Legislature(2007 - 2008)BARROW
07/01/2008 09:00 AM Senate SENATE SPECIAL COMMITTEE ON ENERGY
| Audio | Topic |
|---|---|
| Start | |
| SB3001|| HB3001 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | SB3001 | TELECONFERENCED | |
ALASKA STATE LEGISLATURE
JOINT MEETING
SENATE SPECIAL COMMITTEE ON ENERGY
HOUSE RULES STANDING COMMITTEE
BARROW AK
July 1, 2008
9:03 a.m.
MEMBERS PRESENT
SENATE SPECIAL COMMITTEE ON ENERGY
Senator Bert Stedman, Vice Chair
Senator Kim Elton
Senator Lyman Hoffman
Senator Lesil McGuire
Senator Donald Olson
Senator Joe Thomas
Senator Bill Wielechowski
HOUSE RULES
Representative John Coghill
Representative Anna Fairclough
Representative Craig Johnson
Representative Beth Kerttula (AGIA Subcommittee)
Representative Ralph Samuels (AGIA Subcommittee)
MEMBERS ABSENT
SENATE SPECIAL COMMITTEE ON ENERGY
Senator Charlie Huggins, Chair
Senator Fred Dyson
Senator Lyda Green
Senator Gary Stevens
Senator Thomas Wagoner
HOUSE RULES
Representative John Harris (AGIA Subcommittee, Chair)
Representative David Guttenberg
OTHER LEGISLATORS PRESENT
Senator Gene Therriault
Representative Mike Chenault
Representative Sharon Cissna
Representative Andrea Doll
Representative Mike Doogan
Representative Bryce Edgmon
Representative Berta Gardner
Representative Lindsey Holmes
Representative Reggie Joule
Representative Wes Keller
Representative Gabrielle LeDoux
Representative Bob Lynn
Representative Mark Neuman
Representative Jay Ramras
Representative Bob Roses
COMMITTEE CALENDAR
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
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
PREVIOUS COMMITTEE ACTION
BILL: SB3001
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
06/05/08 (S) Heard & Held
06/05/08 (S) MINUTE(ENR)
06/06/08 (S) ENR AT 10:00 AM TERRY MILLER GYM
06/06/08 (S) Heard & Held
06/06/08 (S) MINUTE(ENR)
06/07/08 (S) ENR AT 10:00 AM TERRY MILLER GYM
06/07/08 (S) Heard & Held
06/07/08 (S) MINUTE(ENR)
06/08/08 (S) ENR AT 1:00 PM TERRY MILLER GYM
06/08/08 (S) Heard & Held
06/08/08 (S) MINUTE(ENR)
06/09/08 (S) ENR AT 10:00 AM TERRY MILLER GYM
06/09/08 (S) Heard & Held
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06/10/08 (S) ENR AT 10:00 AM TERRY MILLER GYM
06/10/08 (S) Heard & Held
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06/12/08 (S) ENR AT 10:00 AM FBX Carlson Center
06/12/08 (S) Heard & Held
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06/13/08 (S) ENR AT 10:00 AM FBX Carlson Center
06/13/08 (S) Heard & Held
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06/14/08 (S) ENR AT 10:00 AM FBX Carlson Center
06/14/08 (S) Heard & Held
06/14/08 (S) MINUTE(ENR)
06/16/08 (S) ENR AT 9:00 AM ANCHORAGE
06/16/08 (S) Heard & Held
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06/17/08 (S) ENR AT 9:00 AM ANCHORAGE
06/17/08 (S) Heard & Held
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06/18/08 (S) ENR AT 9:00 AM ANCHORAGE
06/18/08 (S) Heard & Held
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06/19/08 (S) ENR AT 9:00 AM ANCHORAGE
06/19/08 (S) Heard & Held
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06/20/08 (S) ENR AT 9:00 AM ANCHORAGE
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06/24/08 (S) ENR AT 1:00 PM MAT-SU
06/24/08 (S) Heard & Held
06/24/08 (S) MINUTE(ENR)
06/26/08 (S) ENR AT 1:00 PM KENAI
06/26/08 (S) Heard & Held
06/26/08 (S) MINUTE(ENR)
07/01/08 (S) ENR AT 9:00 AM BARROW
BILL: HB3001
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; Subcommittee Assigned
06/04/08 (H) MINUTE(RLS)
06/04/08 (H) RLS AT 10:00 AM TERRY MILLER GYM
06/04/08 (H) Heard & Held
06/04/08 (H) MINUTE(RLS)
06/05/08 (H) RLS AT 9:00 AM TERRY MILLER GYM
06/05/08 (H) Heard & Held
06/05/08 (H) MINUTE(RLS)
06/06/08 (H) RLS AT 10:00 AM TERRY MILLER GYM
06/06/08 (H) Heard & Held
06/06/08 (H) MINUTE(RLS)
06/07/08 (H) RLS AT 10:00 AM TERRY MILLER GYM
06/07/08 (H) Heard & Held
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06/08/08 (H) RLS AT 1:00 PM TERRY MILLER GYM
06/08/08 (H) Heard & Held
06/08/08 (H) MINUTE(RLS)
06/09/08 (H) RLS AT 10:00 AM TERRY MILLER GYM
06/09/08 (H) Heard & Held
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06/10/08 (H) RLS AT 10:00 AM TERRY MILLER GYM
06/10/08 (H) Heard & Held
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06/12/08 (H) RLS AT 10:00 AM FBX CARLSON CENTER
06/12/08 (H) Heard & Held
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06/13/08 (H) RLS AT 10:00 AM FBX CARLSON CENTER
06/13/08 (H) Heard & Held
06/13/08 (H) MINUTE(RLS)
06/14/08 (H) RLS AT 10:00 AM FBX CARLSON CENTER
06/14/08 (H) Heard & Held
06/14/08 (H) MINUTE(RLS)
06/16/08 (H) RLS AT 9:00 AM ANCHORAGE
06/16/08 (H) Heard & Held
06/16/08 (H) MINUTE(RLS)
06/17/08 (H) RLS AT 9:00 AM ANCHORAGE
06/17/08 (H) Heard & Held
06/17/08 (H) MINUTE(RLS)
06/18/08 (H) RLS AT 9:00 AM ANCHORAGE
06/18/08 (H) Heard & Held
06/18/08 (H) MINUTE(RLS)
06/19/08 (H) RLS AT 9:00 AM ANCHORAGE
06/19/08 (H) Heard & Held
06/19/08 (H) MINUTE(RLS)
06/20/08 (H) RLS AT 9:00 AM ANCHORAGE
06/20/08 (H) Heard & Held
06/20/08 (H) MINUTE(RLS)
06/24/08 (H) RLS AT 1:00 PM MAT-SU
06/24/08 (H) Heard & Held
06/24/08 (H) MINUTE(RLS)
06/26/08 (H) RLS AT 1:00 PM KENAI
06/26/08 (H) Heard & Held
06/26/08 (H) MINUTE(RLS)
07/01/08 (H) RLS AT 9:00 AM BARROW
WITNESS REGISTER
DEBBY EDWARDSON, President
North Slope Borough School District Board
POSITION STATEMENT: Testified during the hearing on HB 3001 and
SB 3001.
MR. PALMER, Vice President
Alaska Gas Development
TransCanada Alaska Company, LLC ("TransCanada")
POSITION STATEMENT: During the hearing on HB 3001 and SB 3001,
gave a presentation on TransCanada's application to and
involvement in the AGIA process.
PAT GALVIN, Commissioner
Department of Revenue
Juneau, Alaska
POSITION STATEMENT: During the hearing on HB 3001 and SB 3001,
explained the AGIA process and answered questions.
EDWARD S. ITTA, Mayor
North Slope Borough
Barrow, Alaska
POSITION STATEMENT: Testified during the hearing on HB 3001 and
SB 3001.
RICHARD GLENN, Vice President
Lands
Arctic Slope Regional Corporation (ASRC)
Barrow, Alaska
POSITION STATEMENT: Presented comments during the hearing on HB
3001 and SB 3001.
GLENN W. SHEEHAN, Ph.D., Executive Director
Barrow Arctic Science Consortium (BASC)
Barrow, Alaska
POSITION STATEMENT: Testified during the hearing on HB 3001 and
SB 3001.
GEORGE AHMAOGAK, SR.
Barrow, Alaska
POSITION STATEMENT: Testified during the hearing on HB 3001 and
SB 3001.
MARVIN OLSON
Barrow, Alaska
POSITION STATEMENT: Testified on behalf of himself during the
hearing on HB 3001 and SB 3001.
NATHANIAL OLEMAUN, JR.
Barrow, Alaska
POSITION STATEMENT: Testified on behalf of himself during the
hearing on HB 3001 and SB 3001.
BEN FRANCE, General Manager
Barrow Utilities & Electric Cooperative, Inc.
Barrow, Alaska
POSITION STATEMENT: Testified during the hearing on HB 3001 and
SB 3001.
WARREN MATUMEAK
Barrow, Alaska
POSITION STATEMENT: Testified on behalf of himself during the
hearing on HB 3001 and SB 3001.
PEARL BROWER, Special Assistant to the President
External Affairs
Ilisagvik Community College (ICC)
Barrow, Alaska
POSITION STATEMENT: Testified on behalf of ICC during the
hearing on HB 3001 and SB 3001.
GEORGE EDWARDSON, President
Iñupiat Community of the Arctic Slope (ICAS)
Barrow, Alaska
POSITION STATEMENT: Testified during the hearing on HB 3001 and
SB 3001.
HAROLD CURRAN
Barrow, Alaska
POSITION STATEMENT: Testified on behalf of himself during the
hearing on HB 3001 and SB 3001.
ESTHER KENNEDY
Barrow, Alaska
POSITION STATEMENT: Testified on behalf of herself during the
hearing on HB 3001 and SB 3001.
DELBERT REXFORD
Barrow, Alaska
POSITION STATEMENT: Testified during the hearing on HB 3001 and
SB 3001.
ROSEMARIE HABEICH
Barrow, Alaska
POSITION STATEMENT: Testified on behalf of herself during the
hearing on HB 3001 and SB 3001.
RANDY HOFFBECK
Barrow, Alaska
POSITION STATEMENT: Testified on behalf of himself during the
hearing on HB 3001 and SB 3001.
MARTHA FALK, Director
Natural Resources
Iñupiat Community of the Arctic Slope (ICAS)
Barrow, Alaska
POSITION STATEMENT: Testified on behalf of ICAS during the
hearing on HB 3001 and SB 3001; Testified on behalf of herself
during the hearing on HB 3001 and SB 3001.
LOUISA KAKIANAAQ RILEY
Barrow, Alaska
POSITION STATEMENT: Testified on behalf of herself during the
hearing on HB 3001 and SB 3001.
CHARLES OKAKOK
Barrow, Alaska
POSITION STATEMENT: Testified on behalf of himself during the
hearing on HB 3001 and SB 3001.
IDA OLEMAUN
Barrow, Alaska
POSITION STATEMENT: Testified on behalf of herself during the
hearing on HB 3001 and SB 3001.
CARRIE KITTICK
Barrow, Alaska
POSITION STATEMENT: Testified on behalf of herself during the
hearing on HB 3001 and SB 3001.
ACTION NARRATIVE
VICE CHAIR BERT STEDMAN called the joint meeting of the Senate
Special Committee on Energy and the House Rules Standing
Committee to order at 9:03:22 AM.
SB3001-APPROVING AGIA LICENSE
HB3001-APPROVING AGIA LICENSE
VICE CHAIR STEDMAN announced that the only order of business
would be SENATE BILL NO. 3001 and 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."
VICE CHAIR STEDMAN made introductions and explained how the
committee intends to proceed.
9:11:10 AM
DEBBY EDWARDSON, President, North Slope Borough School District
Board of Education, extended a welcome to the committee and
expressed appreciation for the efforts of the legislature in
coming to her region. She said many of the resources of the
state come from the North Slope, but often the decisions made
regarding those resources are made elsewhere. Ms. Edwardson
stated her belief that the Institute of Social and Economic
Research's (ISER's) [recommendations] should be fully funded.
Energy costs are skyrocketing, she said, because of the cost of
transportation. Everything has to be flown in, which increases
the cost of all goods. She also mentioned that the funding for
the school district does not pay for the necessary repairs and
building upkeep. Ms. Edwards quoted Representative Joule as
having once said that the North Slope Borough does not have a
shortage of jobs, but rather a shortage of trained workers. She
said the school district and Ilisagvik College are working to
change that. She said there is a better track record in
training people locally; the era of sending them out for
education is over. She asked for the continued support of the
legislature to improve educational and career opportunities for
the people of the region.
9:17:04 AM
MR. PALMER, Vice President, Alaska Gas Development, TransCanada
Alaska Company, LLC ("TransCanada"), said his presentation on
TransCanada's application would be a review of the information
the legislature has studied for the last 30 days, but it may be
new information for the listening public. Mr. Palmer said
TransCanada has 3,600 employees; its gas business extends across
North America; it has experts in all disciplines related to gas
pipelining.
MR. PALMER reviewed that when the AGIA process was established
by the legislature and the governor of Alaska one year ago,
TransCanada had to choose whether to remain involved solely in
the gas on the Canadian side or to submit an application to
Alaska when the state put out a request for application (RFA) in
the summer of 2007, with an application deadline of 30 November
2007.
MR. PALMER said TransCanada's decision was based on several
issues. First, the corporation thinks the project has strong
economics, is "in the money," should go forward now based on
reasonable natural gas prices, and would be economical without
the need to increase today's prices, which he commented are
benefitting both state and national coffers, while creating a
challenge for the individual consumer. Second, Mr. Palmer said
TransCanada carefully considered whether or not Alaska's
administration, legislators, and citizens are committed to this
project, because he said no commercial party can deliver the
project without the cooperation of the government. Regarding
the legislature's commitment, he noted that the legislature
voted for AGIA with only one dissenting vote.
MR. PALMER said AGIA sets out the rights and responsibilities of
all parties to the project. TransCanada was one of five
applicants last year and the corporation learned in January 2008
that it had made the only complete, qualifying application. He
noted that all the paper work TransCanada has submitted is
available to the public. Mr. Palmer listed the following
reasons that the project is important to TransCanada: It is a
strategic fit of the corporation; it's the base business that
the corporation has been in for 50 years; it fits with
TransCanada's core competencies and experience; and it is within
the corporation's geographic footprint. He stated that
TransCanada thinks it can provide costs savings for the project,
and he said the project is a means by which to refill some of
the existing pipelines "leaving Western Canada."
MR. PALMER said he personally has been working on this project
for 23 years, most actively for the past 5 years. He stated his
belief that TransCanada is aligned with the State of Alaska's
objective to "open the basin and provide access and long-term
employment and revenue for the state over the course of the next
50 years." Mr. Palmer noted that TransCanada had sought
involvement under the Stranded Gas Development Act under former
Governor Frank Murkowski, but that administration decided to
work only with North Slope producers. The current
administration decided to conduct an open and competitive
process, asking those applying to reveal their commercial
secrets in advance of being selected as a licensee, which he
said is highly unusual. Mr. Palmer said he hopes that the
corporation will not have revealed those secrets in vain and
will be selected as the licensee.
MR. PALMER said the corporation believes: "As you foster
competition in the pipeline business, you also foster
competition at the upstream end of the project." He said it is
odd that after all the years Alaska has been involved in gas
production there are only 3 major producers. He said
TransCanada started its business in Alberta 50 years ago with 3
initial customers, and now it has more than 300 customers, and
he said Alberta has "seen the benefit of that extra
competition."
9:28:18 AM
REPRESENTATIVE LEDOUX asked Mr. Palmer what sort of agreement
TransCanada had with producers in Alberta when it first started
out there.
9:28:47 AM
MR. PALMER answered as follows:
There were some different arrangements, actually,
within the Province of Alberta, as well as for the
longline moving the gas away from Alberta to Eastern
Canada .... But the pipeline away from Alberta - the
longline at that time - was structured as a merchant
pipeline, so it was the buyer of the gas and it sold
the gas to local distribution companies in Eastern
Canada. There was a very different regulatory
structure at the time throughout North America than
what we've seen in the last 20 years - really, since
1985 - as the business has deregulated. Local
distribution companies, on behalf of residential,
commercial customers like ourselves, as well as
industrials, were the primary customers of longline
pipelines at the time. That was the case throughout
North America .... We had the right to purchase gas
from certain fields - in the Provence of Alberta -
from producers. So, that was the circumstance on the
longline leaving Alberta.
The system within Alberta was an open access, third
party transporter. In other words it moved other
people's gas, and did so since its inception 50 years
ago. It was never a merchant pipeline - it never
bought gas - it strictly moved gas for third parties.
So, a different structure within the Provence of
Alberta and the one moving away from the Provence of
Alberta.
MR. PALMER continued with his presentation. He related that the
corporation thinks constructing, operating, and expanding this
project is not in conflict with any other component of its
business. He said TransCanada's proposal "contemplates spending
north of $600 million - some of it your money, some of it our
money." He talked about open seasons. If granted the license,
TransCanada will, over the course of the next two years, put
forth its commercial terms and offer its service to potential
customers. It will also seek federal government approval, as
well as state government approval, because "building a project
of this nature requires a significant amount of environmental,
field, engineering, and other work where permits are required
...." He said TransCanada does not want to waste its $100
million investment, thus it, along with the State of Alaska,
seeks success.
9:32:25 AM
MR. PALMER noted that some parties in the media have suggested
that TransCanada will be moving Alaska's gas to Canada. He
relayed that TransCanada owns 12,000 miles of pipe in the US.
He said the corporation runs an integrated gas business, with
offices across the United States, including those in Houston,
Texas, Portland, Oregon, Omaha, Nebraska, and Troy Michigan.
Mr. Palmer stated that TransCanada thinks "the Canadian example
is most similar to your circumstance for your project." He
explained that TransCanada started 50 years ago as a small
pipeline company far from its small residential, commercial
market in Calgary, with only 3 initial commercial customers and
only 15 tcf of known reserves at that time. He noted that the
corporation now has over 300 customers.
