particular reason that this rise will continue
on until 2042. He suggested that there will be a correction,
although he didn't know when or how much. The point is, he
emphasized, that all of these assumptions are forward-looking
rising real prices. The aforementioned hasn't historically been
the case. Furthermore, the more pressure on price, the more
vigorous a supply response is received and thus it's more
valuable for folks to enter the business, which results in more
is production and an oversupply that results in a decrease in
the price.
1:40:48 PM
REPRESENTATIVE DOOGAN surmised that if the aforementioned is
graphed, the result will be rising real prices even if the slope
is different. He asked if the expectation of rising prices, as
applied to this project, is really a question of how much the
prices are expected to rise.
MR. DICKINSON responded, "That's a fair way of observing it."
REPRESENTATIVE DOOGAN surmised then that the question to
consider is what is the state's expectations of the increase as
well as the expectations of others and how the state should
analyze those.
MR. DICKINSON confirmed that it's appropriate to ask questions
about a dramatic rising gas price and what it does.
1:42:23 PM
MR. DICKINSON referred to slide 29 titled "Why are the producers
concerned about fiscal certainty?" He posed a scenario in which
there are low prices followed by a correction that results in
higher prices, in real terms, by a bit. In such a situation, if
oil prices have fallen and there isn't much revenue to go
around, the question becomes whether the state tries to solve
its revenue issues by having a different split between the
producers and the state or is there so much revenue that the
return on investment clearly meets the hurdle rate. When there
is discussion of fiscal stability, it's important to focus on
which of those is the concern. He noted that the mechanism the
state might use to solve either might be very different.
1:44:10 PM
REPRESENTATIVE GATTO, referring to slide 28, highlighted that
1984 was the middle of the Alaska housing slump. He questioned
whether that slump was a reflection of a much greater decline in
the economy. Since 2005, [Alaska] has been experiencing another
housing slump, which he surmised is a reflection of the overall
world economy and high petroleum prices. He asked if in the out
years there could be a lengthy decline such that the projections
would be far off.
MR. DICKINSON acknowledged that the aforementioned is a very
real possibility and that the graph on slide 28 ties into many
other things. He reminded the members that what may be more
directly tied to what was happening in Alaska in 1985-1986 was
the dramatic fall in oil prices.
MR. PULLIAM interjected that one must also keep in mind that the
period prior to the late 1980s was a period of price controls
for natural gas in the U.S. Therefore, that first upward
movement prior to 1985 was due to prices being controlled above
market levels. When the prices weren't controlled, there was a
bit of a drop down to normal supply and demand conditions. As
far as price projections, it's certain that the exact prices
won't be what is projected.
1:47:05 PM
REPRESENTATIVE WILSON pointed out that during the period of
falling prices, there weren't two large population areas of the
world entering the industrial revolution, and therefore the
demand that exists now didn't then. She asked if that would
make a large difference.
MR. DICKINSON replied yes. He related that he recently had
dinner with an individual who works for a law firm that does a
lot of work in China. That individual said in 10 years he
expects there to be a full scale civil war in China. Mr.
Dickinson acknowledged that Representative Wilson has correctly
identified a driving growth pattern, but whether that will be
sustained may be more difficult to determine.
1:48:15 PM
REPRESENTATIVE LEDOUX recalled hearing in the past that the
producers needed fiscal certainty due to the large scale nature
of building the pipeline and the corresponding risk. She
inquired as to the rationale the producers have for seeking
fiscal certainty.
MR. DICKINSON explained that in the U.S. those taking the
commodity price risk, the people who have to sell the gas, make
FT commitments and thus even if they have to sell the gas for
less than tariff, they will still pay the tariff. The
aforementioned is what TransCanada takes to the bank because
it's not taking the price risk, other than a minor fuel piece.
The aforementioned is often referred to as risk sharing. Mr.
Dickinson then reminded the members that only five years ago the
producers were in the U.S. Congress seeking a price floor such
that they would receive a tax break if the price fell below
about $2.35. The concern [for the producers] was that they
would put the money out and the effective tariff would be
greater than what the gas could be sold. Although that concern
may remain, there may also be the opposite concern in which
there is so much economic rent being generated that the state
will want to renegotiate that part of the arrangement. The
fundamental idea, he emphasized, is who is taking the risk on
price isn't the pipeline.
1:51:19 PM
MR. DICKINSON, returning to his presentation, directed attention
to slide 30 titled "Words Matter." He highlighted that the
administration has suggested avoiding "subsidies" and/or
"billions of dollars in concessions." However, other aspects of
the current license were referred to as quid pro quos, such as
"state investment buys progress and state investment buys
provisions." The notion is that those who believe there is a
valid need for fiscal stability/certainty for those who take the
price risk would characterize the situation as quid pro quo in
which there will be an arrangement involving the state's ability
to use its taxing authority and those who are taxed when they
sell the gas.
1:52:35 PM
SENATOR FRENCH inquired as to Mr. Dickinson's view of the 10-
year tax certainty offered in AGIA.
MR. DICKINSON related his understanding that the [language
related to tax certainty] was changed, and therefore he offered
to answer later. Referring to slide 18, Mr. Dickinson opined
that it's appropriate for the state to make commercial
arrangements that include fiscal certainty. However, the
problem is that Alaskans don't want to give away things that
aren't necessary or have reimbursements that aren't critical
whereas the producers may argue for a larger number than will
drive their decisions. Therefore, judgment regarding the
correct level [of tax certainty] will have to be made. Mr.
Dickinson related that he is exploring the notion that the state
seems willing to use its taxing authority as part of the
arrangements it will make to enable the construction of the
pipeline. Ultimately, there will be various projections of the
correct number.
SENATOR FRENCH opined that the state has provided fiscal
stability. Therefore, before sweetening the pot, he suggested
obtaining a commitment from the producers to nominate a certain
amount of gas.
1:55:45 PM
MR. DICKINSON, referring to slide 31, highlighted that the state
used quid pro quo, inducements, to find a builder for the
pipeline. Now the state needs to find a financer of the
pipeline. Mr. Dickinson then turned to the difference in the
inducements between the mid- and upstream. He reminded the
members that TransCanada's model doesn't include progressivity.
The notion is that as price increases, there are dramatic
increases in the dollars available upstream that are impacted by
the production tax, the income tax, and the producers' residual
after those are subtracted. The Black & Veatch analysis on
slide 33 illustrates something similar, that is how much of the
dollars, sensitivity for the state, is driven by the oil prices.
As Senator Therriault pointed out, the tornado diagram is
problematic because different impressions can be shown by
choosing what ranges will be shown. The overall notion of the
diagram is that the state's revenue on this matter is being
driven by commodity prices. The tornado diagram on slide 34
refers to the producers' sensitivities, for which the biggest
driver is also the commodity prices.
1:58:58 PM
SENATOR STEDMAN, speaking to slide 32, questioned how valid the
analysis is since it doesn't take into account progressivity,
which is a large impact, and the tie in of oil taxes with gas.
MR. DICKINSON recalled that when TransCanada discussed the graph
on slide 32, Mr. Palmer referred to it as very unsophisticated
analysis because TransCanada focused on the midstream. Mr.
Dickinson agreed with Senator Stedman that the slide, since it
doesn't use progressivity, probably isn't the most useful.
