Legislature(2007 - 2008)TERRY MILLER GYM
06/06/2008 10:00 AM Senate SENATE SPECIAL COMMITTEE ON ENERGY
| Audio | Topic |
|---|---|
| Start | |
| HB3001|| SB3001 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | SB3001 | TELECONFERENCED | |
ALASKA STATE LEGISLATURE
JOINT MEETING
HOUSE RULES STANDING COMMITTEE
SENATE SPECIAL COMMITTEE ON ENERGY
June 6, 2008
10:16 a.m.
MEMBERS PRESENT
HOUSE RULES
Representative John Coghill, Chair
Representative John Harris (AGIA Subcommittee, Chair)
Representative Anna Fairclough
Representative Craig Johnson
Representative Ralph Samuels (AGIA Subcommittee)
Representative Beth Kerttula (AGIA Subcommittee)
Representative David Guttenberg
SENATE SPECIAL COMMITTEE ON ENERGY
Senator Charlie Huggins, Chair
Senator Bert Stedman, Vice Chair
Senator Kim Elton
Senator Lyda Green
Senator Lyman Hoffman
Senator Lesil McGuire
Senator Donald Olson
Senator Gary Stevens
Senator Joe Thomas
Senator Bill Wielechowski
Senator Fred Dyson
Senator Thomas Wagoner
MEMBERS ABSENT
HOUSE RULES
All members present
SENATE SPECIAL COMMITTEE ON ENERGY
All members present
OTHER LEGISLATORS PRESENT
Representative Bob Buch
Representative Mike Chenault
Representative Sharon Cissna
Representative Harry Crawford
Representative Nancy Dahlstrom
Representative Andrea Doll
Representative Mike Doogan
Representative Bryce Edgmon
Representative Les Gara
Representative Berta Gardner
Representative Carl Gatto
Representative Max Gruenberg
Representative Mike Hawker
Representative Lindsey Holmes
Representative Reggie Joule
Representative Scott Kawasaki
Representative Wes Keller
Representative Mike Kelly
Representative Bob Lynn
Representative Mark Neuman
Representative Kurt Olson
Representative Jay Ramras
Representative Bob Roses
Representative Paul Seaton
Representative Bill Stoltze
Representative Bill Thomas
Representative Peggy Wilson
Senator Con Bunde
Senator Bettye Davis
Senator Johnny Ellis
Senator Hollis French
Senator Gene Therriault
COMMITTEE CALENDAR
HOUSE BILL NO. 3001
"An Act approving issuance of a license by the commissioner
of revenue and the commissioner of natural resources to
TransCanada Alaska Company, LLC and Foothills Pipe Lines
Ltd., jointly as licensee, under the Alaska Gasline
Inducement Act; and providing for an effective date."
- HEARD AND HELD
SENATE BILL NO. 3001
"An Act approving issuance of a license by the commissioner
of revenue and the commissioner of natural resources to
TransCanada Alaska Company, LLC and Foothills Pipe Lines
Ltd., jointly as licensee, under the Alaska Gasline
Inducement Act; and providing for an effective date."
- HEARD AND HELD
PREVIOUS COMMITTEE ACTION
BILL: 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) Subcommittee Assigned
06/05/08 (H) RLS AT 9:00 AM TERRY MILLER GYM
06/05/08 (H) House Special Subcommittee on AGIA
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)
PRESENT VIA TELECONFERENCE
None
WITNESS REGISTER
Pat Galvin, Commissioner, Department of Revenue; Tony
Palmer, Vice President, Alaska Business Development,
TransCanada; Tom Irwin, Commissioner, Department of Natural
Resources.
ACTION NARRATIVE
CHAIR SENATOR CHARLIE HUGGINS called the joint meeting of
the House Rules Standing Committee and the Senate Special
Committee on Energy to order at 10:16:11 AM.
HB 3001-APPROVING AGIA LICENSE
SB 3001-APPROVING AGIA LICENSE
CHAIR SENATOR HUGGINS noted that the Committee would recess
for Senate floor session until 11:00 a.m.
RECESSED: 10:16:11 AM
RECONVENED: 11:06:55 AM
CHAIR SENATOR HUGGINS called on Commissioner Pat Galvin,
Department of Revenue, to begin his presentation.
11:08:43 AM
PAT GALVIN, COMMISSIONER, DEPARTMENT OF REVENUE, provided
members with a handout, "AGIA [Alaska Gasline Inducement
Act], Statute & RFA [Request for Applications] Refresher,
Special Session Opening, June 6, 2008" (Copy on File).
COMMISSIONER GALVIN addressed Slide 2, "Today's Agenda":
· AGIA Statute & RFA Refresher
· TC (TransCanada) Alaska Application Overview
· Commissioners' Finding and Determination Summary
· "The Prize" - Alaska Arctic Natural Gas Potential
· Jobs, Training, and In-state Gas
COMMISSIONER GALVIN addressed Slide 3, "Next Four Days":
· Saturday
o Pipeline Regulation and Commercial Terms
o Pipeline Expansion
· Sunday
o How Do You Get the Gas?
· Monday
o LNG (Liquid Natural Gas): Economics,
Likelihood of Success, & Path Forward
· Tuesday
o TC Alaska's Project: Economics & Likelihood
of Success
COMMISSIONER GALVIN asked that questions be held until the
end of the presentation, and that any technical or
substantive questions be delayed to the particular day the
experts testify.
11:14:17 AM
COMMISSIONER GALVIN addressed Slide 4, "AGIA Statute":
· AGIA License Application Requirements and Process
o Applicant must unconditionally accept the
"Must Haves"
o Application Review Criteria
ƒ"NPV" (Net Present Value) and
"Likelihood of Success"
ƒSufficiently Maximize Benefits to
Alaskans
· Terms of the AGIA License
o State's Obligations & Licensee's Remedies
o Licensee's Obligations & State's Remedies
· Upstream Inducements
11:16:52 AM
COMMISSIONER GALVIN addressed Slide 5, "The State's
Obligations":
AGIA Requires the State to:
· Provide a Matching Contribution of up to $500
million
· Provide an AGIA project coordinator
COMMISSIONER GALVIN explained that it is important to
recognize the state is not required to support and defend a
licensee's application before a regulatory body, such as
FERC. He noted, however, that there is an expectation that
the state would act as a good partner and recognize the
value of such a partnership.
11:19:03 AM
COMMISSIONER GALVIN addressed Slide 6, "If the State Wants
Out":
· If the State Provides Financial Benefits to a
Competing Project:
· The State must pay three times the Licensee's
expenditures
· Licensee's expenditures do NOT include amounts
reimbursed by the State as part of the $500
million match
COMMISSIONER GALVIN explained that AGIA provides a separate,
commercial mechanism for the state to get out of a license.
To provide the assurance necessary to attract applicants,
the state is required to pay back the applicant three times
their expenditures, not counting the amount the licensee has
been reimbursed from the matching contribution. He called it
a clear, legal question and noted that TransCanada and the
state agree on the provision.
11:20:26 AM
COMMISSIONER GALVIN addressed Slide 7, "If the Licensee
Wants Out":
If the Licensee breaches the License, the State receives:
· Recoupment of all funds paid, with interest
· All work product related to the project acquired
by Licensee during the term of the License
· Any other remedies provided by law or equity
COMMISSIONER GALVIN explained further that in the event of a
breach, the above obligations go with the license, even if
the license is purchased by another entity. The obligations
also apply to equity partners.
11:21:48 AM
COMMISSIONER GALVIN addressed Slide 8, "Request for
Applications (RFA)":
· Similar to Role of Regulations
· Clarifies Statutory Language for the Application
Process and Terms of License
- Assumptions to be used in providing cost and
tariff estimates in the Application
- Definition of "Project" - Allow expansions to
be at less than 70 percent debt (page 19)
- Definition of "Project Plan" - What changes
will require Commissioner Approval (page 42)
- Includes Contractual Terms of the License
COMMISSIONER GALVIN explained that the RFA functions similar
to regulations. It further defines the terms of the statute
and establishes the general contractual terms of the
relationship between the parties. He explained that the
state provided the assumptions to be used in providing cost
and tariff estimates as part of the application. Within the
RFA the definition of the term "project" is clear in terms
of the debt ratio. The debt ratio does not carry forward to
expansions. Similarly, the term "project plan" is defined in
the RFA and establishes what changes require the
commissioner's approval.