MR. PALMER said another concern expressed is whether TransCanada
can do this and has ever done it before. First, he noted that
TransCanada moves 20 percent of North American gas, and it owns
none of that gas. That is what TransCanada proposes to do in
Alaska and what it has been doing for 50 years. He stated, "It
is highly unusual for the gas producers to also own an
interstate or interprovincial gas pipeline ... in North
America." It is the norm for pipeline companies to transport
gas from the wellhead to local distribution companies. He
stated that TransCanada has the technical skills that no one
else has to finish this project. Mr. Palmer noted that some
people say TransCanada would not be motivated to control costs
because it does not pay its own fees. He said, "I can assure
you that we have not become a successful corporation by
overcharging our customers."
MR. PALMER stated that benchmark studies of TransCanada's
operating costs, conducted by a third party, found those costs
to be 25-35 percent lower than those of its competitors in both
the U.S. and Canada. In response to a question Senator Hoffman
had asked when the legislature met in Juneau, Mr. Palmer said
there is not a third-party benchmarking study comparing
TransCanada's capital costs with those of its competitors.
However, he reported that TransCanada conducted its own 1990-
2003 bench mark study, relating to the cost for 42- to 48-inch
pipeline. In that study it found its costs to be 19 percent
lower than those of its competitors in Canada and 38 percent
lower than those of its competitors in the U.S. Mr. Palmer said
he has shared these statistics with the legislature for four
years, and while he continues to hear from some parties that
TransCanada's costs will be out of control, he said he has never
seen a statistic from the company's competitors that shows their
cost performance in interstate pipeline.
MR. PALMER reminded the committee members that TransCanada has
built longer projects than the one being proposed. For
instance, he said in TransCanada's inception, it built the
pipeline across Canada, and currently, in partnership with
ConocoPhillips Alaska, Inc., it has a pipeline, and it, too, is
longer than the pipeline proposed through this project. He
related that in the 1990s, TransCanada built 7,000 miles of pipe
- four times the distance of the proposed pipeline - and it did
so on schedule and within 0.6 percent of budget. No other
corporation has that record in constructing natural gas
pipelines in North America.
9:39:38 AM
MR. PALMER said there are a number of skills in addition to the
engineering skills required, and TransCanada has those skills.
He indicated that some of those skills have to do with
regulations, community, Native and First Nations peoples, the
environment, commercial issues, and finance. Mr. Palmer ensured
the committee that TransCanada has the financial capacity to
complete the proposed project. He said TransCanada built a much
more difficult project at the inception of its corporation, and
hopes to increase the scale of that project up to $13 billion,
which he said is about 50 percent of the scale of this project.
MR. PALMER related that the U.S. government has offered an
unprecedented $18 billion loan guarantee to help complete this
project and lower the interest rate. He said some may question
how it will work out to have pipeline through 1,000 miles of
Canadian territory, where the U.S. has no control, but he
pointed out that that issue was addressed over 30 years ago
"when this project was supposed to be completed." At that time,
he said, the U.S. and Canadian governments signed a treaty in
order to overcome those issues that might arise in a foreign
country and to assure the U.S. that Canada is committed to the
project. He said that is unique to any pipeline project across
the country. Furthermore, he said there is specific legislation
in Canada designed to facilitate this project; the Canadians
already have $2 billion invested and 25 percent of the project
done. He said, "The Alaska Gas project is in the ground and has
moved Western Canadian gas to market since 1981-2."
MR. PALMER said there has been interest in a liquefied natural
gas (LNG) alternative, which would move gas to Valdez and the
Lower 48 or alternately to foreign markets in Asia. When
TransCanada submitted its application, it had to decide whether
it would put forward that alternative. He said after
significant analysis, TransCanada believes that the superior
project is the one to the Lower 48, and it decided it would put
forward that alternative. He stated:
When we hold that initial open season, parties will
have the opportunity to nominate gas at delivery
points along the route in Alaska, along the route in
the Yukon, and on down to Alberta or to Valdez ...
simultaneously. And in the event that gas is
committed sufficiently to Valdez, just as it would be
to Alaskan markets or to markets to the Lower 48, we
will build a pipeline to that location.
MR. PALMER next addressed concerns regarding the state's
offering $500 million to obtain the cooperation of a company
that submitted its application under AGIA. He said he thinks
Alaska should consider that money an investment in its future.
He said TransCanada thinks that $500 million will buy the
following: a reliable and capable partner committed to
advancing the state's interest. The State of Alaska has asked
TransCanada to hold an open season within 36 months, and the
corporation has indicated it will do so within two years, then
hold further open seasons every two years and expand the
pipeline within engineering increments. Furthermore, Mr. Palmer
said TransCanada is committed to voluntarily expand the
pipeline.
9:46:20 AM
MR. PALMER said that in the event there is a failed open season,
TransCanada has committed to continue on to Federal Energy
Regulatory Commission (FERC) certification, which he said is
very unusual because it would cost the corporation a great deal.
He said that guarantee is one reason the state has offered the
money. He opined that the motivation of the pipeline owner is
important to the future of Alaska - not just to construct the
initial project, but also to expand it over time.
9:47:23 AM
MR. PALMER related that TransCanada thinks employment on this
project will come over time from expansions and drilling. He
noted that TransCanada owns 36,000 miles of natural gas pipeline
across North America, has 3,600 employees, and has about 10,000
megawatts of power generation. He said that means each of
TransCanada's employees, by proxy, are responsible for
approximately 10 miles of pipeline and about 3 megawatts of
power. When completed, the proposed pipeline will have 750 of
its miles from Prudhoe Bay to the Alaska/Yukon border or to
Valdez, which would imply that when completed there will be 50-
75 jobs to operate that pipeline. Efficient line operators do
not require major employment to operate the pipeline. He
estimated that there would be thousands of jobs during the few
years of construction, as well as some jobs in the gas treatment
plant. The long term employment will come from promoting
expansion and promoting drilling, he said, and that is where a
number of Alaska Native corporations are in a good position to
provide services.
9:49:28 AM
REPRESENTATIVE JOULE took a moment to remind the public where
they were meeting and advised them of the schedule. He invited
them to come down and speak to the legislators.
VICE CHAIR STEDMAN said the committee would accept testimony,
not only on AGIA, but on any that needed to be addressed.
9:51:43 AM
MR. PALMER turned to his PowerPoint presentation. As shown on
slide 2 of the PowerPoint, he named TransCanada's objectives.
First, the corporation wants early in-service. He said, "It is
the largest investment opportunity in the natural gas pipelining
in our core business, and it's within our geographic footprint."
He said TransCanada has spare capacity on its existing North
American pipelines that it would like to refill. He said the
corporation is in favor of long run basin development to serve
in-state and other markets, and he emphasized the importance of
increasing market and supply diversity. Mr. Palmer said this is
a growth opportunity, wherein successful drilling can promote
further explanation. He said TransCanada has provided equitable
treatment to its customers across North America for 50 years.
MR. PALMER presented a map of TransCanada's system across North
America. The current system, he said, allows gas to move across
the U.S. and Canada. The pipe from Alberta serves markets in
Boston, New York, Chicago, Detroit, and Seattle, as well as
other cities. He reiterated that the Alaska project is 1,700
miles of pipeline, and he said in the 90s, TransCanada
constructed 7,000 miles of pipeline. The oil line currently
under construction with ConocoPhillips Alaska, Inc., is actually
longer than the Alaska project.
MR. PALMER related that there are two components to the project:
that which happens in Alaska and that which happens on the long
line away from Alaska on the way to major markets. He pointed
to a chart showing that 50 years ago the pipeline system was
made up of 250 miles of pipe and three customers in the
Southeast corner of Alberta. The chart shows how that pipeline
system has evolved in the last 50 years. He noted that some
areas of the province of Alberta are not gas prone, either
because the gas is not there or the areas are national park and
are off-limits. However, he said there are 1,100 locations in
Alberta where gas can be taken "off and on the system."
TransCanada is moving 48 times the volume it started with 50
years ago.
MR. PALMER pointed to a line leaving Alberta and heading to
Eastern Canada, which he said was a single line initially,
completed in October 1958. The initial section of gas pipeline
from Alberta to Winnipeg is 50 years old and, over the next 12
months will be converted to an oil line.
9:58:21 AM
MR. PALMER turned to another slide, which related to expanding
pipelines. The way a pipeline is expanded, he said, is either
by adding extra compressors or pump stations or by putting a
parallel pipe in the same right of way, which is called,
"looping." The pipeline will be buried under four feet of soil,
he said. The chart shows that there are six parallel pipes
leaving Alberta, and in certain places there are partial loops,
because it is not necessary to build a complete pipeline when
there is a modest expansion. Mr. Palmer said, "If, indeed, you
do have 235 tcf of available gas up here, we think that's the
type of expansion that is possible from Alaska over the next 50
years."
10:00:10 AM
MR. PALMER, in response to Senator Therriault, confirmed that as
shown on the chart, the line being converted is the Keystone
line. He reiterated that TransCanada is 50/50 partners with
ConocoPhillips Alaska, Inc. He stated that the conversion of
that line to oil in the next 12 to 18 months will "lower the
cost of the project for all parties."
SENATOR THERRIAULT said in the past there was talk about a
bullet line out of Alberta that would take Alaska's gas into the
Lower 48 market. However, he opined that if there is spare
capacity on existing pipes, that just would not make sense.
MR. PALMER responded that after the pipe is converted, and in 10
years time, there will be spare capacity in the pipes moving
away from Alberta for the full Alaska volume, which is
anticipated to be 4-5 bcf per day of spare capacity leaving
Western Canada to the U.S. Economics indicate that using that
spare capacity rather than building a new pipeline to Chicago
will provide a better netback - a better return - for Alaskans.
SENATOR THERRIAULT said it makes sense to ship oil through
existing pipeline.
MR. PALMER listed other benefits: superior economics, market
diversity, liquidity, and lowered capital cost risk on the
entire project.
REPRESENTATIVE SAMUELS asked for confirmation that TransCanada
entered into a commercial deal with Conoco Phillips, Inc.
MR. PALMER responded yes. He said TransCanada held an open
season, and parties made arrangements to commit their gas. At
that point, ConocoPhillips Alaska, Inc., became the major
shipper, as well as the partner in the project.
REPRESENTATIVE SAMUELS noted that AGIA economics seen thus far
show it would be economical right now to ship using
TransCanada's spare capacity; however, the economics 10 years
from now, when Alaska would still be forced in TransCanada's
hub, are unknown.
MR. PALMER said he has been describing the economics in 10 years
time, not the economics of today, and those economics show that
TransCanada's costs will be lower and the cost of "moving on
spare capacity" also will be lower.
REPRESENTATIVE SAMUELS responded, "You will go to the [National
Energy Board] (NEB), and we will take what the NEB gives us,
because we have no option but to ship our gas in your empty
capacity." He said he understands how that is a good thing from
the point of view of TransCanada, but said that takes options
away from Alaska "which may or may not be useful 10 or 20 years
from now."
MR. PALMER said he disagrees with Representative Samuels.
First, he argued, TransCanada is requiring customers to commit
gas into its system in Alberta, not beyond. In the event that
Alaska does not wish to move gas on TransCanada's system away
from the Alberta hub, or wants to build a new pipeline to
Chicago or to Boston from the Alberta hub, it would have every
right to do so. He said TransCanada does not think the
economics would be there to do so, but Alaska could do it.
REPRESENTATIVE SAMUELS noted that 10 years ago, every economic
factor was different than it is now. He reemphasized that
Alaska does not know what will happen 10 years hence, and
although it may not be an issue at all, the state could be
taking a risk in giving up an option by being forced into
TransCanada's hub.
MR. PALMER responded that the cost to get into the Alberta hub
in TransCanada's application is between 15 and 18 cents. Alaska
has full options away from that location. By entering the hub,
the state would have the opportunity of entry into the second
most liquid hub in North America. At that point, Alaska would
have the opportunity to trade its gas. He said he has described
TransCanada's economics, and he reminded Representative Samuels
that he has also described that system, because it is completed
is not experiencing the cost inflation that other new builds are
experiencing. He said it is true that TransCanada, or anyone
else, does not know what will happen over the next decade;
however, he said it is much easier to predict the future on an
existing system than on a new build. He summarized that Alaska
would be buying "optionality" at a very low price, would have
liquidity, and would have full capability to move wherever it
wishes away from that system.
10:09:38 AM
REPRESENTATIVE SAMUELS responded, "If it's such a no brainer,
then why should we be forced into it? If that's where we're
going to end up anyway, then let the economics determine that
and that's where we'll end up. ... Obviously there's some risk
involved for yourselves or you wouldn't have put it in your
proposal."
MR. PALMER said he would not describe it as a "no brainer," but
rather as a well thought out proposal. TransCanada thought
carefully as to where the best alternative is for Alaskan gas
and for its corporation, as well. He said he thinks there is a
win-win solution here. Furthermore, TransCanada has a proposal
to also improve the economics for Alaskan gas by "going
commercially back here to Fort Nelson." The only way to do
that, he explained, is to integrate into the Alberta hub. That
option will never be available to Alaskan gas without going into
that hub, "because you're in effect integrating into the Alberta
hub upstream of where it would be commercially possible
otherwise." He said these are, of course, considerations for
the administration and legislature to review as it decides
whether or not to grant TransCanada a license.
The committee took an at-ease from 10:11:00 AM to 10:20:37 AM
10:21:22 AM
SENATOR THERRIAULT remarked that once Alaska is signed on,
TransCanada could raise its tariffs, at which point Alaska might
decide to build its own pipe. He observed that NEB is not
interested in seeing a lot of spare capacity built and not used;
therefore, he questioned how NEB would make a decision on
whether to allow a competing pipe to be built for purposes of
having a lower tariff, versus "forcing the molecules into your
existing system."
MR. PALMER, in response to a request from the vice chair,
explained the definition and purpose of FERC and NEB, noting
that NEB is FERC's Canadian counterpart. He then told Senator
Therriault that the senator had described a circumstance that
the governor of Canada has not had to address, because generally
there has not been fair capacity. When fair capacity has
existed, the cost has been lower than the cost of construction
on the new pipeline. In the unlikely event that the cost of the
fair capacity is actually higher than the cost of the new build,
there would be significant pressure on the owner of that spare
capacity to "compete hard" to get that business, as well as
pressure by the NEB "to encourage them," he said.
SENATOR THERRIAULT surmised that any shipper that would come to
TransCanada would do a little bit of preliminary work regarding
price of shipping, then armed with that information, would then
ask TransCanada what its price would be. If that company could
beat that price, then it would tell TransCanada so, and it would
drive TransCanada's price down.
MR. PALMER responded that Senator Therriault had just described
what perhaps the three producers did in 2001; they modeled a
pipeline from Alberta to Chicago, as opposed to trying to model
TransCanada's complex, integrated system, which would have been
very difficult, if not impossible; therefore, they had a
competitive price to bargain against TransCanada at that time.
In fact, today, he said, the Denali project still has an
alternative proposal for a bullet line away from Alberta to
Chicago. He added, "Modeling our complex system is much more
difficult."
SENATOR THERRIAULT reasoned that as gas molecules are put into
the spare capacity, there would be a benefit to all the other
shippers, because they would then be sharing the fixed cost. He
asked Mr. Palmer to "go over the mechanism that you have that
takes part of that benefit and shares it back up the line."
MR. PALMER first explained that the way energy regulation occurs
on gas pipelines in Canada is that the pipeline is not at risk
for volume. So, in the event there is spare capacity, as exists
today, the unit tolls are increased for all remaining customers,
and the pipeline company makes exactly the same amount of
profit. When the spare capacity is refilled, the reverse occurs
and tolls are lower for all existing customers. TransCanada
estimates that when Alaskan gas comes to market, there will be a
$10 billion toll savings to Western Canadian producers. He
reiterated that it would be a win/win situation. In the event
that TransCanada extends the Alberta hub up to Fort Nelson, thus
sharing those costs from Fort Nelson south with Alberta
customers, tolls for Alaska customers would be lowered by 13-18
cents and $3 billion of value would be shifted to Alaskan
customers and away from Canadian customers. Western Canadian
customers would still see $7 billion of value, but $3 billion
would accrue to Alaskans. He clarified that that would only be
available if the line goes into the Alberta hub (and on to Ft.
Nelson).
10:28:02 AM
MR. PALMER, returning to his presentation, said he would not
detail slides 7 and 8, but noted that they show TransCanada's
response to AGIA "must-haves." He continued on to slide 9,
which shows "TransCanada's Competitive Response to AGIA." Mr.
Palmer relayed that certain parties have indicated that AGIA has
failed because there has been no competition, with only one
party making it through the first screening. He said he has
been involved in about 50 competitive bids worldwide, and some
of those bids have preliminary bid requirements, but most ask
for a "best and final bid." That is what happened, he said.
TransCanada put forth a proposal that anticipated competition,
and Alaska has seen the benefit of it.
MR. PALMER said TransCanada indicated that it would prefer not
to own the gas treatment plant in Prudhoe Bay. He said
TransCanada thinks that the parties that hold the leases and own
the existing facilities are the logical owners of that facility
and should have cost savings and synergies that no other party
will have, simply because they can use common use facilities
that any other party could not use. However, if the existing
producers don't want to own or build that facility, perhaps
other Alaskan entities would like to step in, because at about
$6 billion out of a $26 billion capital cost, it is a very
significant piece of business. In the event that other parties
do not wish to build and own that facility, TransCanada would do
so, because it is a necessary facility to complete the project,
he said.
MR. PALMER said most customers of gas pipelines do not want to
be owners; they normally like to invest their money in vertical
pipe - "down in the hole" - as opposed to horizontal pipe that
is regulated and yields a much less volatile but much lower
return. However, he said TransCanada has heard from a number of
potential customers that they may wish to own equity in the
project, and TransCanada has stated openly in its application
that those people would have the opportunity to become a partner
of TransCanada's if they commit their gas in the initial open
season. He said that should help increase the likelihood of the
success of the project.