SENATOR STEDMAN remarked that part of his concern when reviewing
this data is that progressivity is a substantial portion of the
state's tax structure and within that tax structure there's a 20
percent credit. Unless progressivity and the credit are
recognized, the numbers reflecting what the state may gain will
be off. He recalled that being an issue with the oil tax, when
the state was surprised with the modeling. He expressed the
hope that a similar mistake wouldn't be made.
MR. DICKINSON related his understanding that TransCanada has an
economic liability spreadsheet, as required by the RFA, and was
frank that some of the formulas it used were simplistic. The
Black & Veatch analysis is more sophisticated and has been
added. Therefore, Mr. Dickinson surmised that the legislature
would prefer to review those results from the Black & Veatch
analysis versus the TransCanada analysis. He said that although
he hasn't [thoroughly] reviewed Black & Veatch's analysis, the
Black & Veatch analysts did things that TransCanada didn't, and
therefore there's more precision.
2:02:14 PM
MR. DICKINSON moved on to slide 35 titled "Everyone Makes Money
Questions: Would the producers make more as producer/carriers?"
He asked are the producers making so much money that they would
sign on to this project. He suggested that the focus should be
on what's referred to as an incremental analysis. If the
producers agreed to all the AGIA enhanced equal access
provisions and built the pipeline, how much of the money would
flow through, he asked. In other words, how much of what occurs
is a consequence of this particular license or how much is a
comparison of the two projects. Referring to slide 36, the
notion is that a shipper will receive returns from monetizing
gas and after taxes keep the remainder. There is also a
pipeline, a carrier, earning money from carrying the gas. If
that's the same parent company, then it makes that $57 billion.
If there is a third party, then the third party makes the $57
billion and the upstream producer only makes $154 billion. In
simplistic terms, the party that makes the pipeline will earn as
a consequences of doing so.
2:04:32 PM
SENATOR WIELECHOWSKI recalled Spencer Hosie's comments that the
producers have an obligation to sell if they can make a
reasonable profit. He inquired as to what's considered to be a
reasonable profit, $154 billion or $74 billion.
MR. DICKINSON responded that he, like Mr. Hosie, couldn't
quantify what's considered a reasonable profit.
2:05:10 PM
MR. DICKINSON, moving on to slide 37, pointed out that if the
cash flow is discounted at 10 percent rather than 8.8 percent,
it shrinks considerably. If it's discounted at 15 percent, a
producer would come out behind, he said.
2:07:08 PM
SENATOR FRENCH, referring to slide 35, pointed out that the $114
billion and $256 billion refer to the producers, although on
slide 35 those numbers seem to refer to the state. Senator
French then requested that Mr. Dickinson provide members a two-
to three-paragraph analysis of how slide 37 works.
MR. DICKINSON agreed to do so. He mentioned that income taxes
weren't included [in the analysis on slide 37] because the state
doesn't have a separate accounting income tax but rather has an
apportionment income tax. Apportionment income tax means that a
company's worldwide income is multiplied by a state
apportionment factor, the sum of which is multiplied by 9.4
percent. In a project such as this, most of the changes in
income tax are flowing from the change in the apportionment
factors that come from additional production, property,
equipment, or sales.
2:09:05 PM
MR. DICKINSON, speaking to slide 38, said the question is: how
much money is flowing from the incremental effects of the must-
haves and how much is flowing from the unenhanced project. The
aforementioned leads to the notion of an enhanced open access
pipeline. As posed on slide 39: "How does the state achieve
an 'enhanced open access pipeline?'" The goal of the must-haves
is to produce an enhanced open access pipeline such that there
will be an increase in the benefits and in an extreme case of
open access, those benefits could be written into the
documentation. He then turned to the enforceable commitment
relative to the open access line. He explained that TransCanada
is making a commitment as to the position it will take when it
goes before a regulatory body. It's important to recall, he
emphasized, that AGIA doesn't effect the decisions made by FERC.
Another important point, in the case of the producers being the
opposite party, is that the producers' ability to argue their
case isn't constrained. Therefore, he suggested that a question
may be whether that might be a more effective conversation.
Many of TransCanada's positions are ones they might take
regardless, he noted.
2:11:58 PM
MR. DICKINSON, referring to slide 40, highlighted that
TransCanada's commitments refer to both what it will advocate
for and negotiate. However, a negotiated rate still has to go
before FERC or NEB, which may or may not approve it. He related
his understanding that [FERC] likes negotiated rates. Moving on
to slide 41 titled "How will Third Parties be affected by
TransCanada's commitments?", he recalled that Commissioner
Galvin suggested considering whether an entity would explore in
the face of "an unknown and uncertain regulatory process - that
doesn't exist anywhere else, don't know how long it will take,
don't know whether it will succeed." The question to ask, Mr.
Dickinson suggested, is whether TransCanada's commitments make
navigating the new rules at FERC any clearer. "How much
uncertainty are folks used to facing in the regulatory process;
how much does this set of rules, on one of the parties, change
... the uncertainties in that regulatory process," he
questioned. He then reminded members that in 2004 the federal
rules changed and FERC was given powers to enforce some of the
open access pipeline provisions. There is no knowledge as to
how FERC's normal practices will change when it's faced with
enforcing the new rules. Referring to slide 43, Mr. Dickinson
reviewed the five tariff commitments, as follows: expansion in
reasonable engineering increments and on reasonable commercial
terms; rolled-in rates; minimum debt of 70 percent; cost overrun
mechanisms to share risk with shippers; and $500 million state
spending won't be part of the tariff. He noted that the $500
million state incentive would accrue the most interest as it
would essentially be the first funds spent.
2:16:03 PM
MR. DICKINSON, continuing with slide 44, remarked that the
definition of "open access" has been explained as when
"Explorers have confidence that the pipeline will be expanded
and new gas will pay a fair transportation rate with rolled-in
rates." Deputy Commissioner Rutherford has said explorers won't
explore without confidence. Therefore, the question is whether
TransCanada's commitment makes a difference beyond the federal
[presumptions]. He suggested questioning how much of future
benefits from future exploration activity flow from AGIA. With
regard to rolled-in rates, one should ask how TransCanada's
agreement to rolled-in rates impacts its bottom line versus
whether TransCanada is merely rearranging the dollars between
the shippers. TransCanada is always going to receive full cost
recovery and return on its investment. Assuming the credit
risks are equal, it doesn't matter to TransCanada who is paying
those dollars. He opined that when one reviews a rolled-in rate
that is moving a total amount or just allocating between
shippers, TransCanada doesn't care about that in most cases.
However, the overall tariff rate does impact TransCanada because
if the tariff is too high, TransCanada won't have any customers.
Still, the certainty of an entity signing up for there rates is
important, he noted. Mr. Dickinson moved on to slide 45, which
relates that FERC already has a presumption favoring rolled-in
rates for any project. The reason an entity would object to
rolled-in rates is that the entity, with a long-term contract,
might object to having to pick up a piece of an expansion. The
question is whether it would be more effective to reach that
likely objection by talking with those who would likely object
or by talking to TransCanada, who may have been neutral on the
issue. With regard to the limit on equity percent, slide 46,
Mr. Dickinson said it's clearly a case in which TransCanada
pays. That's a compromise that TransCanada is making and any
shipper will receive the benefit of the lower tariffs. As
relayed in slide 47 with regard to the cost overrun risk
mechanisms, TransCanada will take on some risk. As
characterized in the Anchorage presentations [by the
administration], TransCanada has made a very good opening bid.