11:24:59 AM
COMMISSIONER GALVIN addressed Slide 9, "Contractual
Relationship":
· "The License constitutes the final contractual
agreement between the state and the Licensee."
(RFA page 40)
· The License consists of the AGIA statute, the RFA,
and the TC Alaska Application including all
responses to additional information requests.
COMMISSIONER GALVIN explained that the RFA clearly defines
the contractual relationship and further designates the
makeup of the license.
COMMISSIONER GALVIN ended his presentation and took
questions from the members of the legislature.
11:26:19 AM
REPRESENTATIVE ANNA FAIRCLOUGH referred to Slide 7, "If the
Licensee Wants Out," and questioned how the information
regarding a breach of license would come through.
TONY PALMER, VICE PRESIDENT, ALASKA BUSINESS DEVELOPMENT,
TRANSCANADA, responded that the items mentioned on the slide
are one mechanism. He cited abandonment as another. If the
project is abandoned it would revert to the state.
COMMISSIONER GALVIN added that the information on Slide 7 is
not a statement of when the state can acquire the
information, but rather that there are multiple places the
state can acquire the data. He cited abandonment as an
example. If there is agreement to abandon the license, it
can be purchased by the state at the net cost, not
duplicating what was already reimbursed.
COMMISSIONER GALVIN explained that in relation to post
certification, there are two potential scenarios. If there
are firm transportation commitments sufficient to finance
the project, the Licensee has one year to sanction the
project and move forward; otherwise, they have to give
everything to the state without additional payment. If there
is no financing, they get two years to sanction the project.
At that point the state has the option to purchase at cost.
11:29:20 AM
REPRESENTATIVE FAIRCLOUGH queried as to whether the upfront
costs would be an asset and if they would be made public.
COMMISSIONER GALVIN replied the state has access to the
data; whether or not it is made public would be subject to
laws intended to protect the proprietary interests of
TransCanada. He suggested getting further clarification from
legal counsel.
REPRESENTATIVE FAIRCLOUGH wondered about a $500 million
investment that is not public but that the state holds as an
asset. She referred to Slide 5, "The State's Obligations,"
and noted that the state is not required to support and
defend the licensee's application. She asked if TransCanada
believed the state should support the application before the
regulatory bodies.
MR. PALMER responded that TransCanada expects the state to
act as a partner, but the company also recognizes that
defending the licensee application before a regulatory body
is not a legal requirement.
11:31:56 AM
REPRESENTATIVE MARK NEUMAN referred to Slide 6, "If the
State Wants Out," and stated that he expects the state to do
everything it can to help every business and industry that
wants to explore and develop in Alaska.
COMMISSIONER GALVIN commented that the state is responsible,
as a sovereign, to grant permits and authorizations, and to
provide an approval process so that every project can move
forward. However, when it comes to providing state financial
assistance or concessions, the relationship with TransCanada
has to be recognized. Providing additional financial
assistance to a competing project would undermine that
relationship. In that way, the state sees value in the
TransCanada Alaska project and will hold firm and continue
to move forward. If a competing project wants to move
forward, the state will not get in its way. The state will
provide the standard procedural authorizations to make the
decision-making process as efficient as possible. If the
state is going to provide financial assistance, however, it
will do so at the cost laid out in the provision.
REPRESENTATIVE NEUMAN stated, "The line in the sand starts
and stops with financial assistance."
COMMISSIONER GALVIN agreed.
REPRESENTATIVE NEUMAN referred to Pages 5 and 6 of EconOne's
presentation. He referred to the dozen items that
TransCanada is asking of the state, and wondered whether the
requests are "off ramps." He questioned what would happen if
TransCanada did not move forward. He maintained that there
are items the members of the legislature know nothing about.
11:36:34 AM
COMMISSIONER GALVIN responded that the items referenced in
EconOne's presentation are not seen as "off ramps" but as
statements of how to work with the state as the agreement
moves forward. He explained that the state does not see them
as conditions or requirements on the license. If they were
conditions, he would want to see a more formal, written
agreement between the parties.
11:38:20 AM
REPRESENTATIVE NEUMAN verified that the state would not be
held to any obligation of the terms detailed in EconOne's
presentation. COMMISSIONER GALVIN agreed with his assertion.
MR. PALMER reiterated that TransCanada expects the state to
act as a good partner, if granted the license. He clarified
that TransCanada was asked to set out a number of
obligations pursuant to the AGIA license and RFA in its
application. He recognized that the obligations are not
legal requirements but hoped that the state and TransCanada
would stand "shoulder to shoulder." TransCanada made the
decision to file under AGIA believing that once the license
was granted, the state would do what it could to make the
project a success.
REPRESENTATIVE NEUMAN reiterated that the obligations set
out in EconOne's presentation are not requirements of the
state.
REPRESENTATIVE NEUMAN queried the status of an agreement on
fiscal terms with Alaska North Slope (ANS) producers.
COMMISSIONER GALVIN replied that the state has not had any
formal discussions with ANS producers in relation to the
TransCanada project. He did not think the discussion would
take place until the license was issued.
REPRESENTATIVE NEUMAN received clarification that the
discussion would take place sometime between approval of the
license and open season.
CHAIR SENATOR HUGGINS remarked that the administration had
spent $10 million on consultants over six months putting
together the information, while the people have had only a
quick snapshot of that information. He cautioned against the
pull to produce a boilerplate contract that reduces the
broad scale of the information.
11:42:35 AM
REPRESENTATIVE CARL GATTO referred to Slide 7, "If the
Licensee Wants Out," and questioned whether lost revenues
would include penalty and interest.
COMMISSIONER GALVIN said that would depend on the
circumstances, but there is potential to include those
items.
11:43:11 AM
REPRESENTATIVE BERTA GARDNER referred to Slide 8, "Request
for Applications (RFA)," and asked if different assumptions
were used in analyzing the application and, if so, why.
COMMISSIONER GALVIN explained that more than one point of
assumption was used in the application process as part of
the analysis. In the end, the mid-point probability was
reported.
11:45:35 AM
REPRESENTATIVE MIKE CHENAULT referred to Slide 6, "If the
State Wants Out." He wondered whether a bullet line in
Alaska would be considered a competing project.
COMMISSIONER GALVIN replied that it would not, as long as
the project is below 500 million cubic feet per day
(MMcf/d).
REPRESENTATIVE CHENAULT asked whether an all-Alaska
liquefied natural gas (LNG) line would be considered a
competing project.
COMMISSIONER GALVIN replied that most likely it would be
considered a competing project, as it would probably be of a
larger capacity in terms of cubic feet per day.
11:46:11 AM
REPRESENTATIVE LES GARA observed that the state's interests
might not always be in line with TransCanada's. He gave the
example of producers asking for a tax break, since their
shareholders pressure them to pay as little tax as possible.
TransCanada might then advocate for smaller tax breaks. He
wanted assurance that a difference of opinion in this area
would not be considered a breach on the part of the state in
terms of moving the project forward.
MR. PALMER pointed out that taxes would be the business of
the state and the producers.
REPRESENTATIVE GARA further hypothesized that the producers
might approach TransCanada with a request to lobby for a 50
percent tax reduction, and asked for TransCanada's assurance
that it would not intervene in the tax debate.
MR. PALMER replied that regarding upstream taxes, not taxes
on the pipeline, TransCanada has been on the record as
stating that the tax debate is between the state of Alaska
and the parties that hold the lease, not between Alaska and
TransCanada.
11:49:19 AM
SENATOR KIM ELTON asked whether TransCanada agreed that
issuance of the license would not obligate the state to pay
anything more than what is codified in AGIA.