MR. PALMER turned to the issue of how the project would be
financed, whether with 100 percent equity and a modest amount of
debt, as are a lot of small businesses, or with a significant
component of debt. He named two risks involved in projects:
business and financial. In the pipeline business, particularly
in the U.S., there is a wide range of debt equity structure,
which is how much debt there is relative to the total capital
structure of the project. In the U.S., pipelines are financed
with anywhere from 30-60 or more percent equity. The remainder,
he said, is debt. AGIA specifically requires a pipeline company
to have a minimum of 70 percent debt, so only 30 percent equity.
He emphasized that pipeline companies only earn profits on the
equity component; the debt component, he said, is strictly a
"pass through to the customer." The less equity a pipeline
owner has, the less earnings it has; therefore, a pipeline
company prefers to have "thicker" equity - 50 or 60 percent
equity. In order to compete, TransCanada has indicated that it
will go to 75 percent debt, a structure which equals a toll
reduction of $0.09/mmbtu. He explained that that reduces the
tolls by $150 million per year for 25 years, which is a massive
savings.
10:34:41 AM
REPRESENTATIVE LeDOUX asked if a pipeline company could have
more equity and voluntarily base its profits as if they had
less? In other words, she asked if the real question may be
what will be charged, not how that figure is determined.
MR. PALMER said he thinks Representative LeDoux is describing a
"deemed capital structure," which means how a company collects
the tolls from its customers. He said that could be different
from the actual capital structure, but is often not. He pointed
out that if he had 50 percent equity and collected tolls as if
he had 25 percent equity, then he would have really unhappy
shareholders. In response to a follow-up question from
Representative LeDoux, he reiterated that it could be done, but
it would be a rare occurrence. He said, "There have been
occasions where companies have had less equity, actually, then
what they're allowed to earn on, but in order to do that they
usually have to have the financial strength in the remainder of
their businesses to carry it, or the lenders will not lend them
the money."
VICE CHAIR STEDMAN asked Mr. Palmer to explain who sets that
tariff and how the regulatory body would interact with a ratio
of 70/30 or whatever arrangement happens to be before it.
MR. PALMER said the regulatory bodies in the U.S. and Canada set
the tariff; however, it would be highly unusual for a regulator
to require a pipeline company to have more equity than it
voluntarily proposes in its application. He stated, "There's an
old joke in the Canadian regulatory business that says,
'Regulation is like a noose; over time it tightens.'" He said
pipeline companies are always concerned that the regulator will
require them to take less over time than what they think as
pipeline owners they should have. Because AGIA would require
TransCanada to file for 75 percent debt and 25 percent equity,
it would be unusual that a regulator would tell TransCanada that
it should have more equity and therefore charge higher rates for
the customers.
10:38:25 AM
VICE CHAIR STEDMAN asked Mr. Palmer to explain the return
required on equity and the return required on debt, and where
the company makes its money on one versus the other. He said he
would like the listening public to understand why this is even
an issue of concern for the state or for TransCanada.
MR. PALMER responded that operating costs for a new pipeline of
this scale would be between 8 and 20 percent of the actual
costs. The remainder of the costs relate to the capital
expenditures to build the project. He explained that operating
costs are relatively low because it takes very few people to
operate a pipeline. The real costs, he said, are in repaying
the capital, which he reiterated is funded with both debt and
equity. Using the example of 75 percent debt, Mr. Palmer said
that debt will be funded by banks and bonds and other parties
that advance debt money to the capital players, and in this case
will have a U.S. government loan guarantee for up to $18
billion, plus inflation, starting from 2004. That should lower
the interest rate, he said. TransCanada has projected that that
loan guarantee debt would be around 5 percent. He offered his
understanding that when "Goldman Sax did it for the
administration," it assumed the debt cost would be around 7
percent. That, he explained, would mean it would have a 7
percent interest or coupon rate, which would be charged to the
customers. So, $30 billion at 75 percent, he said, is about
$22.5 billion of debt. Multiply that by 7 percent and the
result is the interest rate that would be charged each year to
the customer, he said.
MR. PALMER said the second component is the equity, which is 25
percent - in this scenario $7.5 billion - times the equity rate
of return of 14 percent, plus the income tax impact, both state
and federal in the U.S. and provincial and federal in Canada.
That increases the cost of equity, not just because the return
is at 14 versus 7, but because of an income tax impact that is
payable by the customers. He said, "That is a significantly
higher cost ... than the debt, which is why customers always
want pipeline companies to have less equity." Mr. Palmer
surmised that is also why regulators "want you to have less
equity," because debt is cheaper than equity. TransCanada makes
its money on equity, not on debt.
MR. PALMER said TransCanada has proposed that in the event there
is a capital cost overrun, it would take a rate of return
reduction for five years, which he said is unusual in the
pipeline business, because there is a relatively low component
of equity. He said TransCanada's business risk must be lower
because its financial risk is higher.
MR. PALMER noted that the last two items on slide 9 are the
upside of a run through Fort Nelson and the LNG alternative -
both items of which he discussed previously. The system in
central Alberta, shown on slide 10 as a solid blue line, is the
existing Alaska gas pipeline, prebuilt and put into service in
1981-82, when the project was expected to be going forward.
There was surplus gas in Western Canada, so that system was put
in place under the existing regulatory and legal structure in
Canada to move Western Canadian gas, which was expected for only
seven years, but has been in place for 27 years now.
10:45:07 AM
SENATOR THOMAS asked what will drive or cause spare capacity to
develop over the next 8 to 10 years, and what the options would
be for a pipeline company or producer in Alberta if it decided
not to enter the Alberta hub.
10:45:42 AM
MR. PALMER answered that currently there is about 2 bcf/d of
spare capacity on systems leaving Western Canada, out of a total
capacity of 15 bcf/d leaving Western Canada. The anticipation
is that Western Canadian supply will be relatively flat or
slightly lower over the next decade; however, there is a
significant growth and demand within Western Canadian markets
themselves. That growth, Mr. Palmer said, is coming from a
number of sources: oil sands, heavy oil development, and
electric generation. He said those factors are expected to
drive demand in Western Canada up by about 2 bcf/d in the next
decade. That means there would be 4-5bcf/d of spare capacity in
10 years' time.
MR. PALMER, in response to Senator Thomas's second question,
said a company other than TransCanada constructing a pipeline
for Alaskan gas through Canada, to the Alberta border, would
first have to obtain the approval of the government of Canada to
do so. He indicated that in order to do this, that company
would, in affect, have to be granted the existing rights that
TransCanada has held for 30 years. Making the assumption that
that much had been achieved, the company would have the
opportunity to either enter "our" system or to build facilities
to whatever markets it thought best. It would have to obtain
regulatory approval, as any party would, but it would have the
right to build the pipeline wherever it wished. He added, "You
would also have the right, if you required us through the
National Energy Board, to connect with your system, if you so
chose. The government of Canada, through the National Energy
Board, has the authority to require us to connect with you, even
though I may or may not wish to."
10:48:29 AM
SENATOR THERRIAULT recalled that when representatives from FERC
testified during a meeting in Anchorage, the legislature
received information about debt to equity ratios and FERC
operating under a "zone of reasonableness," regarding what FERC
would approve. He asked if NEB has similar terminology that
guides them to approve debt to equity ratios up to a certain
percentage.
MR. PALMER answered yes. The system in Alberta, as well as the
system across Canada actually has 40 percent equity, not 25
percent. What is important is multiplying the equity percentage
by the rate of return. He continued:
If you take the 25 percent times 14, what's important
is to compare that against other pipelines - equity
ratio times their rate of return. I'll just give you
an example: The Rockies Express pipeline currently
being completed from the Rockies over to the Midwest
and beyond, has a 13 percent FERC allowed return on 55
percent equity. So, 13 times 55 is just under 7
percent; 14 times 25 is 3.5. So, you can see that for
a project which we would argue is at least as risky as
Rockies, we're proposing to have a lower return. And
if you look at the National Energy Board return, for
existing projects in the ground it's true they've had
a lower rate of return, but when you multiply that
number times 40 percent, that's very comparable with a
to-be-built Alaska pipeline.
MR. PALMER, in response to a follow-up question, offered his
understanding that current ownership of Rockies Express is
Kinder Morgan at 51 percent, with ConocoPhillips Alaska, Inc.,
and Sempra owning the other 49 percent. He said he does not
know the debt:equity ratio of the Keystone project, which he
noted is an oil pipeline.
SENATOR THERRIAULT asked what the impact on the tariff would be
if Alaska had 50-55 percent equity in this pipeline.
MR. PALMER calculated that in the event that "we" went from 25
percent up to 50 percent equity, 9 cents would be multiplied by
5, thus there would be a 45-cent increase in the tariff on a
$2.41 base. Therefore, he concluded that the increase in the
total would be something in the order of a 20 percent increase
in the toll.
SENATOR THERRIAULT remarked that the impact to the take the
state would have would be significant.
MR. PALMER said obviously a 20 percent increase in the toll is
equivalent to a 20 percent capital cost overrun or "any other
component that could move you 20 percent." He continued:
If you think about what else it would take to move
that, that would mean interest rates would have to
move up by probably in the order to 30 or 40 percent.
... When you try to predict what items could move the
toll by 20 percent, they really go to capital cost
overrun - the component that is equity or interest
rates.
SENATOR THERRIAULT said Mr. Palmer has mentioned a 14 percent
rate of return, which he said is what TransCanada hopes to get;
however, he noted that the company has not "gone to FERC" or
"gone to NEB." Therefore, he stated his belief that TransCanada
has "started high" and expects to be pressured by the regulators
and shippers to "probably squeeze that a bit." He said there is
a stated toll that gives the 14 percent rate of return, but
suggested the major shippers are probably going to negotiate
"something a little bit better than your sort of default ...
tariff."
MR. PALMER concurred. He said he would expect the majority of
TransCanada's customers to negotiate a toll with the company.
He said he has yet to hear a customer tell him that his rate of
return is too low, and he has experienced cross examination from
examiners for many years, where they have thought his rate of
return was too high. He said TransCanada thinks it has put
forth reasonable numbers, but its customers and regulators often
hold a different point of view that TransCanada is perhaps
asking for too much, at which point bargaining does occur.
10:54:16 AM
SENATOR ELTON asked Mr. Palmer if he could provide a table
showing "different debt levels," as well as the cost to the
state for shipping its gas.
MR. PALMER said Commissioner Galvin had calculated those
figures. He recollected that Commissioner Galvin had indicated
that if the debt equity ratio was at 50:50, there would be a $1
increase in the toll, and that is because "they're starting with
a higher base." Each 5 percent change in the debt:equity ratio,
using the tolls Mr. Palmer provided, means a 9 cent differential
to the customer. Depending on tax revenue and percentage, a
one-third interest would mean "you would see 3 cents of that
change."
SENATOR ELTON clarified that he is still finding it difficult to
determine from the percentage of effect on the tariff what the
actual dollar impact could be on the state.
MR. PALMER responded as follows:
(Indisc. -- coughing) translates that 9 cents into ...
dollars per year. Dollars per year at 9 cents is [a]
$150 million change. So, if your tax rate - and I do
not know the specific tax rate that you will
ultimately apply to this project - but if your tax
rate were one-third, that would mean there'd be a $50
million per year impact. If your tax rate were 50
percent, then it would be [$75 million], and so on.
VICE CHAIR STEDMAN asked Mr. Palmer to explain the difference
between FERC and NEB in terms of the rates they set on equity.
MR. PALMER related that the FERC rate of return is generally
higher than that of NEB, primarily because pipelines in the U.S.
are usually at risk of a volume change. If a U.S. pipeline
loses a customer, it usually does not get to recover their costs
by increasing its toll to existing customers. Another
difference is that U.S. pipeline companies are not required to
have their tolls reviewed regularly, so as pipelines depreciate
over time, pipeline companies often do not change their toll.
That is not the norm in Canada, where a company regulated by NEB
and granted a rate of return by NEB of "x" percent will usually
earn approximately "x" percent return. In Canada, he said, "in
the event that you lose a customer, you spread it over the
smaller base, if you add a customer, you spread it over the
higher base, and also, as you depreciate the pipe, you must
change your toll." The Canadian regulators today are generally
allowing returns that are related to interest rates, and the
current interest rate allowed return on equity in Canada for
2008 is 8.71 percent on 40 percent equity, he said. He offered
further details.
VICE CHAIR STEDMAN concluded that there is a difference in
methodology between the two countries that the legislature
should keep in mind as it moves forward.
MR. PALMER concurred.
SENATOR THERRIAULT noted that an [opposite editorial (Op-Ed)
page] was distributed to the committee, and he asked who was
responsible for providing it.
VICE CHAIR STEDMAN offered his understanding that Representative
Ramras was responsible for the Op-Ed piece.
10:59:53 AM
SENATOR THERRIAULT remarked that it is full of inaccuracies.
VICE CHAIR STEDMAN responded that everyone is entitled to
his/her opinion.
11:00:30 AM
REPRESENTATIVE SAMUELS asked Mr. Palmer if he would agree that
the gas market in the Lower 48 is a lot different than that in
Alaska.
11:01:06 AM
MR. PALMER responded yes. He said he thinks this pipeline will
be the sole service provider for many years, perhaps decades.
REPRESENTATIVE SAMUELS, regarding debt/equity splits, noted that
in 2004, the U.S. Congress specifically passed legislation on
this pipeline that mandated that exploration must be enhanced,
which includes the debt/equity split for the tariff, the rate of
return, which FERC will determine, and the expansion provisions.
These issues have already been spoken to by U.S. Congress and
FERC. Thus, any comparison between pipelines in the Lower 48
and the pipeline that will be a monopoly line from the North
Slope through Canada or Valdez is like comparing apples to
oranges.
11:02:20 AM
MR. PALMER said many people would say the pipeline through
Canada is a monopoly. He continued:
I provided you with the numbers there, which I think
you would find as similar results if you multiplied
... the equity ratio times the allowed return. Most
people would say that there is less competition on our
pipeline in Canada than you would see in most Lower 48
markets. It's true, the U.S. Congress has spoken on a
number of matters on this project, [but] has not
stipulated the particular numbers with regard to debt
equity or rate of return, as you would not expect them
to. And they've certainly addressed the issue of how
the tolling will be factored in.
REPRESENTATIVE SAMUELS asked if there are any other pipeline
projects anywhere where the government has mandated regulations
and tariff methodology to enhance exploration.
MR. PALMER recalled that when TransCanada's pipeline was going
to be put in place across Canada 50 years ago, the Canadian
government had to own the Northern Ontario section and finance
the portion across Canada in order to ensure the project went
forward and did so on the structure the government proposed.
And within two years, because the project was a success,
TransCanada owned it all. He said, "I don't know that they had
a specific provision that said it was [to] encourage
exploration, but it was certainly a government mandate that was
encouraging the pipeline to be constructed in a certain fashion,
which was north of the Great Lakes through Northern Ontario."
VICE CHAIR STEDMAN asked Mr. Palmer to talk about the FERC
orders that took place in 2004.
11:05:12 AM
MR. PALMER responded as follows:
The government of the U.S. passed legislation called
ANGPA - Alaska Natural Gas Pipeline Act - in ...
October 13 of 2004, as I recall, specifically to
encourage the development of this pipeline, to allow
any party to make an application to FERC to construct
the pipeline, and also in legislation at the same
time, they passed the loan guarantee. That was ...
actually a separate piece of legislation, but they
also approved a loan guarantee of up to $18 billion in
2004 dollars, plus inflation, or up to 80 percent of
the capital cost of the project. Once again, large
benefits to the project to expedite.
They also required ... FERC ... to implement
regulations for open seasons - ... how open seasons
would be conducted on a project. And ... FERC held a
hearing at which I testified and a number of other
parties, including the state, testified, in December
of 2004. ... FERC passed the following regulations in
February of 2005, regarding voluntary expansions. ...
A voluntary expansion is a proposal by the pipeline
... owners that they will expand and provide service
either to those base customers for more volume, or to
a ... third-party customer for their own volume.
In the U.S., there are two types of expansions: one
voluntary, where the pipeline company proposes to do
so; and the second is mandatory. Now, mandatory
expansions are only allowed in the U.S. FERC rules for
Alaskan gas volumes ..., not for Lower 48 volumes.
So, that's a highly unusual piece of power that was
granted by Congress.
But let me just address those issues, because they
take you into how you charge customers. And I'll try
to use an analogy for those of you who haven't spent
your days in this business as I have. Most everyone
pays property taxes, or most everyone pays a common
tax for street lights or other services. ... In most
of those cases, customers pay based on what are
called, "averaged or rolled-in charges." So, if you
are a new customer and your house has the same value -
even though it's brand new - as an older home in the
same urban or municipality, you pay the exact same
property taxes .... The original homeowner gets a
break; he's been paying for his service for 20 years,
and he doesn't have to pay for any of the new services
that are now provided to serve your home. And the
logic behind that has been over time for both
municipalities as well as pipeline companies ... that
those new services provide value to not just the new
customers, but the old ones as well, because they
strengthen the system over time.
In the U.S., in the Lower 48, there has been a
mechanism for expansion where there's been rolled-in
tolls ..., in other words, average tolls, when the
costs go down for pipelines. On the other hand, when
the costs go up, it's incremental for the new guy.
So, it's very different than property ... taxes.
So let me now address what that regulation passed by
FERC said. They governed voluntary expansion. They
have what's called, "a rebuttable presumption of
rolled-in tolls." So, that means the government has
said that the test is it will be rolled in unless you
can convince them otherwise. So, that's a high
standard, but it's only for a voluntary expansion; it
does not apply where an expansion is mandated pursuant
to Section 105 of ANGPA. [That is a] critical issue,
[but] not for the AGIA application or for the AGIA
pipeline.
The AGIA pipeline will have voluntary expansion. That
is one of the must-haves; that is what we will do if
we are granted a license. And we're required to do so
by the State of Alaska. So, not only is the state
buying TransCanada or the pipeline sponsor as another
party in a FERC proceeding that is in favor of rolled-
in tolls, but we are agreeing to go down the voluntary
fork in the road.