2:19:44 PM
MR. DICKINSON, referring to slide 48, highlighted that the
administration has related that the $500 million "credit to rate
base pays for itself in increased future revenues." Therefore,
the administration believes it makes sense to lay out that $500
million as its exchange for value. Therefore, he said he would
question whether the rest of the must-haves are free. He said
he would also question whether there's a point at which the
state wouldn't receive a future benefit from the state putting
it's money in. He suggested that there should be a mechanical
breakeven point. Moving on to slide 49, Mr. Dickinson pointed
out that there is the general notion that the state's netback is
dependent on the tariff. Therefore, if there's a high tariff,
the state makes less money and vice versa. One must remember,
however, that the majority of dollars are coming from the
state's production tax. In the November 2007 special session,
the legislature changed those rules as specified under AS
43.55.150(a). Under the new AS 43.55.150(a), the following
conditions were set: if the shipper is affiliated with the
transportation carrier or with a person that owns an interest in
the transportation facility, then the gross value at the point
of production is calculated using the actual cost of
transportation or the reasonable cost of transportation,
whichever is lower. Therefore, if, under the TransCanada plan,
ConocoPhillips bought a 1 percent interest in the pipeline, the
aforementioned would be triggered such that ConocoPhillips'
tariff would be the lower of its actual costs or its reasonable
costs. The statute specifies, "The department shall determine
the reasonable costs of transportation using fair market value
... or other reasonable methods." In other words, if a pipeline
shipper owns any interest or has any commonality of interest
with the pipeline owner, the department can write regulations
which determine the deduction for purposes of the production
tax. Although this doesn't impact third parties, clearly a
higher tariff is real money out of the pocket of the third
party. Continuing with slide 50, he highlighted the following
questions: "How will this license lead to in-state gas in ways
that other project won't?"; "How will this license lead to an
LNG project in ways that other project won't?" As related on
slide 51, the notion is that all these benefits will flow from a
pipeline project, no matter whose project it is. If one
believes the license is the best/only way to start a pipeline
project, then the aforementioned notion is correct. However, if
that's not true, then the state should be wary of benefits
attributable to a specific pipeline project covered by this
license.
2:25:46 PM
REPRESENTATIVE DOOGAN asked if it would be equally true that
this license is the most likely way to start a pipeline project.
MR. DICKINSON replied yes, adding the caveat of being able to
quantify the likelihood of how much would flow.
REPRESENTATIVE DOOGAN remarked that his point is that if this is
being based on a syllogism, it must be the appropriate
syllogism.
2:26:39 PM
REPRESENTATIVE SAMUELS announced that the meeting would break
for a Joint Armed Services Committee meeting, and upon its
conclusion the meeting would continue.
The committee took an at-ease from 2:26 p.m. to 3:16 p.m.
3:17:25 PM
MR. DICKINSON referred to slide 52 titled "5 Local Commitments,"
which include the five in-state takeoff points; firm
transportation with distance sensitive rates even without FT
commitments; local headquarters; local hiring and contracting;
and a project labor agreement (PLA). He noted that a company
that will move gas into the state doesn't necessarily need to
make an FT commitment in the open season. Therefore, he opined
that the volume of gas that will move that way is so small that
it doesn't need to be financed 10-15 years in advance. The
question with regard to all of the aforementioned commitments is
in regard to how unique each is to this particular project, as
relayed on slide 53. Moving on to slide 54 titled "Unique to
TransCanada Project?", Mr. Dickinson questioned how much local
commitments account for if the state received all 20 must-haves
for $500 million because any project would likely include things
such as local headquarters. Another question to ask is whether
the Alaska Natural Gas Development Authority's (ANGDA)
principle: "Ride as far as you can in the big pipe" is tied to
this specific license or would any project include the same
aspect. He then continued with slide 55 titled "What is the
enforceable commitment for In-State Rates without FT?" He
reminded the members that TransCanada said it would offer FT
service, provided that in-state shippers execute long-term FT
contracts with the Alaska Section for service. TransCanada has
also said, "In the event there is insufficient capacity for the
delivery of in-State gas, TransCanada is prepared to expand the
Alaska Section to accommodate such deliveries, provided that
such expansions are in engineering increments under commercially
reasonable terms and conditions." He interpreted the
aforementioned to mean that although an FT commitment doesn't
have to be made, an entity that gives an FT commitment when the
pipeline is already full would only receive what's available
when it's available.
3:21:34 PM
REPRESENTATIVE SAMUELS inquired as to how it works for the ramp-
up for the Fairbanks market to slowly increment to what is a
fraction of an increment. He then questioned whether the usage
in Fairbanks is so small in the aggregate that it wouldn't
matter.
MR. DICKINSON noted that those who forecast future use might bid
on future capacity. The question is whether the entity is
willing to make commitments early on, prior to the build up.
The difficulty with long-term contracts is that others may also
be making long-term contracts. If it's a matter of switching
the Fairbanks economy to base everything on gas, that will take
some time. Furthermore, there will be costs for doing so.
Clearly, one of the issues is that of the 4.5 Bcf/d pipeline,
the state's concerns is about a very small piece. TransCanada
wants to identify the takeoff locations upfront, which means the
construction of a telescoping pipe. The difficulty, he noted,
is to determine the location of the takeoff points and the
amount of demand. The aforementioned decision should be made
when the size of the pipe is determined.
REPRESENTATIVE SAMUELS asked if Fairbanks is such a small amount
on a 4.5 Bcf/d pipeline that the takeoff doesn't matter because
it's such a small amount of gas on a large pipe. Or, is it
problematic for Fairbanksans to slowly ratchet up what they use
or "is the small amount in the rounding?"
MS. ADAIR opined that it's in the rounding, at least at the
level of project definition being discussed today. As Mr.
Dickinson suggested, as more [detail] is available in terms of
the design of the project, [Fairbanks' off takes can] probably
be accommodated. She suggested that it could likely be
accommodated in compression line pack.
3:25:07 PM
REPRESENTATIVE KELLY remarked that it's important that
TransCanada understand that Fairbanks, which will be in the 1
B[cf/d] range, will request that TransCanada provide for that [1
Bcf/d] range and it won't be required to be nominated from day
one.
MR. DICKINSON related his belief that if there's space, that
would be appropriate. However, if it's fully bid out under the
current proposal, then there could be situation in which there
is insufficient capacity and an expansion to meet that would be
required.
3:26:11 PM
REPRESENTATIVE SAMUELS asked if it's assumed that when an entity
bids on pipeline capacity, there's long-term capacity as well as
short-term capacity, which is more fungible in terms of gas
usage. He questioned how pipelines work in small markets, such
as that of Fairbanks.
MR. DICKINSON answered that he wasn't sure. However, he
recalled that TransCanada discussed having several time ranges,
in the range of 20-25 years. He then noted that during an open
season, an entity can have a nonconforming bid and then proceed.
He said he didn't recall anything about shorter timeframes, and
thus he suggested talking with TransCanada about this point.
3:27:11 PM
REPRESENTATIVE KELLY specified, "I think that the words we want
to hear would be: 'provide for the eventual build out.'" He
expressed the desire for the off-take points for Fairbanks and
there to be enough capacity, in say a decade, to have the build
out occur. The aforementioned isn't going to occur initially
with the FT commitments.