MR. PALMER affirmed the statement.
11:50:36 AM
REPRESENTATIVE RALPH SAMUELS referred to Slide 7, "If the
Licensee Wants Out." He questioned what would happen if, at
the end of an open season, TransCanada opted out of AGIA
after concluding that their best option was to reach an
agreement with the producers to collectively build a line.
He asked how much liability there would be beyond returning
the state's money.
MR. PALMER stated that TransCanada believes that once they
are granted a license, they lose the freedom to act in the
manner described. TransCanada believes they must act under
the AGIA license, and would need the consent of the state,
as a partner, in order to act otherwise.
REPRESENTATIVE SAMUELS reiterated his questions.
MR. PALMER replied that TransCanada would have obligations
to the state as a partner to pursue the project under AGIA.
There are various ways to abandon the project, which have
been discussed. TransCanada feels it cannot renegotiate a
deal without the consent of the state, even if the project
was considered uneconomical.
11:54:54 AM
SENATOR CON BUNDE stated concerns about the $500 million
figure and questioned how the amount was calculated.
COMMISSIONER GALVIN answered that the figure was derived
before there was a particular applicant with a particular
budget. A number of different sources came up with estimates
of approximately $1 billion for a project from starting
point through to FERC certification. The intended 50-50
split made the number $500 million. He further commented
that some of the applicants may be able to get to FERC
certification at a less expensive rate, in which case they
would get more out of the $500 million match.
11:56:44 AM
CHAIR SENATOR HUGGINS confirmed that the original AGIA
proposal included a 50 percent reimbursement rate. He asked
how the rate was changed to 90 percent.
COMMISSIONER GALVIN replied that potential applicants had
testified that in the event of an unsuccessful open season,
the cost-benefit would shift. The recommendation of 90
percent was made and approved in order to attract bidders.
11:58:31 AM
CHAIR SENATOR HUGGINS asserted that the 90 percent
reimbursement was explicitly requested by TransCanada.
COMMISSIONER GALVIN acknowledged that TransCanada could very
well have testified to that issue explicitly.
CHAIR SENATOR HUGGINS asked that Commissioner Galvin
research the issue further, and report back at a later date.
11:59:02 AM
SENATOR BILL WIELECHOWSKI asked whether TransCanada would be
taking on other equity partners.
MR. PALMER replied that TransCanada would seek to take on
equity partners as allowed within the AGIA framework, but
not outside of it.
SENATOR WIELECHOWSKI asked if Mr. Palmer could envision a
scenario in which the equity partners assumed more than 50
percent of the voting power.
MR. PALMER said he was not in a position to answer the
question; there have not been extensive discussions with
potential partners at this point in time.
SENATOR WIELECHOWSKI expressed concerns and commented that
many people would like to see an independent pipeline
project. He asked if TransCanada would continue to move
forward towards FERC certification if the license were
rejected.
MR. PALMER acknowledged concerns regarding equity levels. He
said there had been an inaccurate statement in the "Calgary
Herald" indicating that TransCanada would somehow proceed
regardless of the granting of the license. He stated that if
TransCanada were not granted the license, they would
carefully consider whether or not they should continue with
the project, and if so, how they would proceed.
12:02:20 PM
REPRESENTATIVE MIKE HAWKER commented on the ambiguity of
TransCanada's expectations of the state. He noted that some
of the expectations force the state to coerce the producers
to provide gas to the TransCanada project. He referred to
indications by Commissioner Galvin and Mr. Palmer that there
are clear limits on the state's commitments; there are not
expectations of the state beyond the scope of AGIA.
REPRESENTATIVE HAWKER asked if it were the intent of the
administration to acknowledge a request for a good
partnership and to pursue each of the expectations.
COMMISSIONER GALVIN replied that it is the intent of the
administration to evaluate each of the expectations to
determine which would be appropriate and would provide value
and further the interest of the state for the project. He
pointed out that a number of the expectations would require
legislative action. Part of the analysis will be determining
what to advance through the legislative process, which would
include public discussion.
12:06:53 PM
REPRESENTATIVE HAWKER agreed that there should be a
willingness and good faith effort to look at each
expectation and determine which are in the best interest of
the state. He reiterated concerns about committing the
people via legislative action without a more defined
contractual arrangement.
12:08:18 PM
COMMISSIONER GALVIN replied that the commitments on behalf
of the state and TransCanada are clear; there is no need for
further documentation. The question is more in relation to
the uncertainties in advancing the project. He pointed out
that statute invites participation in the evaluation process
to encourage creative ideas. As examples, he cited issues
relating to the use of federal loan guarantees and bridge
shippers.
COMMISSIONER GALVIN asserted that he views expectations
offered by TransCanada as potential ideas to pursue. He
asked that members not confuse those expectations with what
the state is legally obligated to pursue and with what
TransCanada is expecting the state to pursue.
12:12:33 PM
REPRESENTATIVE HAWKER expressed concerns related to
transferring management and control of the project to
another entity. He wanted a contractual commitment from a
company to not transfer ownership and control, for example,
to Exxon Mobile.
12:13:17 PM
COMMISSIONER GALVIN answered that many provisions set out in
AGIA are what the state would expect from any owner, either
an applicant who succeeds in becoming the licensee or as a
complete owner or equity partner. All of the terms and
values in regards to the open access provisions are legally
required commitments on the part of the licensee regardless
of the owner. For example, if Exxon Mobile were to buy out
TransCanada and become the sole owner, it would be legally
bound to the obligations and subject to the provisions set
out in statute, including those provisions related to
breaches.
12:15:36 PM
REPRESENTATIVE MIKE DOOGAN asked Commissioner Galvin whether
the $500 million match would be dealt with through a billing
procedure with a series of expenditures as opposed to
providing a one-time check.
12:16:28 PM
COMMISSIONER GALVIN pointed out that the Department of
Revenue has promulgated the regulations that define a
qualified expenditure for reimbursement from the state in
relation to the license.
REPRESENTATIVE DOOGAN asked Commissioner Galvin to provide
him a reference to those regulations for further review.
12:17:27 PM
RECESSED: 12:17:35 PM
RECONVENED: 1:39:10 PM
COMMISSIONER GALVIN said he had copies of the regulations
relating to qualified expenditures. CHAIR SENATOR HUGGINS
asked for them to be distributed to the members.
1:41:32 PM
MR. PALMER provided members with a handout entitled,
"TransCanada's AGIA Application: Presentation to the
Legislature" (Copy on File). He provided a brief history of
the company and himself.
1:45:53 PM
MR. PALMER stated that TransCanada believes the project is
economically strong. They have examined the supply/demand
fundamentals for the project, for North American gas as well
as global gas. They have examined commodity price
expectations. He called TransCanada a conservative company
that would not give the state imprudent estimates. In
filing, TransCanada used the assumptions given in the RFA.
The administration used different assumptions, but he would
present using the assumptions TransCanada used.
MR. PALMER believes Alaska is committed to getting a gas
pipeline project and is acting accordingly. He pointed out
that AGIA sets out the rights and responsibilities of the
licensee. TransCanada views those from a business
standpoint. TransCanada believes that it provides value to
the state and is getting value back from the state. He
called it a fair business deal.
MR. PALMER asserted that TransCanada views the project as a
very large investment opportunity in relation to its core
competency. They see no conflicts with operating, owning or
expanding the pipeline. In addition, the company still holds
the rights and responsibilities from the government of
Canada; there is no sunset date on the rights. He avowed it
is the business of TransCanada to complete a pipeline and
successfully operate it over the next 30 or 50 or 100 years.
MR. PALMER acknowledged that AGIA does not require the
construction of a pipeline and that no single party owns the
rights to the land along the 1,715 miles between Prudhoe Bay
and Alberta, Chicago, Boston, or Seattle. He emphasized that
cooperation and collaboration will be needed, as well as
compromise.