If you have a non-AGIA pipeline, and it's TransCanada
[that] is the owner, the question to ask that party
is, "Will you file for voluntary rolled-in tolls and
voluntary expansions, or will you be required to
expand?" Because if you're required to expand, then
mandatory expansion provisions apply, and in that case
the likelihood is it will be incremental. That is the
normal test in the U.S. And that's why, although a
very arcane and difficult subject for people to
understand - not just legislators that have had to
listen to me explain this now six times, but I'm sure
for those of you in the audience that have not spent
25 years addressing this - ... it's a critical,
critical factor, if you want to expand your pipeline.
11:11:39 AM
REPRESENTATIVE LEDOUX asked if Mr. Palmer could give her
examples of what might happen with respect to an expansion under
AGIA or under another system not governed by AGIA.
VICE CHAIR STEDMAN asked that Mr. Palmer be sure in his example
to clarify who the ultimate decision maker is.
MR. PALMER prefaced his response as follows:
In all cases ... FERC will make the decision, but I do
need to be clear: In the event that you're proceeding
under AGIA, there is a voluntary agreement by the
pipeline company that they will be going for voluntary
expansion that takes them down the voluntary fork in
the road, at which point there's a rebuttable
presumption of rolled-in toll. So, that means any
party arguing against it must overcome that rebuttable
presumption.
In the event that it's a non-AGIA pipeline that is not
voluntarily expanding - ... and that is in the event
that ... the pipeline does not propose an expansion
and has to be required to expand to serve third
parties - now the test is the opposite. And now the
test is: if there's a subsidy, you will have to
explain it to FERC and get them to agree that rolled
in applies. That's the critical test.
MR. PALMER said he would now answer Representative LeDoux's
question. He said the Legislative Budget and Audit Committee
provided TransCanada with an example of certain expansions over
time. He said that example is shown on slide 23 of his
PowerPoint presentation, entitled, "Impact of Rolled-In Tolls?"
The chart of incremental costs starts at 4.5 bcf/d for two
years, expands to 5.9 bcf/d for two years, then to 6.5 bcf/d for
two years, and finally to 7.2 bcf/d. The incremental costs of
constructing those facilities are shown in his example, and Mr.
Palmer specified that he has done the figures strictly for the
pipeline, not the gas treatment plant. He continued as follows:
The incremental cost, of course, of building the first
4.5 bcf/d is strictly the base system. That happens
to be $1.76. And going from 4.5 bcf/d up to 5.9,
you're expanding using compression. You would expect
that to be relatively inexpensive, and in fact it is.
You'll see in the slide here the second bar at 5.9.
That's actually $1.44, so the tolls go down on an
incremental basis. Going from 5.9 up to 6.5 is $2.81,
and going from 6.5 to 7.2 is actually $4.25. So,
these are the incremental costs.
MR. PALMER turned to slide 24 of his PowerPoint presentation.
He noted that the [chart] on the left shows what happens with
rolled-in tolls or average tolls. The horizontal red line on
the left side shows the AGIA standard, which is rolled-in tolls
up to 115 percent of the base toll. He continued:
If you always had rolled-in tolls, you stay in the
left-hand side. You can see that expansion and
initial customers would see a modest decline going
from $1.76 at 4.5 down to $1.67 at 5.9. And all that
I'm doing here ... is I took that $1.44 incremental
cost on the previous page, and I averaged it with the
volumes and the cost at 4.5. That's how I created the
$1.67. When you go from 5.9 to 6.5, coincidentally,
when you roll all those costs together, you go back up
to $1.76 again. That's the third bar here at 6.5.
And going up to 7.2, you're rolling it all together,
you're averaging it all together, you're just about
[at] $2.00 - so you can see you're just under that red
line. ...
Now, it's true that FERC will have to approve it. But
as I described to Senator Stedman, that will be a high
standard for customers to argue against.
MR. PALMER drew attention to the right-hand chart of slide 24,
entitled, "FERC Lower 48 'Standard'." He said this chart would
not apply for an AGIA pipeline, but could well apply for a non-
AGIA pipeline "if they were not inclined as pipeline sponsors to
expand for third-party gas, and if they were required to
expand." He continued:
The green bar at 4.5 is, of course, just the base
number again, and that's just the $1.76. Going to
5.9, as I described to you, FERC standard is you roll
in when the costs go down, so that's no problem. Both
the green and the blue bar decline down to $1.67. ...
Initial customers are the blue, and expansion
customers are the green. But in the case where the
incremental costs are higher than the base, FERC
normally applies a standard that says, "Base customers
do not subsidize" - that's the terminology they use -
"do not subsidize expansion shippers." And you heard
from the FERC gentlemen, when they were ... in Juneau,
they said a subsidy usually means a toll increase.
Once again, they will determine, but that's normally
what they describe. A subsidy normally means a toll
increase.
So, if you'll recall my numbers back on the previous
page, the incremental costs, going from 5.9 to 6.5, is
$2.80. Clearly more than $1.67. So, in this case,
the blue expansion customer stays down at $1.67, and
the expansion customer would have to pay $2.80 - so,
more than a dollar higher. And then going from 6.5 to
7.2, once again, the base customer stays at that low
level, and the new customer would have to pay more
than $4.00, which is an increment, of course, of $2.50
more permanently for that customer. And that's where
the issue comes for exploration. Because if you are a
new party looking for gas, and you're not sure you can
get on the pipeline, and you think you might have to
make this sort of payment, that will be a significant
disincentive for you to explore.
11:20:21 AM
REPRESENTATIVE LEDOUX observed that FERC does not normally allow
subsidies, and she asked if there are exceptions to that.
MR. PALMER confirmed that is true regarding Lower 48 gas.
Regarding exceptions, he said he recalls through the '80s and
'90s, "they would often allow expansions to be rolled in if the
rolled-in toll was up to 105 percent." He indicated that FERC
does have the authority to "approve rolled-in," but he said that
is normally not allowed.
11:21:21 AM
REPRESENTATIVE SAMUELS noted that Mr. Palmer had said the right-
hand graph on slide 24 would not apply to an AGIA pipeline.
MR. PALMER said if he did, he had misspoken. He corrected his
former statement by saying, "The right-hand side would not apply
to an AGIA pipeline, because the AGIA pipeline must agree to go
to the left-hand side, which is to voluntarily expand. And the
only way it would apply is if FERC overruled the rebuttable
presumption and the proposal by the pipeline."
REPRESENTATIVE SAMUELS said, "So, at the end of the day you're
going to argue for the left side, and all the shippers will
argue whatever their commercial interests are, and you could end
up ... with an AGIA pipeline if TransCanada built it under AGIA.
You could still end up on the right side; it's really up to ...
FERC to ... determine whether or not they roll in the tolls
...."
MR. PALMER answered that that is possible, but highly unlikely.
He explained why as follows:
You have the pipeline company proposing it, which is
important; secondly, you have expansion customers
[who] will be proposing it; and thirdly, you have a
rebuttable presumption of rolled-in toll - a very high
standard for someone to overcome.
REPRESENTATIVE SAMUELS said Representative LeDoux had asked
about subsidies not normally applying on a lower 48 pipeline.
He said there is also a standard presumption of rolled-in tolls
even under the Alaska gas pipeline, with all of its special
rules for exploration, "where you won't get to a subsidy also,
but subsidy is not defined." He asked if that is an accurate
assessment of what Congress said.
MR. PALMER said this is a complex issue, and he repeated his
explanation for purposes of clarification as follows:
The FERC regulations that were passed in February of
2005 govern voluntary expansion only. That's where
the rebuttable presumption of rolled-in tolls occurs.
There is not a rebuttable presumption of rolled-in
tolls for mandatory expansion. If you have mandatory
expansions, and I'll cite you straight out of Section
105 of ANGPA, it says the following: "FERC can order
an expansion of an Alaska pipe under certain criteria.
If FERC orders an expansion, it can establish rates on
an incremental or rolled-in basis, but FERC must
ensure that the rates do not require existing shippers
to subsidize expansion shippers." Those are the key
words.
The committee took an at-ease from 11:25:07 AM to 11:33:42 AM.
11:34:16 AM
REPRESENTATIVE LEDOUX mentioned an example of a sewage system
and said Mr. Palmer had been describing how using rolled-in
rates makes the whole system stronger. She said, "Well, if you
use that rationale with respect to the pipeline system, couldn't
it be argued that there really would not be a subsidy, because
it would make the whole system stronger?"
MR. PALMER replied that Representative LeDoux had just described
the argument that Canadians have used for more than 20 years to
justify rolled in rates on pipeline. However, he said that
argument has not prevailed in the Lower 48, and the FERC
standard has been that "it is a subsidy." He said there have
been cases where that has been overturned, but the standard has
been that in the event that the tolls go up, that has been
treated as a subsidy. He said he is not suggesting that parties
cannot make the argument - they have done so - but they have not
prevailed many times "at FERC."
MR. PALMER, in response to Representative LeDoux, reiterated
that ANGPA was passed in October 2004, and FERC open season
regulations were passed in February 2005. In response to a
follow-up question, he said obviously this issue of a subsidy
has never been mitigated "for this pipeline." There have been
some parties on this pipeline that have made representations to
the court as to what a subsidy meant, he said. Under standard
FERC rules, Section 7 applications, there have been parties that
have addressed this issue. He said he is not familiar with the
cases, thus cannot site them for Representative LeDoux.
11:37:54 AM
MR. PALMER returned to his PowerPoint presentation, and drew
attention to slide 11, which gives a description of the project,
which uses a large inch pipeline and a gas treatment plant, and
which will go to the Alberta hub. Once at that hub, there is
access to markets across the Lower 48 from the Northeast,
through the Midwest, and all the way to California and the
Pacific Northwest. Slide 12, he noted, shows the capital costs
based upon the assumptions provided by the administration when
it requested responses to parties from their RFA application.
Slide 13 addresses the debt equity ratio, which Mr. Palmer said
he had already covered. He said he also indicated that he would
take some risk on the return on equity. Regarding the notation
of "U.S. 10-Year Treasury Note plus 965 basis points," on slide
13, Mr. Palmer said the last time he checked late last week,
those treasury notes were trading at approximately 4.1 percent,
plus the 965 basis points. He explained that a basis point is
one-one hundredth of a percent. He continued:
So, when you see 9.65, that means 9.65 percent on top
of that. And when we calculated this last November,
that would have yielded a 14 percent return on equity.
You can see at 4.1 percent last week that would have
yielded a 13.75 percent rate. And when I say that
TransCanada would take a rate of return reduction of
200 basis points, that is [a] 2 percent reduction.
So, if our 14 percent had been allowed, we would take
a return of 12 percent.
MR. PALMER highlighted that regarding the reference to 7.9
percent fuel, on slide 13, "most of that is actually at the gas
treatment plant; [there is] a significant amount of fuel
consumed there." He stated that to move the gas 1,715 miles
from Prudhoe Bay to Alberta actually only consumes 2.15 percent
fuel - a very low fuel ratio for the pipeline itself. Mr.
Palmer moved on to slide 14, which shows the project schedule.
He said when TransCanada made its application last fall, it did
not know when the state would issue an AGIA license, but assumed
it would be April 1, but now knows it was in error in assuming
that. The new schedule assumes that a license would be granted
on August 1, and TransCanada thinks it knows how the legislature
will act by that date. Assuming that August 1 date, he said
TransCanada would be completing an initial open season by July
of 2010, a FERC filing would be made in 2012, with an approval
hopefully by 2014, and with that approval and customers,
TransCanada would have that line in service ten years from now,
by September of 2018.
MR. PALMER turned to slide 15, entitled, "Partnership
Opportunity." He said in the initial open season, parties that
commit their gas and commit to take long-term contracts with
TransCanada's customers will have the opportunity to become
TransCanada's partner, if they so choose. He said often
shippers do not wish to invest in the pipeline, but the
opportunity will be there. Mr. Palmer next highlighted slide
16, entitled, "Upstream Fiscal Terms," which he said has to do
with the state's fiscal take from producers or lease holders.
He said TransCanada will be an interested observer, because
"those folks are likely to be my customer"; however, he said
that is business between the State of Alaska and lease holders.
He added, "Both the state, as the sovereign, as well as those
producers, are fully capable and sophisticated parties to
discuss your fiscal take; you don't need an interested observer
like TransCanada involved in that, I would suggest."
MR. PALMER, regarding slide 17, named other project components,
such as natural gas liquids (NGLs). He said that includes:
ethane, propane, and butane contained in the gas stream. Those
NGLs generally have a higher monetary value than the actual
methane gas. He said Prudhoe Bay gas, particularly, as well as
Point Thomson gas is very liquid rich, and TransCanada expects
that those liquids will be stripped from the gas stream and used
for their own value. The question is where those NGLs will be
stripped. He said TransCanada, as a pipeline company, is
neutral to that; the decision is that of the customers. If the
NGLs are not removed before getting to Alberta, there are a
number of third parties there that will compete vigorously for
that business.
MR. PALMER turned to slide 18, which addresses regulatory
structure. He reviewed that TransCanada would use ANGPA
legislation for the U.S. portion, and in Canada, the company
would proceed with the treaty and Northern Pipeline Act that has
been in place for 30 years. He reviewed slide 19, which
addresses the rolled-in tolls and shows that open season will
occur every two years. Slide 19 also addresses in-state
deliveries with distance-sensitive tolls, which Mr. Palmer
explained means an average rate for Alaska gas. He continued:
So, you certainly would never expect to pay for
anything south of the Alaska/Yukon border, because
you're not using that service. And within the state
of Alaska, we've proposed that there be an average
number across the state based on average usage. So,
simplistically, if ... the average distance were 70
percent, it would be 70 percent of the cost to get it
to the border.
MR. PALMER noted that he had already covered the following
topics: the five delivery points, the low equity ratio, and the
fiscal issues.
11:47:00 AM
REPRESENTATIVE SAMUELS asked if TransCanada would sue the State
of Alaska for treble damages if the legislature, some time in
the future, passed a law to lock in taxes for 15 years for any
pipeline.
MR. PALMER said he is not TransCanada's lawyer. Furthermore, he
said TransCanada would not be putting its legal opinion in front
of the legislature anyway. He said, "You would have your own
interpretation of the statute, as I'm sure any party would."
REPRESENTATIVE SAMUELS explained his concern is that a
commissioner had said he thought TransCanada would "have a
case." He continued:
So, if we just pass a law of general application to -
in the words I believe that you said earlier - a horse
race between the producer pipeline and the TransCanada
pipeline, both moving forward, and it seemed that if
we passed a law saying any open season - doesn't
matter who it is, here's the terms - and now you race
to the FERC, if you're going to sue us for treble
damages, we're kind of shooting one of the horses
there, right off the get-go.
MR. PALMER responded that TransCanada, pursuant to AGIA, has
undertaken a great deal of obligation to the state, which he
said he has described today. As a trade-off, he said, the state
has provided some benefit to TransCanada. One of those benefits
is the contribution to the cost of development - the $500
million. He pointed out that that money is not delivered to
TransCanada in the form of a check. The company must incur
those costs prudently, submit them to the state under invoice,
and be repaid under a schedule that the state has defined. The
second thing that TransCanada receives is a coordinator for the
project. He reminded the committee that Commissioner Pat Galvin
has testified that a third-party project could also achieve that
by paying for that party. The third item is that the State of
Alaska will not provide financial assistance to a third-party
project. Those are the matters that the State of Alaska has
committed to TransCanada and they are defined in statute, he
said. TransCanada expects the state to behave as a good partner
even as it expects to be a good partner to the state. He
continued:
In the event that you do breach - and we certainly are
not going into a partnership with you expecting that
you're going to - then there needs to be some penalty.
You've limited your penalties significantly compared
to the limitations that we have, because we don't have
those same limitations.
REPRESENTATIVE SAMUELS asked Mr. Palmer if TransCanada thinks it
will get gas committed to its pipeline without a term that locks
in those taxes.
MR. PALMER responded that TransCanada has, for several years,
had preliminary discussions with customers. If granted the
license, TransCanada will work hard to attract those customers
to its pipeline, because that is what it is in the business of
doing. However, Mr. Palmer said he cannot predict at this point
how those producers will act. He said, "They have spoken for
themselves in the past and they will do so in the future."
11:51:50 AM
REPRESENTATIVE KERTTULA said what she hears Mr. Palmer saying is
that both parties give something up in order to go forward. She
said she has heard concern over the possibility that if the
three producers are let in and buy equity in the company, the
state may wind up in the same situation it has been in for so
many years with a "grip on our resource." She offered her
understanding that Mr. Palmer is saying that if those producers
do buy into the equity, they will basically be agreeing to the
same terms and obligations, and Alaska will not wind up in a
situation where the company can then "foreclose explorers from
coming in," and the state will not end up in the same situation.
MR. PALMER responded that's correct. He said TransCanada is
giving up the freedom to act by becoming the state's partner.
For example, it would be prevented from making a deal with
Denali outside of AGIA without the agreement of the state. He
stated that one party cannot retain total freedom and expect to
enter into a partnership.
11:53:46 AM
SENATOR THERRIAULT asked for confirmation that if the State of
Alaska were to pass a law of general application, it would not
be singling anyone out "to give a benefit to a competitor," and
therefore would not "trigger anything."
MR. PALMER said although he can read the statute, he will not
interpret "the state's language that you've applied to us under
AGIA." He said TransCanada continues to "live with those words
that are in front of us."
REPRESENTATIVE SAMUELS expressed concurrence with Senator
Therriault, noting that "that's not what Commissioner Galvin
said at the last meeting." At that time, he indicated, a
question was posed whether the State of Alaska would be exposed
to treble damages if it were to pass a law of general
application for committing gas to any open season - LNG, Denali,
or TransCanada - at a certain percent rate for a certain amount
of years. The answer to that question was yes.
CHAIR STEDMAN said that issue would be explored later.