3:28:27 PM
SENATOR WIELECHOWSKI opined that this is an important issue. He
recalled that according to the ANGDA presentations, there is 500
thousand cubic feet (Mcf) to 1 Bcf in potential demand in Alaska
for in-state use. He opined that going into initial
construction knowing that there needs to be an expansion, there
would need to be a cost benefit analysis regarding whether there
should be a separate in-state line. He pointed out that the
tariff would be lost on that 1 Bcf/d for Alaska and TransCanada
would be losing the tariff that would otherwise accrue going to
Alberta.
3:29:38 PM
SENATOR BUNDE inquired as to whether a provision was made for
the state to take its royalty gas in-kind and how that would be
accommodated in capacity.
MR. DICKINSON answered that under the lease the state has the
option to take the gas in-kind on very short notice. One of the
areas in which the state agreed to fiscal certainty was in
limiting that ability so that producers would know more about
what gas they had versus the state's gas. He offered that a
producer would not want to bid on FT and discover that the state
"pulls it out from under you and you have empty capacity."
However, he related his belief that in the long run whether the
state selects the royalty gas in-kind or not, that someone has
to make the FT commitment. He opined that ownership interest in
the pipeline would be irrelevant since no matter whose gas it
is, the issue is that someone must step forward and say, "I'm
going to pay that charge whether I ship that gas or not." He
said that he didn't think that the upstream shippers have any
concern with the state taking its gas so long as the state makes
it clear beforehand so everyone can make an FT commitment based
on how much gas they will have to take to the destinations to
obtain the highest value.
3:31:24 PM
SENATOR BUNDE opined that someone has to make the FT commitment.
He inquired as to whether that occurs through future
negotiations when the state decides it wants a portion of the FT
such that if the state chooses to take the gas in-kind it can do
so.
MR. DICKINSON offered that might be one way of doing it if the
state didn't feel it was ready in the first open season to
either step in, in place of the organizations that the state
felt might use it or to take that capacity and put it out to
become a secondary market. He noted that several approaches
could be made.
3:32:02 PM
REPRESENTATIVE KELLY suggested that on the Alaska "off-take"
there are two hurdles, which are pipe size and FT. He related
his understanding as to how the two are linked. However, on
sizing the pipeline, as Senator Wielechowski commented, he
opined that the state would want to avoid the situation in which
the flange is sitting useless until further expansion happens.
He opined that the smaller in-state amounts needs to be
approached with the appropriately sized pipe and perhaps the FT
being ramped into it. However, the first hurdle is more
important than the second hurdle since the state has the ability
on royalties to easily satisfy the initial requirements, he
stated.
3:32:59 PM
MR. DICKINSON said he believes that the installation of the
flange when building a pipe is almost cost free as opposed to
attempting to do so later. Therefore, the state might want to
over flange at the time of selecting options and making
commercial arrangements.
REPRESENTATIVE KELLY remarked that was his point.
3:33:24 PM
MR. DICKINSON referred to slide 56, which he said highlights the
same comments that Senator Wielechowski made, which is to ask
how TransCanada makes its money. TransCanada makes its money on
expansion. Therefore, it will be allied with the state on
expansion and TransCanada will help ensure that happens. He
elaborated by offering the analysis that TransCanada makes its
money on transporting gas and its return on investment on how
much plant and equipment it has. Thus, if the company has less
equipment and transports less gas to the Lower 48, TransCanada
is going to make less money. He stated that TransCanada makes
the most money by transporting "the most gas over the most
miles." Considering TransCanada's alignment with Alaska, he
noted that there may be some misalignment.
MR. DICKENSON, referring to slide 57 titled "AGIA Mechanism,"
offered that the AGIA mechanism provided an inducement to a
carrier. If a carrier holds an open season, obtains a license,
and takes the other steps necessary, AGIA sets up a situation in
which a line can be constructed. The inducements for the
shippers were to entice them to underwrite the gasline, or to
provide the financial underpinning, he offered.
3:35:05 PM
REPRESENTATIVE ROSES referred to slide 49, of proposed
AS 43.55.150(b), which read:
b) gross value at the point of production is
calculated using the actual costs of transportation or
the reasonable costs of transportation ... whichever
is lower. The department shall determine the
reasonable costs of transportation using fair market
value ... or other reasonable methods.
REPRESENTATIVE ROSES inquired as to whether Mr. Dickinson
advised that if this provision passed as part of the tax
revenue, then [AS 43.55.150](b) would be triggered in the event
that the company has any affiliation with the pipe. Thus, if
TransCanada guarantees it, does this provision "kick in" and if
so, by passing AGIA did the legislature create disincentives for
the companies to become partners, he asked. If that is the case
and the state has created disincentives for partnerships by
TransCanada, he suggested it provide a reason for TransCanada to
build its own line since it will pay the rate either way.
3:35:54 PM
MR. DICKINSON acknowledged that as a good question to ask. He
stated that he did not want to prejudice potential future
litigation by opining on whether it makes sense. However, he
offered his belief that Representative Roses identified an issue
that should be asked since it does identify the cause and effect
that would flow from these specific provisions in AGIA.
3:36:06 PM
MR. DICKINSON referred to slide 58, and to the carrier
inducements. He stated that a carrier stepped forward and said
that it would accept those inducements in exchange for the "must
haves." He said that the question to ask is whether the $500
million was exchanged for something else, in which the state
created value. Another way to phrase that question is to ask
whether TransCanada was allowed to "play with the shipper
chips." He inquired as to whether a situation exists in which
TransCanada is doing things that won't affect its bottom line,
but would affect the shipper's bottom line and that is the
reason why the inducement was successful. He asked whether
TransCanada would have done some of those things even if it
wasn't required to do so under a binding commitment. Continuing
with slide 59, Mr. Dickinson asked whether the shipper
inducements will be sufficient by adding value and making [the
gasline] more likely to happen.
3:37:35 PM
MR. DICKINSON, referring to slide 60 titled "Part II: The Vote -
Beginning or end of Competition," opined that the questions he
has raised will provoke discussion and provide useful answers.
He offered that the legislature is faced with voting on a
proposition and he wants to suggest some ways of thinking about
the proposition. He stated that he didn't think that a lot of
the questions he has raised are about the connection between
what the license will do and the results. He opined that it
would be a mistake to vote against a license on the basis that
the legislature thinks it won't deliver everything it promises.
He suggested that a better way to consider a license is in
regard to which license places the state in a better position.
One positive step in the process is that the outcome is good if
awarding a license encourages another competitor. He expressed
concern if the administration doesn't treat this process as a
competition, but as the end of the competition. He cautioned
that the process creates a situation in which the race has been
won, the gold medal is placed around the winner, and everyone
else is shunted off. The notion is that there are a number of
producer/state issues that will affect both parties on any
project. He opined that it isn't productive if the license
award is treated as a green light to ignore the issues.
Secondly, the legislature wouldn't be encouraging competition if
the licensee has access to funds in which the non-licensee is
somehow affected and this project is favored over other
potential projects, such as LNG or the producer line, or even a
GTL plant.
3:39:53 PM
REPRESENTATIVE GARA offered his understanding that Mr. Dickinson
is suggesting that the state award the license and then shift
the contract to the producers or someone else later. He noted
his further understanding that awarding the license encourages
another competitor. He inquired as to what sanctions are
contained in AGIA that would apply in an instance in which the
state awards the license, then bails out on the licensee and
accepts another company.