MR. PALMER believes that TransCanada is in alignment with
the state's objectives. Both are in favor of long- and
short-term basin development. He cited Western Canada
(Alberta) as an example and noted that fostering upstream
competition is critical to success. TransCanada believes
that the project is commercially viable. The company already
has a large U.S. business, and the Alberta example has
striking parallels to the circumstances in Alaska. He added
that TransCanada owns over 12,000 miles of natural gas
pipeline in the United States; if granted, this project
would increase its U.S. pipelines by 6 percent. He pointed
out that TransCanada is already constructing a longer oil
pipeline for the Keystone project.
MR. PALMER described similarities between Alaska and
Alberta. At one time, Alberta was the furthest gas from a
major market; it started with three customers and today has
over 300.
1:56:42 PM
MR. PALMER noted that TransCanada moves 20 percent of North
American gas, which equates to one in five molecules of gas
being moved on the continent each day. TransCanada also
moves two-thirds of Western Canadian gas every day, through
36,000 miles of pipe. He stated that no other party has that
kind of record, and noted that its operating costs are 25 to
35 percent lower than competitors. He also stated that
TransCanada does not overcharge its customers.
MR. PALMER referred to the construction part of the project
and noted the regulatory, community, First Nations,
environmental, commercial and financial issues associated
with construction. Since 50 years ago at the inception of
its corporation, TransCanada has developed billions of
dollars of pipeline and power projects. He pointed out that
TransCanada has raised about $3 billion of equity in a very
unstable financial market, and has raised $2 billion in debt
in the last 15 months because of a successful track record,
financial capacity, and good projects. He also noted that
the federal loan guarantee will assist any party in
obtaining the debt in both the coupon rate and acquiring the
debt to help the financial ability of the project.
MR. PALMER added that TransCanada has undertaken to move the
project forward in both Alaska and Canada by putting forward
an LNG alternative in the event of insufficient gas in
Canada, or via a Y-Line. He did not think it would be the
preferred project or the best alternative for Alaska and
TransCanada, but stated that TransCanada is open to such an
alternative.
2:03:11 PM
MR. PALMER spoke to employment opportunities. About 50-75
people would be needed to run the pipeline, which equates to
about 10 people per mile. There will be construction jobs,
but operating the pipeline takes relatively few people. More
employment opportunities come from drillings and expansions.
2:05:57 PM
MR. PALMER addressed Slide 2, "TransCanada's Objectives -
Alaska Project":
· Early in-service
o Largest investment opportunity in core
business line and geographic footprint
o Utilize spare capacity on existing North
American pipelines
o LNG market as alternative investment
opportunity
· Encourage long-run basin development
o Serve In-State and other markets
o Increase market and supply diversity
o Growth investment opportunities
ƒPipeline expansions can create
"virtuous circle"
· Pipeline expansions promote more
exploration and drilling which, if
successful, leads to more pipeline
expansions
· Equitable treatment for all customers
o 50-year successful track record of balancing
interests
ƒInitial and future
ƒLarge and small
MR. PALMER stated that TransCanada expects the spare
capacity to grow away from Alberta for the entire Alaska
volume in about ten years. He noted that the Canadian
government does not punish TransCanada on a throughput basis
for having lower volumes, but it is a critical factor for
its customers as the costs will be spread over a bigger base
and result in lower tolls.
MR. PALMER assured the members that TransCanada wants to
move gas to where the customers want it both now and in the
future. TransCanada is in favor of increasing supply and
expanding market diversity.
2:08:58 PM
MR. PALMER addressed Slide 3, "TransCanada's Credentials."
He highlighted the Keystone pipe. The map also depicts the
proposed Alaska pipeline, TransCanada-owned pipelines, and
other natural gas pipelines in North America. He compared
TransCanada's miles of pipe, compression horsepower, and
throughput volumes, and discussed TransCanada's expansion
over the years in relation to Alaska's pipeline project.
2:10:51 PM
CHAIR SENATOR HUGGINS asked Mr. Palmer to provide the
members with the contracts relating to TransCanada's largest
pipeline project.
MR. PALMER offered to find out what information is available
for public review.
2:11:59 PM
MR. PALMER addressed Slide 4, "Proven Basin Developer -
Alberta Example." He described the regulatory structure of
the Alberta example, highlighting the independent pipeline
model, rolled-in tolls, and the growth of customers from
three in 1958 to over 300 today. He noted that there are now
15,000 miles of pipe and 1,100 delivery points.
2:15:38 PM
MR. PALMER addressed Slide 5, "Proven Basin Developer -
Mainline Example 1960." He highlighted the cross-continent
system that is being converted.
2:16:43 PM
MR. PALMER addressed Slide 6, "Proven Basin Developer -
Mainline Example 2008." He pointed out the loops and partial
loops illustrating how increments are made when necessary.
2:17:29 PM
MR. PALMER turned to Slides 7 and 8, which list AGIA "Must
Haves" alongside TransCanada's responses to each. He
maintained that TransCanada has committed to AGIA "must
haves."
REPRESENTATIVE PEGGY WILSON noted that the initial benchmark
of licensure by the year 2008 has not been met and wondered
how the project timeline has changed.
MR. PALMER deferred the question to a later slide with an
updated schedule.
2:18:43 PM
SENATOR WIELECHOWSKI expressed concern about the billions of
dollars the state would lose because of the 70/30 project
debt ratio split.
MR. PALMER did not agree that the state would lose billions
of dollars from the proposed split. He stated that the
initial project would have access to a federal government
loan guarantee of $18 billion or up to 80 percent of the
initial capital costs, whichever is lower. There is no loan
guarantee for future expansions; he asserted that
TransCanada does not want to fund future expansions without
a loan guarantee on a basis that is not a fair balance
between risk and reward.
2:20:08 PM
SENATOR WIELECHOWSKI wondered whether TransCanada planned to
put in an expansion off the initial build or build the
expansion into the initial project if there were Alaskan
demand in the initial open season of .5 billion cubic feet a
day (Bcf/d) to a full Bcf/d.
MR. PALMER explained that if there were 4.5 Bcf/d nominated
to Alberta and an additional .5 Bcf/d for in-state use,
TransCanada would design and construct the pipeline as the
initial project. It would not be viewed as an expansion.
2:21:18 PM
CHAIR SENATOR HUGGINS referred to the issue of federal loan
guarantees, and asked if it would be unreasonable to request
some sort of tax guarantee from the Canadian government.
MR. PALMER replied that the U.S. federal loan guarantee
applies to expenditures within both Alaska and Canada. He
did not believe Canadian government officials thought they
needed to provide an incentive for Alaska to move U.S. gas
through Canada on the way to the continental U.S. Most
Canadians believe that the treaty agreed to between the
United States and Canada thirty years ago to facilitate the
movement of gas gives both nations rights and
responsibilities. The treaty remains valid and in place
today. He noted, however, that he cannot speak for the
government of Canada or its people.
2:23:04 PM
CHAIR SENATOR HUGGINS stated that the Canadian government
has direct involvement in the regulatory process of this
project because the Canadian National Energy Board (NEB) has
oversight.
MR. PALMER replied that the Northern Pipeline Agency (NPA)
would have responsibility for the construction of the
pipeline, and the NEB would have responsibility for all the
commercial issues in relation to tolls and tariffs, and
other commercial terms. Therefore, NEB would be involved as
a regulator. Canada has promised through the treaty to treat
U.S. gas through property and other taxes on the same basis
as domestic gas. He suggested that relationship and the
treaty should be attractive to Alaska as a means of
resolving any issue between the two countries.
CHAIR SENATOR HUGGINS asked how much money the country of
Canada expects to gain from the success of the Alaska
pipeline project. MR. PALMER deferred the question to a
later time.
2:24:45 PM
SENATOR LYMAN HOFFMAN mentioned the 25 to 35 percent lower
construction costs proposed by TransCanada. He asked how
those costs compare to other construction companies in the
gas pipeline industry.
MR. PALMER replied that it is relatively easy to get a
benchmark on operating costs, but very difficult to get a
benchmark on construction costs because of the different
nature of projects.