MR. PALMER returned to his PowerPoint presentation, to slide 20,
which addresses long-term basin development and pipeline
expansions, the value to producers and governments, the question
of whether or not Alaska has enough gas, and the impact of
drilling and rolled-in tolls. Referring to information on slide
21, he explained that if the gas is sold in Alberta - a location
used as an example of how gas would be sold in the Lower 48 -
the cost of transportation to get it back to the wellheads must
be deducted. After that deduction, he said, calculating 25
years, times 4.5 bcf/d, the value is $350 billion. That value
will be shared among producers that must pay their production
costs, after which they will have profits to be shared with
governments through taxes. He provided an example of what would
happen if the project is expanded, using an assumption of 4.5
bcf/d for 10 years, with 25 additional years at 5.9 bcf/d, at
which point the value raises to $600 billion, with an expansion
value of $250 billion. He said the example shows strictly the
value of selling the gas, less the cost of transportation.
11:58:41 AM
REPRESENTATIVE FAIRCLOUGH said there is a letter from AOGCC that
allows a 2.7 bcf/d "take off," and the legislature has been told
by the administration that Alaska will not be using the Point
Thomson field to provide gas to the line; therefore, she asked
Mr. Palmer to explain from where the gas to which he referred
will be coming.
MR. PALMER replied that TransCanada was not aware of "the Point
Thomson circumstance" when it made its application, so the
corporation expected that gas would be flowing from Prudhoe Bay,
Point Thomson, the other known reserves in the North Slope, as
well as some "yet to be found" gas. He related that TransCanada
is aware of AOGCC's 20-year-old estimate that indicated that 2.7
bcf/d could come off the Prudhoe Bay field, but more recent
estimates by AOGCC anticipate that Prudhoe Bay can deliver
significantly more than that amount. He expressed the
corporation's belief that 3.5 or 4 bcf/d "looks to be
available." He added, "What will happen at Point Thomson is
clearly something we're not going to be influential on; that's
going to be something between the state and the current lease
holders as to how and when that is resolved."
12:01:19 PM
MR. PALMER directed attention to the summary on slide 25. He
reviewed that TransCanada has been responsive to what the
administration and legislature established under AGIA.
Furthermore, TransCanada believes that AGIA was structured to
encourage construction of the project, long-run basin
development, and open access terms for initial and future
shippers in-state, to the Lower 48, and to LNG markets. He
expressed his hope that his presentation has shown that
TransCanada has the credentials and the capacity to build, own,
operate, and expand the project. He stated his belief that
TransCanada's objectives are aligned with AGIA and that state,
because the corporation is in favor of early in-service, long-
run basin development, and open access and equitable treatment
for all customers.
The committee took an at-ease from 12:03:29 PM to 1:03:18 PM.
1:03:20 PM
PAT GALVIN, Commissioner, Department of Revenue, said it was his
role to answer questions and provide a clear message about the
AGIA process. Commissioner Galvin recognized Commissioner Tom
Irwin of the Department of Natural Resources, and indicated that
he and Commissioner Irwin made a joint decision regarding
TransCanada's application.
COMMISSIONER GALVIN reviewed that a little over a year ago, the
administration came forward with the original proposal which
ultimately became the statute passed by the legislature.
Discussions were held to attempt to move the gas line project
forward, because at the time, people were expressing frustration
that the project should be happening but was not. He explained
that AGIA was intended to use the state as a catalyst to move
the project forward, with the recognition that the state had a
choice in terms of what role it would take in doing so. For
example, the state could choose to use $25-$40 billion of state
capital to build the gas line itself. He said the
administration felt that the state should first try to use
private enterprise to move the project ahead, believing that the
project would be attractive to builders, shippers, and sellers.
1:07:19 PM
COMMISSIONER GALVIN said the question was asked as to why the
market was not driving the project to fruition if the economics
were there. The answer, he said, is that a free market did not
exist; there were only a small group of producers who held the
lease to the gas and were barriers to getting the market to work
properly. He related that AGIA was intended to move this
project through those barriers so that the economic factors
could show themselves and make the project a reality. The state
needed to create competition and the sense that those who did
not jump in early would be left behind; it had to create a sense
that time was important. The state also needed to create
competition for the state's inducements, and it wanted to get as
much as it could for them. So, AGIA set up that competition.
The state issued a request for applications, and the application
submitted by TransCanada was the one that met all the
requirements of AGIA. The valuation system was set up to
evaluate all applicants, whether there be one or many. The
commissioners, he said, considered whether issuing a license to
TransCanada would maximize benefits for the state. They
considered Alaska jobs, affordable gas, and revenues to the
state.
1:12:32 PM
COMMISSIONER GALVIN said the analysis was not limited to the
TransCanada project. The commissioners "had to look at it in
comparison to the other options that are available to the
state." Those other options include the Denali project and the
proposal from BP and ConocoPhillips Alaska, Inc. to move a
pipeline project. Furthermore, Commissioner Galvin noted,
Alaska has long considered an LNG project as a potential first
opportunity to get its North Slope gas to market. In the end,
and using the expert analysis from consultants, the
commissioners decided that issuing a license to TransCanada
would sufficiently maximize return to the state.
1:15:08 PM
COMMISSIONER GALVIN offered a PowerPoint presentation of the
summary of the commissioner's findings. He outlined those goals
in maximizing benefits to Alaska, as shown on slide 3, which
are: to get a pipeline, to maximize job opportunities, to
provide energy for Alaskans, and to increase revenues to the
state. Commissioner Galvin said getting a pipeline comes down
to having a feasible project plan that is being forwarded by a
project sponsor that has demonstrated it can fulfill its
obligations and bring the project to fruition.
1:17:36 PM
REPRESENTATIVE NEUMAN asked why Commissioner Galvin feels AGIA
has more opportunity to attract financing, when the Denali
proposal producers who have the right to produce the gas want to
build their own pipeline. He asked what assurance there is that
TransCanada will get those producers to commit to putting their
gas into TransCanada's pipeline instead of their own.
1:18:31 PM
COMMISSIONER GALVIN replied that when securing gas commitments,
the commissioners consider whether the TransCanada project
provides an attractive opportunity for the producers to get
their gas to market. In doing that analysis, the commissioners
found that because of the way the tariff rate is set up and
because of TransCanada's demonstrated ability to deliver a
project within its timeframe and within budget, the producers
would be provided a good opportunity to get their gas to market.
He said the producers consider several factors. One of those
factors is "getting to the point where they're soliciting the
gas commitments." Another factor is whether or not an open
season takes place. Commissioner Galvin said, for example, that
the TransCanada and Denali projects cannot be compared to each
other with the assumption that the Denali project is "going to
get to that open season," because there is no commitment that it
will, only a statement indicating so.
COMMISSIONER GALVIN said another consideration is the economic
drivers for the producers. The producers make their money off
of the exploration and development of oil and gas resources,
generally getting solid returns on investment capital. A
pipeline project will have a regulated rate of return.
Commissioner Galvin noted that Mr. Palmer had talked about
return on equity. He said, "That return on equity, even at the
highest levels that may be expected from the regulatory agency
is substantially below what exploration and development
companies in the oil and gas industry usually would expect to
get for their capital investments and projects." He said from
the state's present perspective, the question is whether or not
the TransCanada Alaska project is one that - barring any other
circumstances - could be expected to attract gas commitment to
the project. Commissioner Galvin said the commissioner's
analysis shows the answer to that question is yes.
1:22:19 PM
REPRESENTATIVE NEUMAN said he thinks the producers have
committed to spend up to $600 million to gather information and
hold an open season, and he asked Commissioner Galvin why he
thinks the producers are not going to follow through on that.
1:22:48 PM
COMMISSIONER GALVIN responded that the question is whether the
producers are going to spend the $600 million, not whether if
they spend it they will get to an open season. He said those
are two different questions. The producers have made public
statements that they will go to an open season and expect doing
so to cost $600 million; however, there is no [guarantee] to the
state or anyone that the producers will actually do so. He said
he would not be supporting the best interest of the state if he
were to recommend relying upon the public statements of the
producers, without "something that binds them and has some
expectation that the state is going to be able to rely upon
that." He emphasized that AGIA requires commitments that are
enforceable and binding, rather than simply relying on a public
statement of intent.
1:24:48 PM
REPRESENTATIVE RAMRAS said his view on the issue is opposite
that of Commissioner Galvin. He noted that Commissioner Galvin
uses the word "attract" often, and he said he would like to know
how many times he has discussed with producers the manner in
which he is trying to attract firm transportation commitments.
He said there is an adversarial relationship between the current
administration and the producers, which he indicated is why he
is questioning the use of the word "attract."
COMMISSIONER GALVIN stated that the issue of attracting the
commitments to the projects is far-reaching; it involves having
a project that will provide both an economic opportunity and
value the state can put in place to provide "a reasonable
commercial opportunity for the producers." He said the AGIA
license project is at a commercially advantageous position "by
having the state say that if you commit your gas to the AGIA
license project, the state will provide upstream values for you
as a shipper." He continued, "Those are things to attract gas
to the project that do not involve sitting down and negotiating
with the companies ... [behind] closed doors in order to try to
provide some additional values on the table." He said the
administration has stated from the beginning that the purpose of
AGIA is to provide transparency to the public regarding the
state's negotiations [related to the gas pipeline].
1:28:22 PM
COMMISSIONER GALVIN, in response to Representative Ramras,
explained that the administration is providing a number of
different values to the producers: an attractive project and an
attractive state system on upstream certainty. More
specifically, to Representative Ramras' request for a record of
the meetings the administration has had with the producers to
attract their gas to the licensed project, he stated that the
administration has not engaged in negotiating the terms to bring
the gas to the AGIA project; it is not actually "attracting the
gas." The intent of the administration will be to bring forward
a project as attractive as a commercial opportunity to producers
and to discuss with producers publicly what is needed in order
to maximize the producers' interest in advancing the project and
to figure out what the state will get in return. He said, "AGIA
is very much focused on the long-term opportunities presented by
the gas pipeline project, and we want to ensure that the
pipeline project that ultimately succeeds is one that is going
to meet the state's long-term interest of having a very robust
and dynamic exploration and development opportunity for gas on
the North Slope."
1:32:20 PM
CHAIR STEDMAN asked Commissioner Galvin to summarize his answer
to Representative Ramras' question.
COMMISSIONER GALVIN responded that the administration does not
believe it is necessary to demonstrate its conversation with the
producers, because it is not engaged in the kind of negotiations
to attract gas to the TransCanada Alaska project. He said, "Our
discussions with the producers are far-ranging on a number of
different factors, but I don't think it's relevant to the
question."
1:33:31 PM
REPRESENTATIVE RAMRAS asked again if Commissioner Galvin would
produce a list showing the meetings the administration has had
with producers to talk about attracting firm transportations
commitments, irrespective of how far-ranging or narrow those
discussions have been.
COMMISSIONER GALVIN replied that he has not kept track of his
conversations with the producers in that manner; therefore,
putting together such a list would not be feasible.
CHAIR STEDMAN said that issue would be clarified later in the
session.
1:35:00 PM
COMMISSIONER GALVIN continued with his PowerPoint presentation,
and addressed the issue of jobs for Alaskans. He explained that
the capacity within a pipeline is "locked up" through contract,
thus, in order for an explorer to get gas to market, the
pipeline will need to expand, either through the addition of
pumps and compressors to allow more gas to flow or by adding
additional pipe, which is called "looping." Having open access
to the pipe and a reasonable rate for capacity will make the
difference on whether or not the explorer drills an exploration
well. Commissioner Galvin said AGIA provides that the owner
will expand and, when the cost is charged, it will be spread
among all the shippers. He said that is referred to as using
rolled-in rates (ROR). He emphasized the importance of these
access provisions to the state, explaining that they will create
the atmosphere for new companies to come drill on the North
Slope, knowing that if they find gas, they can get it to market
within a reasonable amount of time at a reasonable price.
COMMISSIONER GALVIN said construction jobs on the pipeline will
provide short-term opportunities and operating jobs will be
limited. The jobs that result from oil and gas exploration and
development and from having an open access pipeline will be "the
true prize for the state," he said.
1:39:27 PM
COMMISSIONER GALVIN next addressed opportunities for affordable
energy for Alaskans, the subject of which is addressed through a
number of provisions in AGIA. He emphasized the importance of
having access to the gas, having the ability to offtake gas at
good rates within Alaska, and to have expansion provisions. He
said he appreciates that it will take awhile to build up the
lines and to get Alaska's communities up to speed and able to
enjoy the advantages of having access to the gas. Having a
competitive atmosphere on the North Slope, with new players
entering into the picture, with new gas going into the main
line, will provide Alaskans the opportunity over the next
generation to get up to speed and take advantage of the new gas
as it comes into the line.
1:41:25 PM
COMMISSIONER GALVIN related another important aspect of the
opportunity for Alaskans is the timeframe - getting gas to
Alaskans as soon as possible. The focus of AGIA is on the big
pipe that would get gas to a market outside Alaska, because the
quantities of the state's gas are overwhelming in comparison to
the demand within the state.
1:42:11 PM
REPRESENTATIVE FAIRCLOUGH referred to the next bullet point on
slide 7, which read, "Maximize state revenue and create
opportunity for future growth of state economy." She questioned
whether a bullet line might set the state up for treble damages.
1:43:08 PM
COMMISSIONER GALVIN responded that the goal is to get gas to
Alaskans sooner than the time it will take to get the big line -
and possibly a spur line - constructed. Therefore there has
been consideration of having a bullet line for a smaller line
instate that would serve Alaskan markets. He said AGIA provides
project assurance in the form of a treble damage clause, which
is in place to attract companies to participate in the
competition for the state's inducement. The assurance is that
if a company spends its own money, along with that of the state,
to advance this project, it will have recourse if the state then
goes with another company. The company would receive three
times its costs, no more. He said Representative Fairclough's
concern is with the small line that would be built within the
state. He said AGIA defines a project which would be subject to
treble damages as one that is greater than 500 mmcf/d. Thus,
any project less than that would not incur treble damages.
Commissioner Galvin noted that the entire Southcentral part of
Alaska is hooked up to natural gas, and all of that consumption
equals approximately 250-270 mmcf/day. Adding the Agrium Plant,
which at one time was using natural gas as a feed stock, would
increase that amount by about 150 mmcf/d. If Fairbanks were to
convert its power to natural gas, the increase would be
approximately 30-50 mmcf/d. Over the next 10 years, he said,
Alaska will still be getting gas out of the Cook Inlet Basin.
With all these added, total consumption within the state still
would be less than 500 mmcf/d. He concluded that the bullet
line would serve Alaska's needs while staying under the
500mmcf/d limit. The bullet line is something that the state
could even pay for, he suggested.
1:48:23 PM
COMMISSIONER GALVIN said one question raised in this context is
whether the treble damage provision would limit LNG being added
to the project to make it more economic, because LNG is not
included in the treble damage provision. He related that the
answer to that question is yes. However, he said the state will
get tremendous value out of the AGIA license, possibly hundreds
of billions of dollars in cash flow to the state - the present
value of that cash flow being approximately $65 billion "in one
particular scenario." That value overwhelms the potential cost
of building the bullet line, he remarked. He emphasized that
the state can have both.
1:50:37 PM
REPRESENTATIVE FAIRCLOUGH expressed concern that the bullet line
would still be a competing line. She said that in voting yes on
AGIA, the State of Alaska will promote AGIA inside its
departments. She stated, "And so, it's a little disingenuous to
me that we say we're not precluding everything when we're going
to internally have a whole bunch of power that can slow down
those projects."
1:53:57 PM
COMMISSIONER GALVIN said the administration tries to use the
term bullet line in a particular way, to mean a line that will
meet Alaska's internal needs only. He indicated that under that
definition, the line will always fall below the 500 mmcf/d
limit. If the concept of a bullet line is expanded to include
something greater - for example, to include LNG or some other
consumption of gas outside of Alaska's needs - then "it does
raise the question." He offered more details.
1:56:13 PM
COMMISSIONER GALVIN, regarding permitting, said he thinks "the
nature of the discussion on this issue has evolved." He said
AGIA statute spells out whether the state is precluded from
providing permits and authorizations to a competing project; the
statute spells out that issuing permits and doing authorizations
are not considered to be providing benefits to the competing
project. He said that carries to the next question, which is
whether or not the state will insidiously, within the system,
hold back on projects by either not staffing or by diverting
resources to advantage the AGIA project and disadvantage
competing projects. The answer to that, he provided, is that
large projects are generally permitted through a different
vehicle. A contractual relationship is created through a
reimbursable services agreement (RSA) that provides for the
other project to be able to secure the resources in terms of
state personnel and time, to ensure that project gets a permit
in a timely manner. That creates a separate relationship that
will be enforceable and secure on the part of the competing
project, outside of the AGIA process.
1:59:01 PM
REPRESENTATIVE ROSES expressed concern that he has received
different answers from the administration and TransCanada. He
recalled hearing about excess capacity in Canada during Mr.
Palmer's testimony - that building a new line through Canada
would not be cost-effective, because it is much less expensive
to put gas through a pipe that has excess capacity than to build
a new pipe. He asked if the aforementioned 500 mmcf/d capacity
means that if all the possible expansions exceeded that, the
state would be in non-compliance. He reasoned that if the state
were to build a bullet line, it would want to build one with the
greatest capacity, even if the state does not intend to put that
capacity through the line in the beginning. He expressed his
fear that based upon the discussions he has heard, doing so
would become a violation.
2:01:06 PM
COMMISSIONER GALVIN told Representative Roses that a great deal
of time was spent "going through various implications of this
issue" before the Senate Judiciary Standing Committee last week,
and he indicated that the Department of Law issued an opinion in
a memorandum. He said the answer to Representative Roses'
concern is that "the pipeline can clearly have the ability to be
expanded beyond 500 mmcf/d and not violate the treble damages
provision. The issue, he said, is what the capacity of the line
is when it is being designed. Added capacity and looping after
the fact is not the relevant measurement, he said. He offered
further details.
2:03:37 PM
REPRESENTATIVE ROSES said the answer he received from Mr. Palmer
was that [the issue is] "what that pipe is capable of being
expanded to carry." He said before he makes a decision, he
would like to know that Mr. Palmer and Commissioner Galvin are
in agreement on that particular point. He said he doesn't want
attorneys employed as a result of AGIA.