MR. DICKINSON stated his agreement that the state could do the
aforementioned. However, he offered that there is some
question, in terms of reviewing the definitions, as to the
overall financial impact. A number of attorneys and the DNR
commissioner have advised that the state would have a financial
impact of about $333 million maximum. If, after all the work
had occurred to obtain a certificate, the state "changed
horses," the state would be responsible for 3 times the
liability of the unreimbursed amount, which would total b about
$333 million. Others have speculated that the cost would be
three times $600 million or $1.8 billion. Secondly, he pointed
out that one of the things he heard in Anchorage is that
negotiations are ongoing. He opined that the investors have to
ensure that their $30 billion is protected and invested
appropriately. In that negotiation process, the producer will
move risks around and one possibility is that the producers may
play a larger role in this line, whether it stems from AGIA or
not. He mentioned that the license may impede that or not.
Simply dropping one [licensee] and going to another probably
wouldn't occur, he surmised. Furthermore, AGIA clearly sets out
steps to cover instances in which either side thinks the project
is not economically feasible, particularly if the other side
disagrees. The only time that the triple damages would occur is
in the event that the state extends preferential royalty or tax
treatment or a grant of state funds for the purpose of
facilitating the construction of a competing natural gas
pipeline in the state. However, if a negotiation came together
in which the producers made the project feasible, it is possible
that TransCanada might agree not to claim the triple damages.
Thus, if the negotiations occur, it is just another one of the
pieces that would need to be moved around, he remarked.
3:43:40 PM
REPRESENTATIVE GARA inquired as to whether Mr. Dickinson is
suggesting that the state grant a contract and then breach the
contract. He opined that the state does not want to be viewed
as an unstable or untrustworthy partner.
MR. DICKINSON cautioned that he is not suggesting that the state
breach a contract. He clarified that what he is trying to
convey that the intent of how this contract will be fulfilled
is, as the governor stated, the state stays out of the way and
allows the commercial parties to negotiate. He opined that it
could be a three-way negotiation if one commercial party desires
something that isn't in the purview of another commercial party,
but involves the state. In the event that such a situation
happens, one of the issues will be whether treble damages may or
may not occur. Mr. Dickinson highlighted that since TransCanada
has experience in negotiating other deals and shipping other
producers' gas, it has experience in working with producers and
in negotiating tax rates. Thus, developing the gasline doesn't
create a unique experience for TransCanada, other than scale.
He opined that if a deal gets put together that makes sense to
TransCanada, it will inform the state, particularly in
anticipation that the state will provide, as mentioned by
Senator French, "some additional skin."
3:45:26 PM
SENATOR WIELECHOWSKI posed a scenario in which the state awards
TransCanada a license and the producers continue with the Denali
Project. He inquired as to whether FERC would give the
TransCanada license any additional weight due to the state
support through licensure.
DR. NERI answered that while he was not 100 percent sure, he
didn't think that the state issuing the license to TransCanada
would carry any extra weight unless legislation passed.
3:46:11 PM
SENATOR WIELECHOWSKI he asked if anyone has a sense as to how
FERC would analyze two separate proposals, the TransCanada
proposal and the Denali Project.
DR. NERI opined that FERC's intent would be to evaluate each of
the proposals. However, one possibility is that FERC could
advise that the two parties to team up and work out a project
together [in order to avoid] redundancy and waste of resources.
MR. DICKINSON recalled that the same question was posed earlier
and received some thoughtful answers relaying that FERC attempts
to suggest what is in everyone's best interest and when it has
allowed commercial parties to work. He opined that clearly lots
of projects exist in which compete parties attempt to build
projects, when demand is identified. The FERC ultimately
determines which project will work for the public convenience
and necessity.
3:47:45 PM
REPRESENTATIVE SEATON related his understanding of the AGIA
process that the state cannot preferentially aid another
pipeline. However, he inquired as to what would happen if the
producers decide to convert the gas to liquids, monetize it at
the leasehold, and ship it down TAPS. He opined that nothing in
AGIA prevents preferential use or treatment if the gas is
converted to synthetic crude on the North Slope.
MR. DICKINSON reiterated that the provision contains two
components that aren't identical, which he opined is confusing.
The trigger talks about preferential treatment, but doesn't
include the remainder of the phrase in the rest of the sentence.
He expressed hope that Representative Seaton's interpretation is
correct and that other projects will continue to thrive until
the projects are no longer compatible. He said that point is in
the future and he would hope that awarding a license would not
change that. He opined that the attorneys could interpret the
phrase in AGIA and regarding what would trigger the condition.
3:49:57 PM
REPRESENTATIVE SEATON related a scenario in which the producers
decide to monetize the gas by putting it in GTL modules at
Prudhoe Bay and use TAPS to transport it. He then inquired as
to whether anything in AGIA would prevent or impact the license
or any project from moving forward.
MR. DICKINSON said it did not, but he suggested that attorneys
examine the damages questions since they may interpret AGIA
differently than a lay person.
3:50:48 PM
REPRESENTATIVE KERTTULA related her understanding that the
competition has already happened, such that proposals were made
and this is now based on availability of the resource. She said
that it is not as though the state will close things down, but
rather what is available at a certain point.
MR. DICKINSON noted his agreement, adding that the point is what
resources are available at what risk. He predicted that over
the next five days the legislature will hear that those who take
the price risk on the commodity try very hard to protect
themselves from things like cost overruns and so they negotiate.
Echoing his earlier comments, Mr. Dickinson stressed that
awarding the license should be the kickoff for the commercial
negotiation, not the end.
3:51:58 PM
REPRESENTATIVE SAMUELS related a scenario in which
ConocoPhillips and BP sought a permit from DNR for a pipeline at
the same time as TransCanada, and inquired as to whether the
treble damages clause would be triggered. He surmised that
TransCanada would claim that the state couldn't issue
ConocoPhillips or BP the permits since it is the licensee. He
said that he realizes Mr. Dickinson isn't an attorney, but he
asked for his opinion.
MR. DICKINSON, acknowledging that he isn't an attorney, surmised
that it seems to him that as long as the government is
functioning as the government and is not acting preferentially,
he would hope treble damages wouldn't be triggered. He related
his belief that although the rights-of-way are nonexclusive,
there are some "pinch points." Moreover, until the deciding
authority, FERC, has made some decisions, it would be a mistake
for the state to favor one project over another or grant any
exclusive rights.
REPRESENTATIVE SAMUELS noted that TransCanada would be asked the
same question.
3:53:59 PM
REPRESENTATIVE GATTO inquired as to whether the license is a
license that [the licensee] would own or that the state lends it
[to the licensee]. He further asked whether restrictions apply,
the producer can sell [the license], or whether the license will
sunset.
MR. DICKINSON, speaking to the last question, explained that a
set of commitments to act would exist and, at some point,
TransCanada's inaction would represent abandonment of the
project. At that point, TransCanada would turn over to the
state all the work that had been done to that point, he related.
Although he said that he didn't believe a specific sunset exists
in AGIA, the timelines have that effect. Referring to
Representative Gatto's earlier question, Mr. Dickinson said he
would "dodge that." He recalled that it isn't so much that the
license could be sold, but rather what happens if ownership is
changed. He offered to find out and provide a specific answer.
3:56:05 PM
REPRESENTATIVE GATTO inquired as to whether the contract would
still be [TransCanada's], if [TransCanada] were enter into an
agreement with the producers. He opined that in such a
situation [TransCanada] couldn't merely inform the state that
the contract is now shared with the producers.
MR. DICKINSON clarified that it's a license. However, he
deferred to an attorney regarding those kinds of changes to the
license.