MR. PALMER added that in undiscounted dollars, based on the
assumptions in the application, the Canadian federal
government, as well as the governments of Yukon and British
Columbia, would have a total tax take of approximately $8
billion (US) over the 25 year life of the pipeline, assuming
no expansions.
2:25:56 PM
MR. PALMER continued his presentation with Slide 9,
"TransCanada's Competitive Response to AGIA":
· TransCanada bid to win - competitive enhancements
o Initial system design with inexpensive
expandability
o Gas treatment plant ownership, if no 3rd
party willing to build
o Equity opportunity for shippers committing
gas in initial open season
o 75 percent debt vs. 70 percent minimum limit
in AGIA
ƒToll reduction of $0.09/mmBTU
o TransCanada's return reduction in event of
capital cost overruns
o Fort Nelson Option upside
ƒToll reduction of $0.13 - $0.18/mmBTU
o LNG alternative if insufficient gas
commitments through Canada, or via Y-line
MR. PALMER noted that TransCanada believes the initial
system design with inexpensive expandability is valuable to
the state, but noted that the final design will depend on
the ultimate volumes committed to the pipeline.
MR. PALMER stated that TransCanada does not intend to own
the gas treatment plant unless no third party is willing to
own, operate, and manage facilities of that nature. In the
event that producers wish to own those, it would cost $6
billion of a $26 billion project, or 22 percent of the
project. If those parties do not wish to own the facilities,
or other parties, TransCanada is prepared to construct those
facilities in order to have a complete project, although
that would not be their first choice.
MR. PALMER pointed out that there are a number of producers
in the basin that have an interest in owning a piece of the
pipeline. TransCanada does not own the gas moving through
the pipelines. In the event the parties commit their gas in
an initial open season, they will have an investment
opportunity. It is their prerogative to take it or not. In
many basins, producers do not wish to invest their money in
interstate natural gas pipelines. That may not be the case
in Alaska.
MR. PALMER stated that TransCanada has been required to have
a minimum of 70 percent debt at the initiation of the
project. TransCanada proposes, upon completion of the
project, to refinance the project at 75 percent debt. This
equates to a 9 cent per million British thermal unit (mmBTU)
savings to customers. This translates to a $150 million
reduction in the toll per year at 4.5 Bcf/d.
MR. PALMER indicated that TransCanada would reduce its rate
of return in the event of capital cost overruns. He said it
is unusual for pipeline companies to offer a rate of return
reduction for a capital cost overrun, but that type of
capital cost risk element was in the original structure. He
listed the reasons TransCanada does not want to have a
capital cost overrun. They want long-term growth, not short-
term gain from an additional investment.
2:34:17 PM
REPRESENTATIVE SAMUELS spoke to the risk passed to the
shippers. The entire tariff would increase by 40 percent and
the shippers would assume the risk, which would lock them
up.
MR. PALMER reiterated that TransCanada did not want to see a
forced investment of 7 percent for five years. He
acknowledged that the shippers would bear the most
significant component of the risk. However, they are not
restricted to the regulated rate of return. He stated that
because of his investors, he must look for return within
certain boundaries.
REPRESENTATIVE SAMUELS understood how the risk is allocated;
however, even 7 percent is a good profit. The risk is
nominal compared to that of the shipper. He asked if
TransCanada could negotiate a rate on a new project, setting
a cap on what cost overruns could be built into the tariff,
so that the risk is taken on by the pipeline company, rather
than the shipper.
MR. PALMER responded that TransCanada share holders would
not agree that a 7 percent return on an overrun is a good
investment. He emphasized that TransCanada does not seek
that. In order to motivate TransCanada to not earn extra
money, they have proposed that the U.S. government loan
guarantee should be applied to some degree to cover capital
cost overruns. In that circumstance, TransCanada would not
earn one penny more; in fact, they would earn less.
MR. PALMER said that it was possible for a smaller project
to find a pipeline company that would guarantee the toll, or
guarantee it within a range. It was not the norm, but could
be done. Pipeline companies generally do that on a "black
box" basis, for the rate of return as well as their debt
equity ratio. They will have a significantly higher
opportunity to earn money if they over-perform. They have
more risk if they under-perform.
MR. PALMER referred to the Rockies Express Pipeline, which
has 55 percent equity, and a 13 percent return on equity.
Comparing 55 X 13 percent with 25 X 14 percent shows that
TransCanada has a much lower toll to customers.
TransCanada's risks are lower, which is the trade-off. He
maintained that no party would give a fixed toll for the
scale of the proposed project in Alaska.
2:40:58 PM
MR. PALMER located Fort Nelson, which is about mid-way
through British Columbia, on a map, and continued with Slide
9. He explained that TransCanada, if it refills its pipeline
systems in western Canada as a result of moving Alaskan gas
into the Alberta hub, will not see a higher return. However,
there would be a significant benefit to TransCanada's
western Canadian customers. The benefit could be $10 billion
in the first 15 years. Alaska gas would also enjoy lower
tolls by entering Alberta's system. TransCanada has proposed
a Fort Nelson upside as a mechanism to share some of that
$10 billion value from western Canadian producers to Alaskan
producers. The toll reduction would be around 13 to 18
cents, which converts to about $3 billion. TransCanada would
propose this as an upside. It is not something they can
guarantee, but they would sponsor it before their
regulators.
MR. PALMER addressed the issue of alternatives to the
Alberta hub. The AECO hub, or Alberta hub, is TransCanada's
Alberta system. He explained that the hub is not accessible
unless the system is entered. A user gets on the system,
pays the receipt toll-which is included in the TransCanada
proposal-and then trades gas for free. TransCanada's
analysis, which is supported by independent analysis by the
Canadian Energy Research Institute, indicates that if a user
gets their gas to the Alberta hub, not only do they have
liquidity and opportunity to go to diverse markets, but a
higher net back. "Net back" is pipeline jargon for "more
money in your jeans." Going into the system creates a 30 to
40 cents better net back, because of using partially
depreciated pipes; the costs are shared with other users.
Entering a new pipe costs money, in addition to losing
liquidity and market diversity.
MR. PALMER addressed the LNG line, the alternative offered
in the event of insufficient gas committed to Canada.
2:45:51 PM
SENATOR WIELECHOWSKI asked when TransCanada would consider
the LNG alternative.
MR. PALMER replied that in a scenario where 5 Bcf/d was
gotten to China and no volumes to Canada, TransCanada would
build a pipeline to Valdez for 5 Bcf/d. TransCanada has not
done the economics of that scenario yet, but would look at
it.
2:47:21 PM
REPRESENTATIVE BERTA GARDNER referred to other proposals,
including pipeline construction beyond Alberta to Chicago.
She wondered if it would be advantageous for Alaska to
participate in construction of a new pipe to Chicago.
MR. PALMER replied that he had not seen economic analysis
that would support that as being a good outcome for
Alaskans. For example, the cost risk of capital cost
overruns would be accentuated.
2:48:27 PM
REPRESENTATIVE CRAIG JOHNSON asked for clarification
regarding access to the Alberta hub if a producer pipeline
were to be built.
MR. PALMER replied that if they do not interconnect with
Alberta's TransCanada system, a producer will not have
access to the Alberta hub. In the event that TransCanada did
not build the pipe from Prudhoe Bay to Alberta, if producers
built a pipe and connected into (Alliance?) for example, or
built a new pipe all the way to Chicago, they would not have
access to the Alberta hub unless they integrate with
TransCanada.
REPRESENTATIVE JOHNSON asked if a producer could be shut off
if they built a pipeline to the Alberta hub.
MR. PALMER emphasized that they would have to physically
interconnect with the Alberta hub. He further stated that
TransCanada has the right to build the first pipeline
through Canada to transport Alaskan gas. In the event that a
producer solved that issue, and built a pipe from Prudhoe
Bay to the Alberta border, they would have to physically
interconnect with TransCanada Alberta system or they would
not have access to the hub.
2:50:54 PM
REPRESENTATIVE JOHNSON asked if a producer pipeline could be
allowed to connect.