2:04:49 PM
COMMISSIONER GALVIN suggested that Representative Roses ask Mr.
Palmer again whether he disagrees with the opinion of the
Department of Law.
2:05:42 PM
COMMISSIONER GALVIN moved on, explaining that in order to
maximize revenues to the state, it is important to realize that
the state gets most of its money from the royalty and the
production tax off oil and gas. He focused on value at the
wellhead and where the royalty and the production tax are
calculated, emphasizing the importance of keeping the cost of
transportation low in order to increase the value at the
wellhead.
2:07:22 PM
COMMISSIONER GALVIN said he would cover the crux of the economic
aspect of the TransCanada Alaska project during the remainder of
his testimony [the information for which begins on slide 8 of
his PowerPoint presentation]. He stated that a primary focus
during the commissioners' evaluation was the economic analysis
of TransCanada as compared to other projects. Commissioner
Galvin named two drivers: how much the projects would bring to
the state in revenue and net present value (NPV); and the value
of the project to the producers - the likely outcome in revenue
stream. Rather than pin pointing an overall number, he said the
commissioners considered the range of each of those drivers,
based upon expert information, and they tested the economics of
the projects, moving the variables within the expected range of
each project. They conducted a sensitivity analysis across an
endless number of variable to see if a project would be a
reasonable investment decision for producers.
2:11:49 PM
COMMISSIONER GALVIN said the second aspect of the analysis
relates to the likelihood of success, which meant looking at the
potential barriers of a project and evaluating those barriers to
determine whether they are more likely than not to cause the
project to stall. He said the commissioners conducted that
analysis for the TransCanada Alaska project alone, and also as a
comparison to the other projects available. Commissioner Galvin
said a complicating factor in the analysis is that, as allowed
under AGIA, TransCanada said it could not pinpoint a specific
throughput on day one because that information is unknown. So,
an analysis was done on a range of potential starting points for
the project, as provided by TransCanada, but when it came to
reporting the results, the commissioners had to limit the
information to something manageable in order to provide the
public with a representation of the information that would be in
the report. Commissioner Galvin said the commissioners are
trying to focus on scenarios that would result in less gas than
expected, a factor he said became more relevant as the Point
Thomson lease conflict came into light.
2:15:18 PM
COMMISSIONER GALVIN named the factors in NPV analysis, as shown
on slide 11, which are: gas prices, transportation costs,
pipeline construction schedule, and gas production costs.
Transportation costs include: the total cost of the project,
cost escalation rates, the [initial pipeline] throughput, and
tariff terms. Regarding the schedule, he said money coming in
later will be less valuable, thus the length of time the project
takes will have an impact on the analysis. The production costs
are a driver for production tax, since there is a net-based tax,
he relayed.
2:16:51 PM
COMMISSIONER GALVIN turned to slide 11, which shows gas price
models. He said the commissioners did not want to come up with
a number picked "out of the air" and then have the discussion be
about whether or not that price assumption was reasonable or
not. Instead, they looked to outside, reputable industry-based
forecasting models. He explained that this was done because the
producers would not accept only the state's numbers. He said,
"We don't know what the producers themselves use as their price
models - they use their own - but we have a little bit of a
window into it, because we can look at what they look at, at
least." He noted that the consulting firm, Wood Mackenzie,
provides price forecasts on oil and gas, and the commissioners
were able to use those forecasts. Other sources of information
are from the United States Department of Energy for gas price
forecasts, and the administration's own consultant, Black &
Veatch, who built its own model for price forecasts, providing
information not provided by the other two sources. The
forecasts are all equally unreliable, he remarked, but are the
best available. Commissioner Galvin noted that he and
Commissioner Irwin put together a team of technical consultants
to look at the engineering, the project management issues, and
the rate-based issues associated with building a pipeline of
this size. The intent was to get subject matter experts to feed
off of each other as would be expected for any project of this
size.
2:20:23 PM
COMMISSIONER GALVIN talked about price estimates. He said there
are mid-range estimates of $31 billion in today's dollars for
the project. He said Mr. Palmer's numbers, offered previously,
were based upon TransCanada's project assumptions and project
analyses. He said it is important to understand why some of the
numbers are different. He explained that applicants were asked
to do a project planning exercise, to give a cost forecast, use
the assumptions for prices and cost escalation, and then come up
with a number of the amount of economic return. He stated,
"What we went through was a sensitivity analysis," which he said
was a different way to test the economics and evaluate how
assumptions might "live up" in the real world. In schedule
assumptions, the schedule brought forward by TransCanada was
reviewed by the state's technical team, and the team found that
that schedule was reasonably aggressive. He said, "From our
analysis, we look at the probabilities of where we can expect
the outcome to be, and we came up with a mid-range in 2020 ...."
Using a mid-range Wood Mackenzie forecast, he said, the state
can expect to see $261 billion in cash flow over the first 25
years of operations of the pipeline, with an estimated NPV of
$66 billion [at a discount rate of 5 percent]. The producers
have a lower cash flow estimated at $147 billion and an
estimated NPV of $13.5 billion in value today [at a discount
rate of 10 percent]. He added, "And that's why we consider it
to be a favorable economic project."
2:23:52 PM
COMMISSIONER GALVIN indicated that [slide 20] reflects the
throughput of the gas that exists on day one. He emphasized
that the figures on the slide assume no expansion - that the gas
on the first day is the same amount that will be put through for
25 years. He remarked that the outcome is surprising. A bcf/d
of 3.5 would produce a favorable economic to the state of $51.6
billion, while 4.0 bcf/d would produce $60.7 billion, and 4.5
bcf/d would produce $66.1 billion.
COMMISSIONER GALVIN, regarding the likelihood of success, said a
team looked at TransCanada as a potential pipeline builder and
operator and found, as Mr. Palmer indicated, TransCanada is the
largest pipeline company in North America for gas pipelines, has
handled similarly sized projects over the years, and has the
capability to carry the financial burden associated with a
project of this magnitude.
2:25:57 PM
COMMISSIONER GALVIN next addressed a comparison with the Denali
Project, as shown beginning on slide 26. He posed the question,
"If you have the Denali project in hand, what is the advantage
of going forward with this license?" First, he noted that the
state has no commitments from the Denali project regarding a
schedule, debt:equity ratio, and tariff terms. For example, a
50:50 debt to equity ratio would increase the tariff by $1
compared to a 75:25 ratio proposed by TransCanada, which would
cost the state over $8 billion in NPV. There is a risk of the
state losing tremendous value. Furthermore, Commissioner Galvin
noted that the Denali project has no commitments with regard to
open access. He explained as follows:
And the way that the commercial dynamic can operate on
a pipeline that is controlled and owned by the
producers is such that they could manage it in such a
way that it would make it very difficult, if not
impossible, for an explorer to get their gas into the
line. It would make it ... commercially
disadvantageous to explore to potentially go in and
drill a well and put themselves in a position where
they're going to have to fight to get access into that
line through the regulatory process, as opposed to
having a pipeline that has committed to expand,
committed to use rolled-in rates, and provides them
with confidence that they're going to do so. That in
itself could stifle the type of competition on the
slope that we're going to need in order to bring in
new companies and to get a robust exploration
development on the gas side as well as the oil for
generations to come.
2:28:59 PM
COMMISSIONER GALVIN said he would skip the discussion of LNG.
Regarding the treble damages provisions, he said it is something
that will grow over time, and is based upon three times the
licensee's cost, not counting the state's contribution.
COMMISSIONER GALVIN, in response to the discussion between Mr.
Palmer and Representative Samuels regarding whether providing an
across the board tax change would create treble damages, said:
The way the question was framed in Kenai was if there
was a change in the law to provide - I think it was in
the context of - fiscal certainty for the project, and
that the understanding was that that would create the
opportunity for Denali to move forward but it was
given to all projects, and that resulted in Denali
being the project that ultimately got the gas
commitment to move forward, would that ... create a
treble damage issue?
And I said, "Yes." Because if you assume that it is
set up to advance the Denali project, even if it
applies to all projects, that ... is exactly what was
intended with treble damage assuring, was that we
weren't going to take a step to provide a tax or other
advantage to a competing project in order to
facilitate the development of that project.
COMMISSIONER GALVIN said if one were to ask whether any tax
change that is applied across the board equally to everyone
would implicate the treble damage, the answer would be no,
because the question then would be too broad. He continued:
And that's specifically why it was written the way it
was. ... It had to be preferential tax treatment for
the purpose of facilitating the development of a
competing project. That is what puts you into the
treble damage issue.
2:31:46 PM
COMMISSIONER GALVIN summarized that the issue analyzed by the
commissioners was whether or not the TransCanada Alaska project
would sufficiently maximize benefits to Alaskans, and they found
that it would, even in comparison to other options. He said the
options were considered with "a very wide and clear-eyed view"
of what the options to the state are at this point in time.
The committee took an at-ease from 2:33:24 PM to 2:41:33 PM.
2:42:06 PM
SENATOR HOFFMAN commenced a special presentation for the North
Slope Borough in honor of Founder's Day. He had a photograph of
the first Alaska legislature, with each legislator's signature.
It was given to him by Bethel's first senator, Jack E. Weise,
and about six years ago, he asked Tom Stewart to help him
identify all of the signatures and associate the names with the
photographs. He said the photograph is possibly the last in
existence and he had 50 copies made as limited additions. He
presented a copy to the mayor of the North Slope Borough [who
made a short speech of acceptance].
VICE CHAIR STEDMAN announced that public testimony was now open.
2:49:26 PM
EDWARD S. ITTA, Mayor, North Slope Borough, announced he would
hand each one of the guests present a special edition of the
book, "Gift of the Whale," which he said would further their
knowledge of what the North Slope Borough is all about. He
thanked the administration representatives, the legislators, and
Governor Sarah Palin for holding an AGIA meeting on the North
Slope and for giving the residents there the opportunity to
speak.
2:51:55 PM
MAYOR ITTA named the headings he would cover during his
testimony as follows: first, lessons learned from the first 40
years of oil development in the North Slope; second, the Alaska
Gasline Port Authority (AGPA); third, the role of partnerships
and expectations; fourth, cumulative impacts; fifth, how
offshore development is tied into what is being discussed today;
sixth, the area of science; and seventh, the importance of job
training.
2:53:13 PM
MAYOR ITTA stated that this is the next major phase in resource
development on the North Slope. He said the gas line project
will define Alaska's experience with natural gas, "just as
Prudhoe Bay characterizes our experience with oil." Much has
been learned about resource extraction over the last 30 years.
He said "we" have been part of the technology, politics,
economics, social issues, culture, and drama that accompanies
the discovery and production of vast resources in a "frontier
region." Those who live in the region call it home and have
watched, participated, and helped create the legacy of resource
development. Like all participants, he said, the people have
learned many lessons. While being part of that which changed
the course of resource history in Alaska, the people of the
region have also been changed.
MAYOR ITTA stated for the record his region's support for
onshore development in general, and for AGIA. He said AGIA's
priorities are clearly designed to jumpstart a responsible
project to benefit Alaskans, with well-defined time tables,
commitment for construction, multiple off-take points, distance-
sensitive tariffs to ensure maximum well head price, and
provisions that encourage the hiring of qualified Alaskans for
the project. He said he sees no reason why the North Slope
Borough would not support any project that "plays by the rules
of AGIA and earns the legislature's approval at the end of this
process. He said his region's support for AGIA is in keeping
with the borough's long-standing approval of reasonable
development on the North Slope. He said many of those present
know that the North Slope Borough has aggressively supported the
opening of the Arctic National Wildlife Refuge (ANWR). In fact,
he indicated that the borough has continued to be involved with
media and delegation visits, as well as has accommodated the
National Petroleum Reserve-Alaska (NPR-A) development in all but
the area of Tusikpak Lake, "where unusually valuable wildlife
habitat and subsistence activities have historically taken
precedence." He said the borough will continue its support,
since BLM has recently decided to "drop that area in its final
EIS for NPR-A Northeast." Years of experience have given the
region a certain comfort level regarding onshore activity; when
spills occur, they can be reasonably contained.
2:57:18 PM
MAYOR ITTA remarked that offshore drilling is "an entirely
different ball game." He relayed that in addition to the fear
of having to clean up a spill in Arctic conditions, there are
other impacts related to the Bowhead Whale migration and other
marine mammal activities that cannot be avoided in the Outer
Continental Shelf. He stated, "It is a fundamental, cultural
consideration that shapes our policy up here in regard to
proposed activity off shore, and I don't see our position
changing any time soon." He mentioned the Liberty project near
shore as a good example of technological development that can
occur.
2:59:06 PM
MAYOR ITTA reminded those present that the North Slope Borough
joined with the Fairbanks North Star Borough and the City of
Valdez to create AGPA in 1999. As the three municipalities
along the Trans-Alaska Pipeline System (TAPS), these entities
hold a number of common interests, and AGPA was established as
an additional method of encouraging gasline development. He
said the existence of AGPA does not preclude the borough from
supporting any other project that will "commercialize North
Slope natural gas in a responsible way." He said "we" continue
to support the port authority, as long as that mandate does not
undermine the AGIA process or any other competitive projects.
3:00:05 PM
MAYOR ITTA said the borough has learned lessons from the Prudhoe
Bay experience. For example, it learned that a development this
big is not just one single project. He said getting natural gas
out of the ground and to market will require vast new layers of
infrastructure and will depend on new reserves in different
locations. The discussion related to capacity and the ability
to expand concerns the people of the North Slope Borough, he
said. He warned that the decisions made now will affect the
community forever.
MAYOR ITTA said what is really being discussed is a giant
expansion of resources, which has two parts. The first part, he
said, is the pipeline itself, along with a massive gas treatment
plant at Prudhoe Bay. The second part is a collection of
projects to develop resources that would feed the gas pipeline
during its lifetime. The gas pipeline will require a 50-year
commitment to a new web of development that will spread out in
the North Slope Borough region in all directions. It will have
a unique and far-reaching impact on the North Slope environment,
the wildlife, and the people. Mayor Itta said the people in the
region depend on the natural world as a means for cultural,
spiritual, and physical survival.
3:02:05 PM
MAYOR ITTA said common sense and logic show that if a company
spends $30 billion to build a pipeline, it will look far and
wide for the reserve needed to keep that pipeline full. The
impacts will be much greater than can be imagined. To
illustrate how this has happened before, Mayor Itta showed a
series of slides depicting Prudhoe Bay at various stages of
development, beginning with images from 1968, and including
images from 1977, 1989, 1999, 2001, and 2008. The last slide
shows that activity has now expanded over 100 miles outside of
the core area originally outlined. He said, "We fully expect
the gas resources ... that will be developed will be at least as
widespread as oil has been."
MAYOR ITTA continued as follows:
NPR-A appears to have a lot of gas potential, as do
the Foothills. The multi-million dollar bid total of
the OCS lease sale that was just held recently in the
Chukchi Sea suggests the strong possibility of off-
shore development - obviously a very, very long way
away from infrastructure.
MAYOR ITTA, regarding impact, said sometimes one plus one can
equal four. He explained that every oil and gas project goes
through an environmental review process to determine what its
impacts will be on the land, the wildlife, the habitat, and the
people living nearby. At some point, the impacts of development
go beyond the effects of one project or another. That is what
has happened in Nuiqsut, he said, a place that is now surrounded
by pipeline and development. The same will happen with gas
development, he cautioned. He noted that a lot of the gas is
not co-located where the oil is, which means there will be new
roads, buildings, support services, power plants, and sewage and
water facilities. So, they will have more roads and facilities
and the map will get more crowded.
3:08:11 PM
MAYOR ITTA, regarding the impact of a gas line on subsistence
and culture, emphasized the importance of recognizing cumulative
impacts as a separate category of impact. He noted that the
Natural Resource Council conducted an extensive study of
cumulative impacts on the North Slope in 2003 - the only study
attempted to evaluate the issue of cumulative impacts - and he
expressed his hope that all the legislators and other decision
makers will consider the results of that study seriously.
3:09:13 PM
MAYOR ITTA spoke next about partnerships. He related that for
those living a traditional subsistence lifestyle, the adaptation
to an industrial presence has not been easy. He said he thinks
these people have learned a lot about the needs, methods, and
attitudes of industry, and they have embraced their role as a
participant and partner - not an observer, having learned that
they are better off doing so. He stated that the people's
cultural identification with the land and water of the North
Slope Borough give them "a fundamental claim to this place." He
stated his belief that if the project is going to succeed, "it
must continue this tradition of partnership."
MAYOR ITTA said that with the recent surge of activity in "the
oil patch," industry is having difficulty housing additional
employees at Prudhoe Bay. He proffered, "We can help break that
log jam if the State of Alaska would pick up the pace in
conveying lands that we have applied for in Prudhoe Bay - lands
that we could make available to private industry." Mayor Itta
expressed his thanks to Commissioner Irwin for his efforts
towards making that happen.
MAYOR ITTA noted that Dead Horse is "squeezed for water and
sewer capacity and landfill services," all of which he said the
North Slope Borough stands ready to provide if only the state
would allow it through timely permit approval. He said this is
one important way for the borough to fulfill its role as a
development partner. Mayor Itta said the idea of partnership
applies to AGIA, as well. He said that the people of the North
Slope Borough may not have their signatures on the AGIA license,
but they need to feel that they are included as a party to the
agreement. The license provisions must recognize that the
project starts in the back yard of those people. He reiterated
the ways in which the people of the borough would be impacted.
A project done right will create the basis for the future of the
borough, as well as the future of Alaska. Conversely, a project
done poorly, would threaten the borough's way of life, which
would not be good for the future of resource development on the
North Slope. He said the people of the borough look forward to
an active partnership and the ability to issue local permits for
gravel, dredging, disposal of excess fill, and other project
needs. An effective partnership must be built on mutual
respect, especially when the parties involved have different
priorities.