3:56:32 PM
MR. DICKINSON, returning to his presentation, referred to slide
61 titled "Beginning or End of Competition?" He explained that
this slide portrays two views from Commissioner Galvin, one that
introduces more competition while the other doesn't. The
question is which way is the state headed. Mr. Dickinson said:
The first one, he was very clear and very forceful.
It says, "We are not here to stop them [the producer
line]." I think he was very explicit that they can
continue to move on whatever schedule they had, but
that the administration was embarked on something with
its own set of specific guidelines and timelines, and
it wasn't an attempt to move in a way of a producer
pipeline. On the other hand, at that same forum, on
the same day, I believe even the same presentation, he
said that the "State has a considerable interest in
steering producer gas to the TransCanada project."
And again, what the state views as the steps it can
take to follow through on that considerable interest
are things that you might question if what you're
trying to do is keep the competition a full-fledged
competition.
3:57:48 PM
MR. DICKINSON noted that slides 62 and 63 are in the wrong
order. He related that on slide 63 he was asking a cynical
question by asking, "How can another 'competitor' with no credit
and no customers strengthen the prospect for a line?" He
offered that the answer is: the more information gathered the
better. He opined that although this is already the most
studied pipeline ever, much is still unknown. He surmised that
given the size of the commitment that it made sense to gather
more information. He pointed out that one of the things that
can happen in an "open season" is that producers may use non-
conforming offers to forward the negotiations. He opined that
in a commercial negotiation other parties figure out what their
weaknesses are and what the other party can bring [to the
table].
4:00:08 PM
MR. DICKINSON, referring to the last bullet point on slide 63,
related his understanding that historically, when FERC has had
two competing projects, it has specified what it believed to be
in the national interest and would suggest ways that the parties
could resolve issues much in the way that a judge suggests a way
to resolve a case. In this case, Congress has told FERC that
[Alaska's gasline] is clearly in the national interest. He
related that he has heard in a conversation today that the
aforementioned isn't as true recently as it was in the past.
Therefore, the question to ask is whether FERC will intervene
and attempt to merge the parties or not.
4:00:43 PM
REPRESENTATIVE GUTTENBERG inquired as to whether the legislature
has access to the work product.
MR. DICKINSON said that the state has access to the work product
if certain things fail. He related his belief that the
legislature probably has access to the work product under AGIA,
but he offered to research that matter further.
REPRESENTATIVE GUTTENBERG related that in his experience
construction contracts sometimes don't include [access to work
product] provisions. He related his understanding that many
legislators feel that having a non-producer owned pipeline is
critical to open competition in Alaska. He inquired as to
whether the state would still have an open access project if the
producers hold the controlling interest in the project.
MR. DICKINSON replied yes, the federal law is explicit on that.
He related his understanding that the Anchorage presentations
specified that AGIA brings an enhanced or true open access
pipeline. Thus, some of the questions raised are whether the
ownership interest creates the difference or can it be
mitigated. He questioned whether, under federal rules, the
state adding its own layer affords that much protection or not.
He stated that although he doesn't have a quick answer, he
believes being an open access pipeline is embedded in federal
law and FERC will act on that. Therefore, one must ask whether
that's a sufficient guarantee, and if committing one of the
parties who is appearing before FERC to something else is an
improvement. He suggested that perhaps better open access could
be achieved by talking directly to the folks who would be trying
to get the provisions which may be viewed as more controlling.
"The problem," he said "is knowing the FERC rules are not tested
and tried, and so you are always going to be having, you'll have
to get opinions from folks who have been in front of FERC under
the old rules and try to figure out what may or may not happen."
4:04:24 PM
SENATOR WIELECHOWSKI related his understanding that everyone,
including the state, seems to be in agreement that the gasline
is a profitable project. He inquired as to whether it's in the
state's best interest to have an independent entity build the
pipeline or if it's better to have the producers do so, if the
choice is between TransCanada and the Denali Project or some
other producers.
MR. DICKINSON answered that he personally doesn't know. He
opined that it's important to step back and review what affects
each party can have, what they can provide, and the values
associated with that. He said it would be unfortunate if a
battle ensued that was identified for the wrong reasons. He
clarified, "What I'm trying to say is I don't have a personal
opinion on that and I don't believe at this stage, voting on the
license, that that answer is a critical one, one way or the
other."
4:06:44 PM
SENATOR BUNDE referred to slide 4 titled "Another Reason to
Support a TransCanada License" which he read: "Probably won't
harm the prospects for a line and may strengthen them." Senator
Bunde inquired as to whether that slide poses a question or
provides a statement.
MR. DICKINSON answered that slide 4 offers a way to think about
the license and what it brings the state. The question is
whether irreparable damage is caused by taking this step or
whether there's an advantage to this step and the legislature
shouldn't focus on whether this step leads to the next step and
subsequent steps because there are so many steps. In further
response to Senator Bunde, Mr. Dickinson noted his agreement
that it's like chicken soup in that it won't hurt.
SENATOR BUNDE asked the other panel members to weigh in on
whether matter the TransCanada license probably will not harm or
will harm [the prospects for a gasline].
MR. PULLIAM noted that this isn't a question he specifically set
out to answer. However, based on his part in the process, as he
has reviewed the findings, listened to Mr. Dickinson's
presentation, and been part of the process for the past few
years, he offered that he personally did not see harm.
MS. ADAIR concurred with Mr. Pulliam. She said that although
she hasn't personally reviewed this issue, discussing the issues
further and perhaps clarifying everyone's position a little
better has been helpful. She offered that project completion
will require many steps and the better everyone understands the
needs of individual parties, the higher the likelihood of
success of the project.
DR. NERI answered that he, too, didn't see [granting the
license] as harmful to the process and as mentioned earlier many
more steps are needed, including obtaining the certificate.
4:09:35 PM
MR. DICKINSON pointed out that it is easier to ask detailed
questions about detailed projects. He recalled someone
characterizing the Denali Project as a 12-page PowerPoint. He
opined that if the license is issued, in two years it would
likely result in two open seasons from which the legislature
could learn much more. Referring to slides 64-65, he stated
that the critical issue is who is underwriting this project.
Mr. Dickinson, referring to the upstream conversation, expressed
the hope that no one thinks that granting the license ends the
need for conversation and communication on that matter.
4:11:29 PM
REPRESENTATIVE DOOGAN, assuming this project is going to make
money for everyone including the shippers, asked what carrots or
sticks could be used or should be used to encourage the
shippers.
MR. DICKINSON answered that the question really comes back to
the risks associated with the pipeline. He explained that the
those investing the money want to ensure money is made and thus
they reduce their risks. He then explained the "terrible price
scenario" in which the state's natural resource wealth isn't
worth as much. Although that was a concern five years ago,
ConocoPhillips may believe that it's no longer a concern due to
rising prices.
4:13:19 PM
REPRESENTATIVE DOOGAN recalled that the Department of Revenue
(DOR) commissioner has stated several times that an important
goal is for the state to use the pipeline to open up the basin.
He further recalled Mr. Dickinson mentioning that issue as well.
He inquired as to why that issue hasn't been discussed, whether
it's important, and how awarding of a license to TransCanada
might affect opening the basin.