MR. PALMER replied that the NEB has the power to require
TransCanada's system to expand, but he would have to get
more information on whether NEB could require the system to
interconnect.
2:52:00 PM
SENATOR HOFFMAN referred to Slide 9 and asked whether the
statement regarding capital cost overruns would still hold
if the overruns were not covered by the federal guarantees.
MR. PALMER replied in the affirmative. TransCanada thinks
that applying the federal loan guarantee to overruns would
assist the project and takes away any possible incentive for
TransCanada overruns. In the event that the overrun
guarantee was not extended by the U.S. government,
TransCanada would still have the risk of a lower rate of
return.
2:53:12 PM
CHAIR SENATOR HUGGINS referred to the LNG alternative and
questioned the timing of first gas.
MR. PALMER estimated 2018.
CHAIR SENATOR HUGGINS described a hypothetical of an
independent bullet line project taking gas as far as Homer
at a volume of 1.5 Bcf/d. He asked if the agreement would be
violated if the state then participated in that project.
MR. PALMER replied that in the event that the state is
supporting a project that is in excess of the limitation
under AGIA, it would be in violation. If the state or other
parties wish to advance a bullet line within the limitations
for the volumes as stipulated in AGIA, and if TransCanada is
the licensee, then there would be no opposition. Going
outside the bounds of AGIA, on the other hand, would take
gas away from the larger project.
CHAIR SENATOR HUGGINS clarified that TransCanada would
object to a project with a volume of 1.5 Bcf/d.
MR. PALMER replied he would be surprised that the state
would put forward something in direct contradiction to the
existing law.
RECESSED: 2:57:08 PM
RECONVENED: 3:22:04 PM
COMMISSIONER GALVIN commented on bullet line parameters. He
thought the previous discussion reflected Alaska's dual
interests: first, assuring the state maximizes its
opportunities to get in-state gas going as quickly as
possible, and second, recognizing the long-term desire to
have a large capacity gas line getting Alaska gas to an
outside market. The structure of AGIA allows a bullet line,
by which he means a line that satisfies in-state demand.
This does not include an LNG project that would ship out of
state from a terminal in the state.
COMMISSIONER GALVIN added that any projection of the
potential market within the state for the next 10 years caps
out below the 5 MMcf/d that has been established as a
threshold. The question raised addresses a situation in
which a bullet line within those parameters results in
Alaskans paying more for in-state gas than they would pay
through alternative means, and the only way to make it
affordable would be not a bullet line but a small capacity
LNG project that can be set up more quickly and have spur
lines off for in-state consumption. The decision was made a
year ago through AGIA that a line that moved more than .5
Bcf/d would undermine the viability of the main line. In the
end, it was recognized that the reserves are one of the
important variables in terms of viability. We are making
assumptions regarding how much gas might come out of
existing fields and how much additional gas would be
discovered and put into the pipeline in the future. A small
capacity export line is truly in competition with a major
pipeline to markets. There is a risk of drawing out just
enough capacity in the small line to never get the big line
over the threshold to make it economically viable.
COMMISSIONER GALVIN stated that the administration is very
sympathetic and committed to getting gas to Alaskans as
quickly and economically as possible, but that could end up
eliminating any opportunity for a large capacity line and
the benefit of long term revenue streams associated with
projects that are the key to Alaska's financial future.
COMMISSIONER GALVIN emphasized that although the smaller
capacity line is a potential short-term fix to the local
energy issue, it could cost the state tremendously in the
long term. This was the tradeoff established within AGIA.
3:27:47 PM
COMMISSIONER GALVIN noted that the one caveat is that
competition is allowed as long as the state does not provide
economic assistance to the competing project. If it is
economic on its own, then it can continue to move forward
and will ultimately compete with TransCanada project. He
emphasized that there is no quick fix.
3:29:00 PM
CHAIR SENATOR HUGGINS noted that the state is potentially
creating a scenario that will increase the cost of gas in
Alaska. He wanted to guarantee that the state is not signing
up for reduced flexibility.
REPRESENTATIVE NEUMAN agreed that the residents of Alaska
want access to low cost energy as soon as possible. He
stated concerns that if the state agrees to the terms laid
out regarding the state incentives, gas for in-state use
could be delayed by five years.
COMMISSIONER GALVIN responded that the process regarding
both the TransCanada project and the LNG project has many
unknowns. He warned against making a choice based on faulty
information or perceptions. For example, there has been a
perception that we had to choose between an overland project
that could take ten years and an LNG project that could be
done in five to six years. After more study, it became
apparent that an LNG project could take as long, or longer,
than the overland route. He urged Alaskans to make choices
based on accurate facts.
3:34:08 PM
REPRESENTATIVE GARA stated concerns about a 1.5 Bcf/d bullet
line eliminating prospects for a large diameter gas line. In
the case of a 1.5 Bcf/d in-state line, if .5 Bcf/d goes to
in-state use, in-state use has been exempted from taxation.
This would make the revenue from an in-state line
questionable. He asked for an assessment of what state
revenue would be lost by choosing an in-state line that
eliminated a large diameter line.
COMMISSIONER TOM IRWIN pointed out that since AGIA was
passed, exploration for gas has taken place for the first
time. Until now, all know gas has been found while looking
for oil. As the project moves forward, more opportunities
would be found. There may be many opportunities for in-state
gas. The process of switching to gas would take time.
CHAIR SENATOR HUGGINS commented on limiting development.
3:37:25 PM
MR. PALMER pointed out that there is some component of the
Keystone contractual terms in the response provided to
Legislative Budget and Audit (LB&A) request number eight,
filed on May 27, Page 6.
3:38:05 PM
MR. PALMER continued with Slide 10, "Alaska Pipeline
Project," which contains a map showing the projected Alaska
pipeline connecting to the Alberta hub. He expected that by
2018 there would be spare take-away capacity sufficient to
move all Alaska volumes to the continental U.S. markets. One
third of that pipeline is already built.
MR. PALMER understood the difficultly of the in-state gas
issue. He assured the members that TransCanada hoped to
serve that market, although it would 2018 until that could
happen.
3:39:12 PM
MR. PALMER gave an overview of the project, using Slide 11,
"Project Description":
· Gas treatment plant at Prudhoe Bay
o 5 Bcf/d initial capacity
o TransCanada will develop/own only if
necessary
· Natural gas pipeline from Prudhoe Bay to Alberta
Hub
o 4.5 Bcf/d initial capacity
o Expansion to 5.9 Bcf/d with compression only
o More than 1700 miles
o 48-inch diameter; 2500/2600 psig [pounds per
square inch gauge]
· Alberta Hub to Lower 48
· TransCanada's existing pipeline system in
Alberta is the "Alberta Hub"
o TransCanada's Alberta pipeline is both a
physical and commercial system
o Largest natural gas trading hub in North
America
· By 2018, downstream pipelines projected to have
spare capacity for full Alaska volumes
3:39:46 PM
MR. PALMER presented Slide 12, "Project Economics." These
figures are based on information provided by the state and
current TransCanada estimates, including exchange rates and
capital cost escalations. The slide highlights the cost to
get to open season, regulatory certification, and the tolls
that derive from those numbers:
· Capital costs
o $26 billion (2007 $US excluding AFUDC
[Allowance for Funds Used During
Construction])
ƒApproximately $0.6 billion for Open
Season and regulatory certification
· Tolls
o $US 2.76/mmBTU in 2018 to the Alberta Hub
ƒLevelized negotiated toll for 4.5 Bcf/d
in Nominal dollars, including fuel
o Expansion Tolls
ƒRolled-in tolls in Canada
ƒRolled-in tolls in Alaska up to 115
percent of initial tolls, including fuel
3:40:28 PM
REPRESENTATIVE SAMUELS referenced Slide 11 and the subject
of the gas treatment plant. He thought if TransCanada did
not own the gas treatment plant, if the oil companies owned
and operated it, one of the upsides of a third party
pipeline is access. He wondered about the gas treatment
plant becoming the bottleneck.