3:14:46 PM
MAYOR ITTA explained that he believes all the partners in the
North Slope development have basically the same set of values,
but each prioritizes those values a little differently. The oil
companies, while caring about the environment, are driven by a
return on investment. The North Slope Borough, on the other
hand, is a political creation, he said, with a "broad menu of
social and economic concerns." He stated, "One of our essential
motivations is the determination to protect the culture of the
North Slope original inhabitants." He noted, "The health of our
community is directly tied to the health of the animal
population and their habitat." He emphasized that the people
need the whales, seals, caribou, and subsistence [lifestyle],
not only physically, but spiritually.
MAYOR ITTA said the people of the North Slope are worried about
environmental stresses in this time of "epoch climate change."
He talked about the importance of the ice pack to the survival
of polar bears and other species, and said it seems to be
disappearing. He noted that the ocean is not only rising but is
becoming more acidic. He said he is not a scientist, but knows
what affects the core of his people. He said the pH level is
changing because the ocean absorbs one-third of the carbon
released into the atmosphere from human activity. He said that
is a big cause for alarm. Mayor Itta said whalers are
instinctively focused on the low end of the food chain, knowing
that the Bowhead whale feasts on the tiny krill. He said when
the Bowhead is in trouble, people are in trouble.
3:19:05 PM
MAYOR ITTA said there are plenty of biological changes happening
naturally without adding development, and oil companies are
offering billions of dollars just for the chance to explore. He
said there are no benefits to the North Slope Borough to balance
those risks. The borough cannot collect property taxes in
federal waters, and there is little to no revenue sharing to the
state or proceeds on federal lands. He said the borough is
asked to take a risk that has greatly increased with virtually
no benefits.
3:20:20 PM
MAYOR ITTA said he thinks everyone can agree that industry
should be held to the highest standards if it expects to operate
in this critical environment. Oil executives routinely pledge
to use the best available technology and the safest operational
standards. They stand to reap billions in rewards, thus Mayor
Itta said he thinks the state should hold them to their pledge.
He reported that the North Slope Borough is currently
researching to find the safest and most advanced practices
currently being used in other Arctic regions of the world, and
he said one way the state government, industry, and North Slope
residents could come together is by adopting those practices.
He offered an example of one such practice: state-licensed
marine pilots on vessels engaged in oil and gas operations. He
offered further details.
3:22:35 PM
MAYOR ITTA explained that the reason he is talking about off-
shore matters during a discussion on AGIA is because of the
issue of expansion and how to keep the gas line full. He said
he does not think it is asking too much for the borough to be
asking that its hunting grounds be protected. He said the
aforementioned marine pilots currently operate in Prince William
Sound, Southeast Alaska, and the Aleutians. Mayor Itta opined
that all Alaskans owe it to future generations to demand the
best protection. He characterized this issue as one of Iñupiat
homeland security.
MAYOR ITTA said the borough comes to this "next generation of
resource development" with expectation based on prior
experience. For example, he stated that stakeholder groups must
come together and jointly pursue scientific data gathering and
interpretation. He said in this regard, the borough recognizes
the potential of the North Slope Science Initiative (NSSI),
which he said is made up of federal, state, and local decision-
making authorities active on the North Slope, "along with our
regional corporation." He said there are gaps in knowledge
regarding wildlife species in the proposed development areas,
and he opined that the scientific community must expand its
collection of data before the commencement of widespread gas
development. Baseline data will make it possible to respond to
changes appropriately.
3:26:40 PM
MAYOR ITTA said there needs to be a stronger effort in training
and local hire. Hindsight shows that although provisions and
right-of-way leases required TAPS to hire Alaska Natives, that
effort failed miserably. Promises were not kept and land was
lost by Native peoples. Mayor Itta said it takes a vigorous
training and workforce development program to prepare workers
for a project like this, and he said he knows AGIA aims to
increase access to relevant careers through apprenticeship and
technical education programs. He expressed his hope that the
State of Alaska will pay particular attention to North Slope
resident training and local hire. He reemphasized his prior
statement as follows: "The history of ... resident hire in the
oil patch is pathetic." He said the local hire focus,
specifically in North Slope villages, needs to be strengthened.
He added, "There is no better place to train for work on the
North Slope than right here in this community."
3:29:08 PM
MAYOR ITTA said there is no better example of a partnership than
the one that used to exist with the Coastal Management Plan. He
explained that until changes were made in the last
administration, the Alaska Coastal Management Plan "pulled
together all stakeholders in balancing responsible development
and protection of our coastal resources." He said it was an
effective program, which was an effective program that addressed
local concerns in a successful way. He revealed that he was
involved in that process as a director of planning. He asked
the legislature to restore "the guts of that program" in the
interest of promoting future development through inter-
governmental partnerships.
3:30:38 PM
MAYOR ITTA, in closing, stated that the success of gas
development will rest on the strength of relationships among the
stakeholders, good communications being key to those
relationships. He told the legislature that its visit to Barrow
today is an important step in that direction. He said issues
need to be discussed long before they get to the critical
regulatory and permitting stages, and he emphasized the
importance of "timely communication" and respect for everyone's
wishes.
3:33:15 PM
RICHARD GLENN, Vice President, Lands, Arctic Slope Regional
Corporation (ASRC), began his testimony by telling the
legislators that he is a resident of Barrow, a whaling crew co-
captain, a father, and someone with a background in both natural
resources development and the stewardship upon which his culture
is based. He shared that his grandfather had told him that
Native people could be found to have settled along coasts,
around lakes, and along rivers, thus at the time of the Alaska
Native Claims Settlement Act (ANCSA), "our people, with
legitimate cause, laid claim to the entire North Slope." Next,
ASRC became the vehicle created by Congress, by which the
Iñupiat of the North Slope were endowed with land and "some
tools for economic self-determination." He stated, "It's those
lands and those tools that form the basis for our testimony
today." Mr. Glenn noted that ASRC is the largest land owner on
the North Slope, with titles to approximately 5 million of the
50 million acres of the North Slope. He said the people are
legitimately entitled to more than that.
3:36:32 PM
MR. GLENN pointed out approximately 11 million acres of land in
the area between of the foothills of the Brooks Range and just
north of the Coleville River (ph) and between the Arctic
National Wildlife Refuge (ANWR) and the National Petroleum
Reserve in Alaska. He said that land is owned jointly by ASRC's
10,000 shareholders and the State of Alaska. The land holds
very high natural gas potential. He said there are maps of the
land that show areas with oil marked with symbols of oil wells.
On those maps, cross hairs represent areas with a "dry hole."
Mr. Glenn explained that a dry hole means no oil. He added,
"Dry hole in those days meant they found natural gas - gas prone
reservoir intervals rather than oil prone." Today, that symbol
"takes on a whole new meaning," he said.
3:38:05 PM
MR. GLENN said in addition to the land entitlement, ASRC
operates subsidiary companies, including those involved in
engineering, pipeline construction, oil field services, oil
field operations, pump station management, government
contracting. ASRC employees about 3,000 in Alaska, and almost
double that nationwide. He said Congress directed ASRC to make
a change for the betterment of its people without losing the
values upon which their culture is created. The people depend
on the land for food and depend on resource development in order
to build communities. He noted that the school in which the
present meeting is taking place was built from monies derived
from resource development. Referring to the previous testimony
of Mayor Itta, Mr. Glenn added that if the oil field
infrastructure was limited to "that early circle that was
dreamed about in the 1970s," the school probably would not have
been constructed. He said there is a conflict between
stewardship [of the land] and bettering shareholders and village
residents. He added, "But we think it's this kind of conflict
that brings a balance to the discussion regarding natural gas
development on the North Slope."
3:39:50 PM
MR. GLENN said ASRC shareholders want the promise of ANCSA
honored, which means they want access to economic opportunities
related to the development of resources. At the same time, he
said, they believe there should be certainty for prompt, initial
shippers of gas, so that ASRC is ensured there will be enough
people showing up for the first open season. Subsidiary
companies are waiting to work with their industry partners -
both the pipeline companies and the producers. He stated, "Our
pipeline construction companies have created more miles of
pipeline on the North Slope than any other company.
Additionally, he related, ASRC has a partnership with the
village corporation - an alliance created solely for the purpose
of working with the extractive industries in the region. He
told legislators he thinks if they asked a typical village
resident - a person depending on this industry for schools,
health clinics, and fire halls - he/she would speak in favor of
a successful natural gas project that would involve the
residents at each level.
3:42:43 PM
MR. GLENN noted that Mayor Itta had brought up a good point
about workforce development and training. He said there is a
place here for training North Slope people for North Slope jobs.
He expressed thanks for those supporting the local, accredited
college, which offers training in oil field industry-related
jobs, and he asked the legislature to find ways to support the
college. He listed those points which hold promise: access,
economic development, and workforce training. He related an
Aesop's tale in which a dog is chasing two rabbits and, while
directed toward one, looks at the other, and both end up getting
away, while the dog goes hungry. He expressed his hope that the
result of the legislature's traveling around the state to hear
public testimony will not result in two projects competing and
neither one nor the other coming to fruition. He opined that
there must be a marriage of issues in order for this project to
succeed. Pipeline constructors and oil and gas producers have
to get together. He concluded as follows:
You can't ask me how it's going to happen; you have to
watch how it's going to happen. I'll be there with
you if you let me. Our people want to be there when
it's done so that we can take our important rightful
place in this whole process. The legislature and the
administration are at an important cross road, and we
hope that you remember the words and wisdom of the
people of the North Slope as you take this message and
go and make your final decision.
3:46:32 PM
GLENN W. SHEEHAN, Ph.D., Executive Director, Barrow Arctic
Science Consortium (BASC), characterized Barrow as a good place
for oil and gas development, climate change studies, wildlife
and subsistence studies, and for the people who have been
thriving there for thousands of years. He related that he would
like the State of Alaska to encourage more science on the North
Slope for the benefit of all Alaskans. Furthermore, he said he
would like to see more opportunities for students from around
the state to participate with researchers in field projects in
the Barrow region. He said that kind of networking leads to a
life in science, develops "our future readers," and ensures that
"we will help control our own future here."
3:48:03 PM
DR. SHEEHAN said a relief road needs to be built to Utqiagvik
Iñupiat Corporation Naval Arctic Research Laboratory (UIC NARL)
to keep the science camp connected to town, despite increasing
coastal storm threats. A modern electrical distribution system
needs to be built as well to provide reliable power to the
science facility, the residents there, and the visiting
researchers. Dr. Sheehan said the legislature should consider
funding a science and communications corridor between Barrow and
the Brooks Range to allow the monitoring of baseline conditions
early and continuously as the NPR-A development proceeds. He
spoke of funding satellite and field verification documentation
of current conditions on the changing North Slope for baseline
and ongoing revue, including that of changing lakes, which serve
as sources of fish and sources of water for ice roads. He
mentioned ancient and not so ancient trails and communication
corridors and the changes they have been undergoing over time as
being possible indicators of the result of future development.
DR. SHEEHAN concluded:
Funding the North Slope Borough's investigation in the
terrestrial and near-shore methane hydrates has both
the potential relief to increasing fuel costs and as a
means for the state to participate in the development
of a new technology that eventually will be an
important part of the oil and gas industry's
(indisc.).
3:49:59 PM
GEORGE AHMAOGAK, SR., said he had been in public service as the
former mayor of the North Slope Borough for 5 terms, a tax
assessor, and the director of the tax department. He revealed
that he has also been a Barrow whaling captain since 1984. He
said he has experience dealing with oil and gas issues. He
agreed with Mayor Itta's comments regarding future impacts. He
stated that open access for explorers concerns him, because the
economic modeling for the AGIA process and the natural gas
pipeline is predicated on 35 tcf of gas, "mostly in the Prudhoe
Bay proper." He clarified that the concern is regarding access
to other areas. Once that gas has expended, companies will be
looking for other resources. As an example of those other
areas, he listed the estimated tcf of gas reported by various
professional papers for places such as the Cold Belt prospect,
the Foothills, and the Barrow Arch.
3:54:18 PM
MR. AHMAOGAK said throughout the entire process there has been
no discussion on how to get access agreements to these areas and
rights of way. He warned that without those agreements there
will be cumulative and adverse impacts from oil and gas
exploration and development. He talked about legislation
regarding NPR-A impact funds, which he said was a good piece of
legislation used to mitigate those impacts. He asked, "Where in
the economic modeling do you see any funds available to mitigate
those impacts?" Using the NPR-A impact funds for such
mitigation needs to be done at the local level, he said.
MR. AHMAOGAK, regarding jobs, said funds for training are now
available only in Anchorage and Fairbanks. Those funds are
needed in local areas. Regarding the issue of energy, he said
North Slope villages are experiencing an energy crisis. The
price of home heating fuel has doubled, and Mr. Ahmaogak said he
would like to see natural gas access brought immediately to some
of the villages. He said municipalities are not being mentioned
in the AGIA process, nor are they being asked to participate in
the planning process of the natural gas pipeline, which he said
is not a transparent and public process. He continued:
Some of you ... members of the legislature don't
recall [the] history of the Trans-Alaska Pipeline
during its construction. The North Slope Borough has
been fighting with ... passable valuations of the full
and true value of the Trans-Alaska Pipeline. Now are
we going to go through the same fight again in taxing
the natural gas pipeline?
3:57:50 PM
MR. AHMAOGAK, in summary, said "we" support a natural gas
project; however, he said he does not know if giving a license
to AGIA is the proper way of doing things. He suggested perhaps
a collaborative effort on the part of the oil and gas industry -
the producers, the state, the federal government, and the
municipality - is the way to go. He said he especially does not
support giving the license to TransCanada if there are
incentives given to make the project economical "on the backs of
municipalities."
3:58:37 PM
MARVIN OLSON, said although he is the director of Public Works
for the North Slope Borough, he was testifying on behalf of
himself. Based on the earlier presentations and comments made
regarding both the AGIA process and the Denali project, he said
he can see the benefits to the borough government. However, he
said he is concerned when he hears the terms of giving gas to
Alaskans "and the only other words that come out from the state
is Fairbanks." He observed that the pipeline did not become
such a big issue until people in the Lower 48 started paying
[the price] for diesel that Barrow has been paying for quite
some time. He said many people in the country expect those
living in the North Slope to change their way of life so they
don't have to change theirs.
MR. OLSON thanked the legislature for recently providing the
weatherization program to address the energy crisis. He said it
will make a difference over time, and he hopes the legislature
renews it funding of the program. Regarding development of the
pipeline, he said having worked in the Prudhoe Bay area, he has
responsibilities regarding the utilities there. He expressed
concern that municipalities may have to boost their
infrastructure to accommodate a gas pipeline boom, and they
might not be able to sustain that boost after the construction
is over. He said he is looking to the legislature and the State
of Alaska to partner with those municipalities to lessen those
impacts to avoid any adverse effects to the municipalities.
4:02:05 PM
NATHANIAL OLEMAUN, JR., said he was a former mayor of the City
of Barrow, as well as having served as past president of the
Native Village of Barrow, past president of the local
corporation "UIC," and past executive director to the regional
tribal Iñupiat Community of the Arctic Slope (ICAS). He said he
worked for Prudhoe Bay in the '70s for 10 years as a coordinator
to Arco. He related that even though he and 36 others from
Barrow - most of them certified, and some of them journeymen -
had applied for specific jobs, when they arrived in Prudhoe Bay,
they were told all the jobs were put on freeze and all of them
would be "roustabouts," which meant that none of them was
allowed to work in his/her career field. Mr. Olemaun said it
took five years before he was finally working in his career
field, and seven years to get into a position to which he
aspired. Three years later, no one was hired who lived in
Barrow on his/her weeks off. In 1980, the numbers of people
from Barrow working in any of the companies in Prudhoe Bay
diminished. He stated, "They said their hiring policy is for
Alaskans to work, but it's not being promoted." Many workers
were brought up from the Lower 48. That was and is still true,
he said. Mr. Olemaun stated that he wants there to be job
training and jobs for Alaskans - with Natives to be included as
Alaskans. The local college is established "under an Indian
accredited college," and he said he hopes the legislature will
support it. He said, "We support development," but have
concerns regarding NPR-A. He mentioned not being allowed to
receive the 50 percent funding from a lease sale. He said the
legislature is in Barrow now telling the residents that things
will be different and that the people of Barrow will be treated
as Alaskans. He continued:
But we're Iñupiat. We wanted to be treated as
Iñupiat. We don't want to be given another identity.
You failed the first time around, and you keep saying,
"We're not going to fail," or "Give us one more
pipeline." Well, let's do it; let's not fail. Let's
build an all-Alaskan pipeline.
4:09:09 PM
BEN FRANCE, General Manager, Barrow Utilities & Electric
Cooperative, Inc., told the legislators that he has been
involved in utilities on the North Slope since 1971. The
company he manages is a multi-utility cooperative that generates
electricity, distributes natural gas, and produces water. He
offered details related to the water plant. He said Barrow has
been generating electricity with natural gas in Barrow for 44
years; the majority of "our fleet" has run on compressed natural
gas for 25 years. He said he knows first-hand the benefits of
utilizing natural gas, especially as weighed against the sky-
rocketing costs associated with the use of diesel, on which the
majority of rural Alaska depends for electrical generation and
home heating. He said "we" are all aware of the immediate and
dramatic impact the cost of oil is having on the state in both
rural and urban communities. He offered examples of what some
communities are doing to address the energy issue.
MR. FRANCE asked that as the state considers capitalizing upon
the trillions of cubic feet of natural gas through "our" gas
pipeline for the state and the nation, and as valuations are
being done to represent the economic viability of such a project
to Alaska, the legislators remember that "our" future is
dependent on the broad-based economic support that a project of
this significance brings. A healthy state and healthy project
is what Alaska needs in order to address the upcoming
challenges, he opined. He said, "This project alone will not
cure all our ills; we need to take this step and move on to the
other steps of significance we need to take if our next 50 years
of statehood are to be as accomplished as our first." He
related that the North Slope is presently supportive of "safe
and responsible development of our resources," having been
"right and proper stewards of our land and resources." He said
"we" look to the legislature and the administration to be the
proper stewards of the land and resources, as well. He thanked
the legislators for the transparency in the process and for
coming to Barrow.