MR. DICKINSON answered that although he may not have addressed
that issue expressly, he opined that a [gasline] project will
open the basin. Therefore, the question is whether a
TransCanada project will do a better job of opening the basin
than a producer controlled project. The aforementioned returns
to the previous discussion, regarding that federal law defines
this as an open access pipeline, and the question of whether the
provisions of AGIA will do more to open up that basin than the
current provisions in FERC. If so, and if the state is trading
to obtain those provisions, the question is whether the state is
trading the right amounts. He related his observation that
historically when producers have been involved in pipelines,
they often dispose of them. However, he acknowledged that Ms.
Adair mentioned earlier that ConocoPhillips prefers to have a
percentage equal to what it invests in the pipeline and thus he
said he wasn't guaranteeing that the producers will dispose of
the pipeline. The question is whether during the early years,
when the state is forming competition, the producers will resist
expansions and convey that other companies aren't welcome in the
pipeline, and therefore other exploration won't occur and the
basin won't open. However, he opined that TAPS isn't a good
analogy from which to draw that conclusion. He said, "As I see
that risk in the documents that I've read, ... I certainly
believe that the FERC, the federal concerns, will do something
to alleviate that. And I guess this is really, at the margin, a
question of whether the additional AGIA provisions move you from
opening the basin to not opening it. ... Do they get the basin
opened more than just the federal provisions?"
REPRESENTATIVE DOOGAN, assuming Mr. Dickinson has identified the
question correctly, requested Mr. Dickinson's answer.
MR. DICKINSON answered by saying that as the negotiation
proceeds, the folks concerned about the open basin provisions
need to ensure those provisions are adequately protected as
other commercial arrangements are made. He said "And the notion
of a must have which ... cannot be compromised, and cannot be
used to reach a solution, I think is not ... necessarily the
best way to proceed towards a given goal."
4:16:53 PM
REPRESENTATIVE DOOGAN pointed out that some provisions in AGIA
aren't protected in the FERC process, such as the treatment of
rates, at least in the initial expansions, and the frequency
with which FERC will evaluate the necessity for future
expansions. He said he thought that review was every two years.
He inquired as to whether that provision, which is a part of the
license but not part of the FERC procedure, is "a chip that's
worth playing for here."
MR. DICKINSON offered his understanding that the engineers will
confirm that the early expansions lower the overall project cost
for everyone. He said, "No one gets to show up and say, if I
pay for an extra compressor, can I just pay for that compressor
and then ship." Therefore, the question only occurs when [the
project produces] several billion cubic feet a day of expansions
in the gas. He opined that the project would have to be at the
6.9 Bcf or 7 Bcf before that becomes an issue. The federal law
addresses rolled-in rates, but he said he doesn't know whether
[the state's] rolled-in rate provision or [the federal] rolled-
in rate provision will be more effective.
4:18:30 PM
REPRESENTATIVE DOOGAN pointed out that AGIA provides for the
shipper to reevaluate every two years.
MR. DICKINSON related his belief that a the shipper that is
denied expansion can ask FERC for that expansion. For the first
time, FERC has the authority to "do it." He commented that he
didn't know whether a solicitation every two years would enhance
that process. However, he opined that the reevaluation wouldn't
provide any additional rights before FERC, which will act as the
ultimate arbitrator.
MR. PULLIAM noted his agreement with Mr. Dickinson that
ultimately the issue will come before FERC. He explained that
AGIA provides an "automatic alignment," in which the pipeline
has to go automatically, as opposed to having a shipper or the
state bring them. The aforementioned may move things along a
little quicker, he remarked. No matter who owns the pipeline, a
producer or a third party, their interest will be to have more
gas flowing down the pipeline for increased revenues. However,
the issues become clouded when the upstream pieces are included
as well. "Whether those are really enough, on the margin, to
make ... a difference, I don't know," he said. He reiterated
that with AGIA the state has an automatic provision whereby the
pipeline has to go to FERC, which will tends to speed things a
bit.
REPRESENTATIVE DOOGAN surmised then that Mr. Pulliam is
conveying that [AGIA] offers some advantages in terms of the
process, but doesn't guarantee the result.
4:20:39 PM
SENATOR WIELECHOWSKI opined that the producers obviously believe
this is a profitable project as they have proposed a $30 billion
project. He inquired as to what additional carrots should be
provided.
MR. DICKINSON said that he wasn't sure. He then remarked:
Is there a right set to bring about negotiations? The
state is taking the majority of the upstream value,
and you can argue that is entirely appropriate. One
of the questions I raised here is if the state
increases that by "x" percent it can reduce the
producer's take dramatically, and is that a fear that
needs to be addressed. Is that what is holding the
project back. If you identify that, I would view that
as a carrot so to speak.
4:21:42 PM
SENATOR WIELECHOWSKI inquired as to whether Mr. Dickinson
considered that a tax break or a concession.
MR. DICKINSON explained that but under the current statute the
state would basically be agreeing to a 10-year "freeze." The
question is whether that's appropriate and how one would arrive
at the appropriate level.
SENATOR WIELECHOWSKI asked if Mr. Dickinson thought it was
appropriate.
MR. DICKINSON, speaking as a citizen, replied yes. He related
his belief that the state's taxing authority is [a tool] it can
use to open the basin. However, it would be inappropriate to
use taxes, such as a reserves tax, as a stick and provide an
exemption for only gas that went to a licensed project. In
further response to Senator Wielechowski, Mr. Dickinson said he
didn't see what the [state's taxing authority] would be used to
accomplish in the next 60 days. He suggested that if the
legislature passes the license, the process [should be allowed]
to work out, such that investors can make rational decisions and
negotiate on the points that hold the most concern.
4:23:27 PM
REPRESENTATIVE KELLY, recalling the answers to Senator Bunde's
earlier question, surmised that [awarding TransCanada the
license] wouldn't hurt and might even help. He noted that for
the past several days, legislators have been told that either
[TransCanada or Denali Project] have the ability to build the
pipeline. He offered his understanding that the $500 million
investment in nominal dollars could bring the state to over a
billion in present value dollars. Therefore, he questioned why
[the state] would eliminate one of the players from the
beginning rather than move ahead with both players.
4:25:16 PM
MR. DICKINSON offered that Representative Kelly provides the
basic question he is trying to frame. He opined that [moving
ahead with both players] is entirely appropriate and not doing
so doesn't seem useful. The concern, he related, is that the
granting of the license may be viewed as a "green light" to do
just what Representative Kelly framed. He then said:
I hope that, and certainly the administration said
lots of things that led me to believe that they heard
the same things from the experts that I did, and
concluded that this is a long process and that the
more competition in these early stages makes the most
sense, and that they would do that.
4:26:10 PM
REPRESENTATIVE SEATON pointed out that AGIA requires that the
pipeline identify how it would handle carbon emissions. He
inquired as to whether Mr. Dickinson has reviewed the effect on
tariffs or on the probability of moving forward under a regime
of carbon taxes, carbon credits, or carbon sequestration.
MR. DICKINSON answered that although he didn't review those
types of credits, he recalled that the materials he reviewed
offered some treatment. However, he couldn't recall the
specifics of the analysis, with respect to credits.
4:27:09 PM
REPRESENTATIVE SEATON opined that a carbon tax could have a
drastic effect on the tariffs. He inquired as to whether carbon
credits could be sequestered and whether the state would obtain
the carbon credits or whether the pipeline company would, in
terms of net present value (NPV).
MR. PULLIAM said he didn't recall carbon credits being addressed
in the analysis and that he isn't familiar with that issue at
this point.