COMMISSIONER GALVIN asked that the issue be deferred until
the 6/7/08 discussion.
3:42:03 PM
REPRESENTATIVE DOOGAN referenced Slide 12 and the subject of
the toll estimates. He asked why TransCanada had different
toll numbers than another estimate prepared for the
administration.
MR. PALMER answered that the other estimate included a
higher Canadian/U.S. exchange rate. There were also higher
capital costs for the gas treatment plant and a higher
escalation of capital costs. The last significant item was a
different interest rate.
REPRESENTATIVE DOOGAN wondered which set of numbers was more
accurate.
MR. PALMER thought the TransCanada assessment was fair.
There may be some variation regarding the exchange rate.
TransCanada was provided with a relatively low escalator.
The historic escalation of capital costs is very changeable,
making it difficult to predict what the actual average will
be over a dozen years. The administration consultants came
up with an average of 3.6 percent. The numbers could change.
3:48:21 PM
MR. PALMER reviewed "Financial Parameters" on Slide 13:
· Debt/Equity Ratio
o 70/30 during construction
o 75/25 upon completion of initial project
o 60/40 for all expansions
· Return on Equity (ROE)
o U.S. 10-year Treasury Note plus 965 basis
points
o TransCanada's ROE will be adjusted downward
in first 5 years by up to 200 basis points
in the event of CAPEX [Capital Expenditure]
overruns
· Fuel
o 7.9 percent including gas treatment plant
(GTP) from Prudhoe Bay to Alberta Hub
o $US 0.35/mmBTU in 2018 @ 4.5 Bcf/d
MR. PALMER elaborated on equity return and debt/equity
ratios for other pipelines projects in Canada and the U.S.
over the last several years. He emphasized that it is
critical to look at items together.
3:50:37 PM
MR. PALMER continued with Slide 14, the project schedule,
which is subject to the AGIA license being issued by August
2008:
· Open Season
o Concluded 24 months after AGIA License
issuance -July 2010
· FERC Application
o FERC pre-filing by April 2011
o FERC Certificate application by October 2012
· FERC Approval
o CPCN [Certificate of Public Convenience and
Necessity] by Q2 2014
· In-service
o September 2018
MR. PALMER emphasized the changghes that had to be made
because TransCanada had originally assumed a license date of
April 2008.
3:52:45 PM
REPRESENTATIVE SAMUELS asked if there would be any problems
with the timing of the application.
COMMISSIONER GALVIN pointed out that the statute does
contemplate changes in the schedule that are based on things
out of TransCanada's control. There was a discussion about
the details of timing.
3:55:00 PM
REPRESENTATIVE DOOGAN commented that the administration had
a schedule that included an in-service date later than that
being proposed.
MR. PALMER stated that the administration thought
TransCanada's schedule was aggressive, but workable. He
hoped to achieve the proposed schedule.
COMMISSIONER GALVIN stressed the differences in purpose
between the two schedules. Applicants were asked to put
together a project plan with point specific estimates. The
analysis attempted to allow each variable to slide along a
probable continuum to determine the 50 percent likelihood to
address all variables. The technical team assumed neutral
competence of the developer; no extra benefit would be given
to TransCanada because of their expertise.
3:59:06 PM
REPRESENTATIVE GATTO questioned TransCanada's need to use
part of a summer season to do the research work.
MR. PALMER responded that TransCanada already has much of
the information on the Canadian section. The primary field
work required is for the Alaska portion. TransCanada is
therefore significantly impacted by the lack of summer
availability this year.
REPRESENTATIVE GATTO questioned which section needed work.
He thought the section between Prudhoe Bay and Glennallen
project should be an easy one due to an existing pipe.
MR. PALMER agreed that there may be significant information
available on the section of the pipe from Prudhoe Bay, but
the information is not in TransCanada's hands. In addition,
it is a different kind of pipeline. New work needed to be
done.
4:02:21 PM
MR. PALMER showed Slide 15, a pictorial representation of
the project schedule described on the previous slide.
4:02:47 PM
MR. PALMER addressed Slide 16, "Partnership Opportunity":
· TransCanada will offer equity opportunity to
shippers in the initial open season that subscribe
for a threshold volume
· Should improve likelihood of success and
alignment of interest between project sponsors and
shippers
MR. PALMER emphasized that TransCanada aims to provide
opportunity for parties that commit their gas in the initial
open season. TransCanada feels this will increase the
project's likelihood of success.
4:03:30 PM
REPRESENTATIVE FAIRCLOUGH referenced Slide 49 from the
6/5/08 meeting presented by Mr. Dickenson. She described the
discussion on disincentives for producers to join the
TransCanada project. She queried regarding a tax penalty
that producers would have to pay.
MR. PALMER replied that he was not in a position to discuss
the income tax to the state.
COMMISSIONER GALVIN referenced the issue, brought up during
the ACES special session, of the change in the production
tax law to allow the Department of Revenue to look beyond
the usual tariff tax rate. The implication raised by Mr.
Dickenson related to the provision in the context of a new
gas line. If the producers were to participate as an equity
partner, the state would re-adjudicate an entirely new
tariff based on what the state thinks the rate of return
should be. The state would second-guess the actual
regulatory process. For an initial pipeline, it is highly
unlikely that the state would do that.
4:08:15 PM
REPRESENTATIVE FAIRCLOUGH stated that what was specifically
in the consultant's report was under new AS.43.55.150(a).
The statute addresses shippers affiliated with a
transportation carrier, or with persons that own an interest
in the transportation facility. Mr. Dickenson had challenged
that there may be disincentive for the producers to
participate because they would be taxed at a higher rate.
She asked for the legal ramifications.
CHAIR SENATOR HUGGINS asked that Commissioner Galvin provide
that information.
COMMISSIONER GALVIN said that opinion would be provided.
4:09:11 PM
MR. PALMER reviewed Slide 17, "Upstream Fiscal Terms":
· TransCanada's AGIA obligations are not
conditional on a review of Alaska's upstream
fiscal terms.
· TransCanada acknowledges that this issue is
between the state and natural gas producers.
· TransCanada requests that the state review
upstream terms for natural gas prior to the
initial open season.
4:09:44 PM
MR. PALMER discussed Slide 18, "Other Project Components":
· Within Alberta
o Foothills will construct necessary additional
facilities to integrate with TransCanada's
existing pipeline system in Alberta and
connect to the pre build under the NPA
· NGL Extraction
o TransCanada can accommodate NGL extraction in
Alaska or downstream
o TransCanada's Alberta system is straddled by
three NGL complexes owned by third parties
o Excess capacity expected at those plants
sufficient to process Alaskan gas if Shippers
so choose
MR. PALMER emphasized that TransCanada would construct
whatever facilities are necessary from Boundary Lake into
the pre-build. That is where the most variability is likely
to be in the construction; TransCanada anticipates that to
cost more than $1 billion, dependent on the situation with
Alberta supply and demand. If Alberta supply is lower or
demand is higher, it would affect how many facilities had to
be built, which would affect costs.
MR. PALMER stressed that TransCanada does not own NGL
extraction facilities. TransCanada is a transporter and will
move gas. The owners and shippers of the gas have to decide
whether they will remove the liquids within the state, fewer
BTUs will move down the pipe, raising tolls. The Alberta
system is straddled by very large NGL complexes owned by
third parties. They have excess capacity, or are expected to
have more going forward. TransCanada expects that those
parties will vigorously compete for the business.
4:12:03 PM
CHAIR SENATOR HUGGINS asked the names of the parties that
own the complexes.
MR. PALMER recalled that BP (formally British Petroleum) is
a large owner. He believed Inter Pipeline Fund was a second
company.
SENATOR HOFFMAN asked about the extraction indicated on
Slide 18. He wanted to know if it included downstream
extraction of propane.
MR. PALMER replied that the provision was included, although
TransCanada has not contemplated providing that service.