4:14:37 PM
WARREN MATUMEAK told the committee that he was a Land Management
Administrator for the North Slope Borough after the land
management regulations regarding fish. At the time that he
served, he said, he was opposed to the oil industry for fear it
would harm all of the fish and animals in the region. However,
after hiring people with expertise who knew about planning,
regulations were put in place to protect the land and the
industry was required to apply for a permit from the North Slope
Borough. In that way, the land was protected. Pipeline was
installed so that caribou migrations could pass under it, and
ramps were installed for the timid animals to use to get to the
other side. Not one caribou, bird, or fish has been lost
because of the protection that was afforded them. Before that
protection, seismic activity around rivers and lakes were
killing lots of fish.
MR. MATUMEAK stated his preference for the Denali project. He
explained that BP did not leave when the price of oil dropped to
$9 a barrel, while "other oil companies chickened out." He said
[BP] already knows "how to do it."
4:18:21 PM
PEARL BROWER, Special Assistant to the President, External
Affairs, Ilisagvik Community College (ICC), said that the
college is the only accredited, Alaska Native-controlled
institution of higher education in the state and the only
college located within the boundary of the Arctic Slope. Two
years ago, she noted, ICC also became the only tribal college in
the state. The college offers two-year associate degrees, as
well as certificates and endorsements in academic, vocational
and workforce development fields. Every program ICC offers not
only models Iñupiat traditions, values, and culture, but offers
substantial career and employment opportunities in the Arctic as
well as elsewhere in the state. Ms. Brower related that ICC has
students at its campus in Barrow, as well as in seven other
North Slope villages; 70 percent of its students are minorities
with over 60 percent being Alaska Native. Enrollment is at a
record high, she relayed. The college educated over 1,100
students last school year, which is more than 14 percent of the
North Slope population.
MS. BROWER said ICC has heard there is discussion of building a
new training facility to address the need for qualified Alaskan
residents to work on the new gas pipeline project. She said the
college is concerned about this. She explained that the college
already provides such training, and she sees no reason to
construct a new facility when ICC already exists. Mr. Brower
said ICC has never asked the state for funding prior to this
year, when it requested $300,000 and was denied. She said the
college was disappointed, especially because oil and gas is
exported from the region and there are so few residents who work
in the oil and gas field from that region. Today the college
receives no state support for any of its workforce development
programs although they train hundreds of Alaskan residents each
year who are directly employable in the North Slope oil fields.
Most of the students are Alaska Native. No other higher
education institution in the state has ICC's track record in
educating and graduating Alaska Native students. Ms. Brower
said the college wants the opportunity to train Alaska residents
for the oil and gas workforce, to partner with the state, and to
be part of the process. She concluded:
Our numbers show that over 70 percent of our residents
do now want to leave their region for training, which
is why it is important that any funds expended by the
state for AGIA training should be shared with an
institution that is in existence, is accredited, knows
the North Slope population, has a successful track
record, has relevant curriculum in place, and
continues to train over 1,000 residents each year.
That institution is Ilisagvik [Community] College.
4:22:00 PM
GEORGE EDWARDSON, President, Iñupiat Community of the Arctic
Slope (ICAS), said that ICAS is a federally recognized regional
tribal government whose council is comprised of elected council
members of other communities. Mr. Edwardson related that in the
early 1980s there was a "Point Thomson hearing" conducted in
Kaktovik, to which he was invited as a speaker. He recollected
that at that meeting, his great aunt told him that she did not
care how he took care of the problem, but "all this stealing
from us has to stop." The other elders agreed, he said. The
subject was ANWR. He said he listened to his elders and has
never stopped opposing the opening of ANWR. He said an excise
tax would appease those who, like his great aunt, feel that the
people of the land are being robbed. He said that under the
[The Indian Tribal Government Tax Status Act of 1983], he is
allowed to collect that tax.
MR. EDWARDSON said the community has been talking about a gas
line for 31 years. He explained the reason he needs to collect
a tax is to care for his people. For example, there is one
whole community whose children have respiratory problems. That
community has to travel 100 miles to hunt caribou. He said it
is true that the herd may be multiplying, but the oil and gas
construction has disrupted the migration route of the caribou.
He said the proposed gas line will use a lot more pipe beyond
that used to produce oil, which will affect the environment
further. He noted that his father lived in Prudhoe Bay and used
to fish there, but the fish are disappearing. He said that is
happening because there was never a "baseline done to Prudhoe
Bay." He added, "Without that baseline, we cannot correct the
wrong that has been done over there."
MR. EDWARDSON said he would like to give the legislators a copy
of a meeting he had with Minerals and Management Services,
during which the subject of oil development was discussed.
MR. EDWARDSON said:
We have never received a single penny from Prudhoe Bay
or any oil development as an Iñupiat community. The
state created a municipality so they could funnel a
controlled, regulated amount of dollars for the North
Slope, but as a tribe, I have never received a penny,
and you have received billions. This is from the land
which we owned as a people. You took over 95 percent
of our holdings and then called that a just settlement
when you sold ... oil leases in Prudhoe Bay and
claimed their discovery. That was not a discovery, by
the way. My grandfather struck oil over there in
1926.
MR. EDWARDSON told the legislators that they are the only people
right now who can help him get the taxes he needs. He said he
does not even have offices for the staff he has in the villages.
4:31:33 PM
MS. EDWARDSON spoke of all the meetings that have been held in
the past regarding resource development, and said people used to
show up in droves for the meetings, which lasted into the wee
hours of the morning. She said she thinks resignation plays a
part in the fact that not as many people have showed up for the
current meeting. She explained that there is a sense by the
community that resource development is going to take its course
regardless of the opinions of the Native people of the region.
Ms. Edwardson recalled that in the back of each report from
those past hearings is a section listing socio-economic impacts.
One of the cumulative impacts has been the loss of the Native
language. She said that is why a translator is not present
today. That is also why the youngest people present today who
can speak Iñupiaq are over age 40. She said that is an issue
that is being addressed in the North Slope Borough's schools,
and one she said she thinks legislators need to take to heart.
The impacts are not just region-wide, but state-wide. Ms.
Edwardson noted there is a video called, "The Voice of Our
Spirit," about the Iñupiaq language, which is part of the
Iñupiat history series. She said her daughter created that
video, and she expressed her hope that the legislators will
watch the video. She urged the legislature to fund the schools
so that they can keep the language alive.
4:36:10 PM
HAROLD CURRAN noted that although he is the chief administrative
officer of the North Slope Borough, he is testifying on behalf
of himself. He expressed appreciation for the legislature's
holding the hearing in Barrow. He said he recognizes the
capabilities, confidence, and earnestness the legislators have
in dealing with the issue before them. He said, "Anybody that's
going to produce the resources that will go down the pipeline
needs fiscal certainty for putting the investment into this
state that's necessary for that to occur." Mr. Curran said he
has been in Alaska since 1976 and has followed what the
legislature has done regarding the tax structure for oil. He
recollected that in the '90s, when oil was $9 a barrel, industry
approached the legislature and the governor and said it could
develop some fields, but needed tax breaks. The government gave
the industry those tax breaks; therefore, there was fiscal
certainty in being able to appeal to the foresight and knowledge
of the legislature and the administration to deal with those
needs. Taxes were never increased to the point that they were
prohibitive to industry. That is the certainty that an
intelligent government provides to the industry and has provided
to them since the state came into being. He concluded:
That's the kind of power you have, as representatives
of the sovereign of the state. You exercise that
power well, your predecessors have done it, and I
think, unless our system is broken in this state, your
successors will do it. And I propose to you that the
history of taxes in the state of Alaska demonstrates
that it's not broken, and I hope you'll take that into
consideration in dealing with that issue.
4:39:58 PM
ESTHER KENNEDY said just because [the people of the North Slope
Borough] are humble and don't "make noise," that does not give
[the state government] the right to treat the people with
disrespect. Ms. Kennedy indicated that those working in oil and
gas related jobs come in and out of the area, with no interest
in the land, which is eroding. She stated there are "black
spots" in the water that cannot be fished. Ms. Kennedy said the
settlement from ExxonMobil Corporation may sound like a lot of
money, but she indicated that the amount each fisherman will be
compensated is approximately $14-15,000 - the amount he/she used
to make in one day. She indicated that the region needs money
and better housing. She said people come in, do their jobs, and
leave the local people with nothing. In summary, Ms. Kennedy
asked the legislature to do what it says it will do. She asked
the legislators to get the people in the region involved in the
process, because they know the land. She concluded, "My jar is
empty, and all I'm asking to you [is] to please fill it back
up."
4:46:04 PM
DELBERT REXFORD, Barrow, Alaska, said a former mayor, during an
address to the Circumpolar Conference, April, 1978, regarding
the consultation on oil and gas exploration and development in
the Arctic, said the ultimate purpose of the regional
governments will be to protect their subsistence game habitat,
including the off-shore marine mammal habitat. However, Mr.
Rexford noted that the mayor also said local government can be
the means through which the oil and gas industry can both ensure
Inuit cooperation and benefit fully from Arctic oil and gas
development.
MR. REXFORD said he speaks from experience, having been a former
city councilman, North Slope Borough assemblyman, and president
of the Alaska Municipal Police. Regarding NPR-A, he indicated
that "we" had to take the State of Alaska to court, because the
state wanted 100 percent of the funding. Now, he said, "we only
get 50 percent." He said 50 percent is not sufficient - 100
percent would be. He related that when he attended an Outer
Continental Shelf (OCS) meeting in Houston, Texas, language was
introduced proposing that impact funds be provided to impacted
communities and regions. He said Bristol Bay would have to
address this issue in the near future when that area is
developed.
MR. REXFORD said more importantly, individual corporations
across the state want full and meaningful participation. He
reminded the legislators of "Section 29," when the Alyeska
Pipeline Service Company had to "come back up to the plate and
provide work for Alaska Natives when they broke their promises."
Alaska Natives had to go to court in order to have that promise
fulfilled. Mr. Wexford said leases need to be written so that
Alaska Natives have a preference in contracting.
MR. REXFORD said he was president of the Alaska Municipal League
when 48 municipalities decided to distinguish the municipal for
of government, because the State of Alaska did not provide
sufficient municipality assistance and revenue sharing. In
recent years, there has been the issue of power cost
equalization. He said there are people without jobs who are
dependent on subsistence resources to sustain their lifestyle.
Mr. Wexford said these are the issues - the revenue that the
state will receive and how it will appropriate that revenue to
impacted communities - that need to be considered as a part of
the proposed natural gas pipeline.
MR. REXFORD said the Ukpeagvik Iñupiat Corporation (UIC)
supports the construction of an environmentally sound pipeline
that is beneficial to Alaska Native village corporations. He
spoke of the workforce available in the North Slope Borough, and
the commitment there of providing funding of $200,000 a year to
the local community college. He concluded by asking the
legislature to "look at Alaskans first."
4:50:04 PM
ROSEMARIE HABEICH said although she serves as the director of
the North Slope Borough Health Department, she is testifying on
behalf of herself. Ms. Habeich opined that the permitting
process needs to include an assessment of potential health
impacts, including: physical, mental, spiritual, and cultural.
She noted that the legislators had the day before experienced
events that taught the importance of the culture and environment
and how it all ties together and ultimately feeds the souls of
the people in the region. She noted that while working closely
with the North Slope Borough, the Bureau of Land Management
(BLM) and the Minerals Management Service (MMS) have built a
health assessment process into their EIS process. Doing so, she
explained, requires the permitting agency to consider the
aforementioned impacts and plan for appropriate mitigation. She
stated her belief that it is both important and prudent for the
state to follow this example in preparing for a gas pipeline.
4:52:08 PM
RANDY HOFFBECK said although he is the director of
Administration and Finance for the North Slope Borough, he would
be testifying on his own behalf. He said he used to work as a
petroleum property assessor for the State of Alaska, and as such
donated two years of his life in negotiations over the Stranded
Gas Development Act - an Act he remarked the legislature was
"wise enough not to pass." Mr. Hoffbeck proffered that if the
state does not want to repeat the steps taken during discussion
of that Act and have the same outcome as before, it is critical
to "keep as many players in the process as possible, for as long
as possible." He said, "Because of that, I strongly support
AGIA and the TransCanada application, as well as the option that
TransCanada talked about today for an LNG option in Valdez, if
in fact there is commercial, economic interest for that ...
particular project." If the state does not keep as many players
in as possible, Mr. Hoffbeck warned, it will ultimately end up
with results similar to the Stranded Gas Development Act
negotiations. Mr. Hoffbeck said everyone recognizes that the
state must partner with industry; but he said the state must not
confuse partnership with friendship. The desire of industry is
to increase its economic benefit to the greatest degree
possible, which is not necessarily the same desire of the state
or local municipalities. He said, "If we want leverage, we need
to have multiple players in the process."
MR. HOFFBECK observed that during the process of negotiations
there will be concern about the cost of construction prior to
gas flowing through a pipeline, as well as about the outlay of
resources of the company without the state seeing any return for
many years. He added, "That will necessarily point to the fact
that the local government collects property taxes during
construction." Mr. Hoffbeck said the local revenue source was
negotiated away early in the Stranded Gas Development Act
process, and it was a fight to try to get it back. He added,
"We can't make that same mistake again." Property tax revenues
are critical, he said. He emphasized that [local governments]
need to be included in the discussions early on and need to have
direct input into what can and cannot be negotiated away, as it
affects local government.
4:56:32 PM
MARTHA FALK, Director, Natural Resources, Iñupiat Community of
the Arctic Slope (ICAS), testified first on behalf of ICAS. She
noted that Mr. Ahmaogak had, during his previous testimony,
mentioned a tax. She clarified that is not an excise tax but
rather a severance tax that tribal governments have an authority
to put in place. Next, Ms. Falk requested that tribal entities
be kept involved with the state in the process of AGIA.
MS. FALK began the personal comment portion of her testimony.
She said she thinks awarding TransCanada the license for AGIA
would be allowing the non-Alaskan company a monopoly, and the
state would then not have any control over the decisions that
TransCanada would be making regarding the gas pipeline.
Therefore, she opined that an instate entity should be awarded
that license. She mentioned the possibility of the Denali
project.
4:58:33 PM
LOUISA KAKIANAAQ RILEY said she would address the issue of
impacts on Native people as a whole. She noted that her father
was affected by the oil pipeline. She indicated that she
interviewed elders and a book is now being published. She
relayed that she is involved with the Alaska Native Women's
Coalition Against Domestic Violence and Sexual Assault, Amnesty
International, is a board member of Abused Women's Aid in Crisis
(AWAIC), has been working with families for over 30 years, and
is an interpreter for the State of Alaska Court System and the
tribal court. She offered further details about her background.
MS. RILEY asked the legislators to think about the blanket toss
they witnessed in Barrow - that around it would be "everyone,"
including law enforcement and social workers. She mentioned
mental, spiritual, and physical well-being, and emphasized the
importance of everyone working together as a family. She talked
about Amnesty International as a means to help Barrow's
indigenous people, and she said she wanted to give Amnesty
International's report on Native people to Senator Olson and
Representative Joule.
5:03:37 PM
CHARLES OKAKOK offered his testimony in the Iñupiaq language.
[The translation will be inserted if it becomes available.]
5:06:04 PM
IDA OLEMAUN, testifying on behalf of herself, relayed that she
has been a subsistence provider at her camp since 1970, and she
has raised her children at that camp during the summers. She
stated that through the act of God, climactic climate changes
are occurring on the North Slope. She recollected that when the
International Whaling Commission (IWC) was trying to work with
the Barrow Whaling Captains' Association, it had to set up a
quota system. Ms. Olemaun said Whaling is in the blood of the
people of the region, and she said she is glad the legislators
were able to observe a part of the celebration related to
whaling that occurred yesterday. She reported, "We've been able
to work with IWC in order to have the quota system and continue
whaling." She emphasized the importance of whaling to the
people, noting that spring and fall whaling is part of their
subsistence lifestyle.
MS. OLEMAUN talked about "the ice-free condition that is
occurring," and the tightening up of the economy. She said
people are in need not only in Barrow, but in the whole state.
The price of the gas used in order to get to the seals to skin
the boats is very expensive. She said the high price of gas is
global, and she cannot think of any "global way to lessen the
price of gas." Gas is also needed to get the bearded seals that
are used to make the blanket for the blanket toss. She offered
further details regarding the way the people work together, and
she expressed her hope that the legislators are able to be
sensitive to the subsistence activities that occur in the North
Slope Borough. Ms. Olemaun stated, "I just don't want to see
another Exxon." She said that hurt the state greatly. She said
the people here pray and get the whales - they get the bounty.
She asked the legislature again to be sensitive to all that if
the pipeline is built.
MS. OLEMAUN said she used to carry a baby on her back in the
'70s to come to hearings that were well attended, and she said
she is very disappointed at how few local people are present at
the meeting. She said, "I knew it. I knew once the oil
companies step on our ground up here, they would come like a
swarm of bees, and it clearly reflects that, and they still want
more, more, more out of the land."
5:11:25 PM
CARRIE KITTICK, testifying on behalf of herself, told the
committee that she represents her four grandmothers and four
[grand]fathers. She indicated that many in her family have been
part of a whaling crew. She said the people are fed through
subsistence. She said she goes camping and has been "taught in
blessed ways." She expressed her hope that the legislature
would protect the land and resources, as well as for that of the
future generations. Ms. Kittick talked about the price of gas
and groceries and how little a dividend covers. She said her
grandmother taught her that she should not have to look to other
people to provide for her, but she expressed concern that the
people's resources would be driven away. She said she has to
travel further to go hunting because of the pipeline, which uses
more gas.
5:14:16 PM
REPRESENTATIVE SAMUELS thanked all of the community for their
hospitality at the community event the day before, and thanked
certain individuals for their help during the legislature's
visit to Barrow.
[SB 3001 and HB 3001 were heard and held.]
ADJOURNMENT
There being no further business before the committee, the Joint
Senate Special Committee on Energy and House Rules Standing
Committee meeting was adjourned at 5:17:54 PM.
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