4:28:09 PM
REPRESENTATIVE GUTTENBERG, referring to the prior
administration's proposal, opined that the legislature "poured a
lot of sugar over that proposal." He inquired as to whether
anyone compared this proposal to that one, given that the
current price of the commodity is significantly higher for
profit margins. He expressed concern that "we have to pour more
sweetener into the pot." He noted that part of the analysis in
Anchorage was to get to an "open season" and to let producers
come to table. He pointed out the estimate of $200 billion in
savings for consumers once the gas is supplied to the Midwest
market. Additionally, he pointed out that Congress has viewed
the gasline as a matter of national importance. Thus, he
questioned the need to "sweeten" the deal more. He surmised how
much better this proposal is due to the increased value of the
commodity, since the risk remains the same while the profits are
higher.
MR. DICKINSON agreed that Representative Guttenberg
accurately identifies why producers are announcing this
project. He opined that the timing may have something to
do with this, given AGIA. He agreed that after 20 years of
low prices, the producers are more interested now. He
predicted that if producers believed prices would stay high
and that the state would not change the relative split of
economic rents, the producers might move forward. He
acknowledged that no one can guarantee prices, and thus the
remaining issue is how the economic rents are split.
MR. DICKINSON reminded members that the last administration
proposed a project that focused on the state having 20 percent
ownership in the pipeline and the gas and make 20 percent of the
FT commitment. The aforementioned was coupled with locking in a
20 percent tax rate with no progressivity, with which many were
very uncomfortable. Since then, a progressivity piece has been
added. Mr. Dickenson related his understanding that
Representative Guttenberg's question "implied that the prior
administration had piled up a certain amount of sugar, and ...
that I was arguing that now a larger pile needed to be made on
top of that." However, he pointed out that the current proposal
starts from a very different place and is a very different
project. Still, the question remains: would the guarantees in
the aforementioned contract have been sufficient if all the
ownership issues had ever been worked out. He opined that the
aforementioned is something no one knows.
4:33:03 PM
REPRESENTATIVE GARA stated that he doesn't want TransCanada to
think that the legislature will vote [to approve its license]
and then "use them as sort of a horse to ride" and then "just
leave them." He related his understanding that Mr. Dickinson
suggests that if the legislature moves ahead that perhaps the
parties will negotiate and form some type of consortium, which
he characterized as acting in good faith. He expressed concern
with Mr. Dickinson's suggestion that TransCanada would invoke
the treble damages provision because the treble damages
provision would only apply if the state breaches the contract.
He said he hopes that Mr. Dickinson didn't mean to imply that
the state would breach its contract. He recalled Mr.
Dickinson's question as to what the state needs to do to bring
the shippers in to finance the project. He surmised that if Mr.
Dickinson means to let the parties negotiate and form a
consortium, he has no problem with that. However, he opined
that it's cause for concern if Mr. Dickinson is asking what the
state needs to do to bring the shippers in to build the project.
He reiterated his comfort with the process that the legislature
would approve the license in hopes that the shippers will
negotiate and form a consortium. However, he inquired as to
whether Mr. Dickinson is suggesting that the state should take
actions, invoke the treble damages under AGIA, and then let the
producers build the pipeline, "in which case, you are speaking
for yourself and as far as I know, not anybody in the
legislature."
MR. DICKINSON apologized and as a non-attorney related his
understanding that under one scenario TransCanada would receive
an 80 percent reimbursement and under another set of conditions
that reimbursement would be raised to three times some number.
He opined that he didn't know whether that would constitute a
breach of the contract. Clearly, TransCanada is paid by the
state in various conditions outlined in the contract. He
commented that it might be a definitional issue. He said he
doesn't think the state should enter the contract in bad faith.
However, certain conditions exist under which the state will owe
TransCanada some money or TransCanada will argue the state owes
it money. He offered that as a lay person he is confused by
that sentence. He said, "If what you mean is meeting the
conditions of that sentence, that that constitutes a breach,
then maybe we're saying the same thing. I don't read it that
way and I don't think I'm talking about anyone breaching a
contract."
4:36:13 PM
REPRESENTATIVE GARA responded that he understands Mr.
Dickinson's answer. However, he reiterated that he doesn't have
any intention of awarding a contract to a party and then just
abandoning it. Such an action, he opined, would lead to a very
unstable negotiating atmosphere.
MR. DICKINSON remarked that what is at issue is the issuance of
a license and not a contract. He reiterated that [AGIA] sets
out conditions for payment under the license, which he is unsure
as to how that fits into breach of contract.
4:36:48 PM
SENATOR THERRIAULT, referring to the graph on slide 37,
expressed concern that it might be misunderstood. He noted that
when referring to the $13 billion, Mr. Dickinson is really
discounting the $154 billion listed on the graph on slide 36.
MR. DICKINSON clarified that the white area on the graph on
slide 37 represents the producers' NPV 10 or NPV 15.
4:37:47 PM
SENATOR THERRIAULT pointed that that since the amount is
discounted at different rates, it makes the state's profit
appear to be much larger. He suggested that Mr. Dickinson could
have discounted the state at 4 percent and it would have
increased the state's portion from $66 billion to $80 billion.
He related that Mr. Dickinson has arbitrarily selected values,
and thus the public may be confused by the slide titled
"Everyone makes money questions."
MR. DICKINSON interjected that the numbers, NPV 5, NPV 10, and
NPV 8.8 were taken from the report. He offered his belief that
the legislature would hear arguments as to why the numbers are
appropriate numbers. He explained that when one is discussing
hundreds of billions of dollars, it's not something that people
can automatically translate into [something meaningful], such as
how many car payments that totals. Therefore, he opined that
it's valid to discount the numbers as long as one understands
what's being compared. However, he said he did agree that the
chart could be misinterpreted by someone that doesn't have that
level of sophistication. "But, I think if you understand what
the concept is, it does make sense to ask how valuable is this
to the company," he said. Mr. Dickinson said:
If I can go out and spend, if I can go out and do
other projects and get a rate of return, what I really
want to care about is what is my increment on top of
that. If I am the state and I don't have a lot of
other options, then it's appropriate to look at that
number differently. And I absolutely agree that there
is a great opportunity to be misled there, but ... the
point I want to make is ... not only was there no ...
intent to mislead, there is an intent to educate
because I really think the notion of discounting makes
sense for certain comparisons.
4:40:00 PM
SENATOR THERRIAULT concurred, but pointed out that it should be
made clear that the 13.5 [in the graph on slide 37 titled "TC
Project"] still represents 40 percent of the profits over the
life of this project, or the period that was chosen.
MR. DICKINSON responded that although he hadn't done the
calculations, it "sounds about right." He pointed out, "If you
said 13.5 in profits, but what I was trying to say here is that
it is the NPV, and could there have been more words there, sure,
but I take your point."
4:40:38 PM
SENATOR THERRIAULT recalled a conversation with Dr. Pedro van
Meurs, who said that "once we get this up and running, it is a
cash cow." However, in reviewing the graph on slide 36, the
Black & Veatch estimate shows $154 billion, which represents 40
percent of the net revenues from the economic activity.
Although $154 billion is substantial, when it's reduced to the
$13 billion, that diminishes it. He offered his understanding
that the graph was done for comparison purposes.
[HB 3001 and SB 3001 were heard and held.]
4:42:49 PM
ADJOURNMENT
There being no further business, the joint meeting of the House
Rules Standing Committee Subcommittee on AGIA and the Senate
Special Committee on Energy was adjourned at 4:42 p.m.
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