TransCanada believes the service should be provided by a
third party in the event that liquids are removed from the
gas upstream of Alberta. TransCanada will move the gas
provided to them, as long as it meets a certain minimum BTU
level, generally around 1000 BTUs. He noted that there had
been interesting work done by third parties for Alaska
Natural Gas Development Authority (ANGDA) several years ago
about those prospects. He recommended comments regarding the
topic be directed to [Harold] Heinze at ANGDA.
4:14:20 PM
MR. PALMER briefly addressed Slide 19, a continuation of
Slide 18, "Other Project Components":
· Fort Nelson Option
o TransCanada is exploring options to move its
Alberta system receipt point upstream of
Boundary Lake to Fort Nelson, BC
o If successful, this would provide toll
savings for Alaska Shippers of $US 0.13-
0.18/mmBTU
· LNG Alternative
o TransCanada is willing to offer gas treatment
and transportation services from Prudhoe Bay
to an LNG terminal should insufficient gas be
committed through Canada or via a Y-line
4:14:42 PM
MR. PALMER spoke to Slide 20, "Regulatory Structure":
· Alaska
o TransCanada Alaska Company, LLC will proceed
under Alaska Natural Gas Pipeline Act of
2004 (ANGPA)
· Canada
o Foothills Pipe Lines Ltd. will proceed under
the Northern Pipeline Act (NPA)
· Canada/U.S.A. Treaty
o The pipeline will follow the route set out
in the Treaty and the NPA
MR. PALMER said that TransCanada, the entity that has made
the application, would proceed under ANGPA on the Alaskan
side. Foothills Pipe Lines Ltd. would operate on the
Canadian side under NPA.
4:14:57 PM
MR. PALMER addressed Slide 21, emphasizing that Alaska-
TransCanada Alaska Company, LLC was never a partner in the
original Alaska partnership with Alaska Northwest Natural
Gas Transportation Company (ANNGTC), and owes no obligation
to ANNGTC or withdrawn partners. TransCanada intends to have
a complete new start in Alaska. He referred to earlier
questions by Representative Gatto about field work, which
will be primarily in Alaska. TransCanada will develop
entirely new assets for the project; it has not and will not
utilize any ANNGTC assets (certificate, Right-of-Way, 404
permits, engineering, geotechnical, etc.). As an additional
safeguard TransCanada has committed to never including any
potential ANNGTC liability in AGIA project tolls.
4:16:11 PM
MR. PALMER, highlighting Slides 22-23, "ANNGTC," stressed
that the ANNGTC partnership was certificated by FERC thirty
years ago under the original legislation, the Alaska Natural
Gas Transportation Act (ANGTA), to construct the Alaskan
section of a North Slope pipeline project only. Prior to the
AGIA deadline for submitting applications, the ANNGTC
partnership considered whether it could, or should, submit
an application for the AGIA License. ANNGTC holds some
assets, the old engineering and geotechnical work, and some
regulatory authorizations. However, it also has significant
contingent liabilities precluding a viable proposal.
Accordingly, ANNGTC did not make an AGIA application, and
has played no role in the AGIA application filed by the
TransCanada AGIA co-applicants.
4:17:30 PM
MR. PALMER asserted that the partnership agreement for
ANNGTC has no non-compete clause, and there is no implied
duty to refrain from competing. The withdrawn partners
forfeited any right to be treated as a partner when they
withdrew from ANNGTC. They have no right to anything unless
ANNGTC builds the pipeline, which it cannot do. They were
entitled only to contractual right to payment if and when
ANNGTC builds the pipeline, and if payment would not pose
undue hardship on ANNGTC.
MR. PALMER argued that previous statements are not correct
regarding a current liability of $10 billion. That is a
contingent liability only occurring if the entity completes
the project, puts it into service, and can make the payment
without undue hardship on that partnership. He added that
the partnership agreement specifically provides that no
other remedy is available. The two remaining ANNGTC partners
intend to formally dissolve the ANNGTC partnership and
dispose of all of its assets because it is no longer a
viable enterprise. TransCanada has undertaken discussions
with federal regulatory bodies to start that process.
4:18:54 PM
MR. PALMER summarized, referring to Slide 24, "ANNGTC
Summary":
· TransCanada's AGIA Application has nothing to do
with ANNGTC, its long history or its contingent
obligations to Withdrawn Partners;
· No claim has ever been made or even threatened by
Withdrawn Partners;
· Additional safeguard - TransCanada's AGIA
Application commits to never including any
potential ANNGTC liability in AGIA project tolls;
and
· Any claims against third parties would also fail
because third parties played no role in the
TransCanada Partners' decision that the ANNGTC
Partnership is no longer viable.
4:19:36 PM
MR. PALMER turned to Slide 25, "Canada - Foothills Pipe
Lines Ltd.":
· Foothills Pipe Lines Ltd. was certificated under
Canada's Northern Pipeline Act for the section of
pipeline in Canada
· Foothills is an entirely separate entity from
ANNGTC
· No Withdrawn Partner issues in Canada
· Foothills has no potential future contingent
liability
· ANNGTC does not hold any authorizations under the
Northern Pipeline Act or otherwise for any
facilities in Canada
· Foothills Pipe Lines Ltd. does not hold any
authorizations for facilities in the U.S. under
ANGTA
4:20:28 PM
REPRESENTATIVE BOB ROSES mentioned an application before
the regulatory agency to dissolve the ANNGTC partnership and
disperse assets, and asked if it could be denied.
MR. PALMER indicated that there have been discussions
regarding turning back some of the federal assets held, like
the right-of-way, but TransCanada would not be making an
application to those federal agencies to dissolve the
partnership. That is something TransCanada would do on its
own.
REPRESENTATIVE ROSES asked if the request could be denied.
MR. PALMER did not think that would happen. He offered to
look into that concern. He said the issue was the right-of-
way and the certificate granted to ANNGTC by FERC.
4:22:20 PM
REPRESENTATIVE GARA acknowledged that he was not qualified
to make a judgment regarding the case. He asked the
determination of Commissioner Galvin. He also asked if any
of the other partners came to TransCanada and offered help
in bidding on the project.
COMMISSIONER GALVIN replied that the concern was taken
seriously. There were comments raised in correspondence with
the North Slope producers, ConocoPhillips in particular, who
identified their own legal opinions. They allowed the
state's legal counsel to discuss the issue with their legal
counsel.
COMMISSIONER GALVIN reported that the state looked at the
issue from two vantage points. First, the question of
whether there was a liability and risk that would affect the
rate base and transferred on to shippers and ultimately the
economic viability of the project. That question was
answered conclusively: there is no risk.
COMMISSIONER GAVIN said that the second question related to
TransCanada as a potential partner for Alaska, particularly
given the potential for a shipper to join as an equity
partner. There is also the question of TransCanada's ability
to get financing for the project if they were going into it
as the sole proponent. The state sought legal advice both
from FERC and from other corporate and litigation counsel
from the vantage point of the transactional perspective and
the risk assessment. The state also received input from
Goldman Sachs as a financial advisor, who brought in their
own counsel. The advice the state received was that it
should not be a barrier for participation in the project and
should not result in a hindrance to financing the project.
Based on that advice, the administration is very confident
that they could move forward in recommending the project.
4:27:38 PM
MR. PALMER added that TransCanada was not approached by any
of the withdrawn partners to join the AGIA application.
TransCanada has had on-going discussions for many years with
a number of parties about potential alignment for the
project. LB & A sent specific notification to each of the
withdrawn partners about the proposals of TransCanada and
none of them have come to TransCanada and said they wanted
to be a partner on the project.
REPRESENTATIVE WILSON asked if any of the permitting
certificates from FERC that would be turned back were
necessary for TransCanada to go ahead with the project.
MR. PALMER acknowledged that that federal right-of-way for
federal lands, FERC, and other permits that are held by
ANNGTC will be required by TransCanada. However, those will
be sought independently with no reliance on ANNGTC or its
assets.
REPRESENTATIVE WILSON asked if TransCanada anticipated any
problems during that process.
MR. PALMER responded that they did not anticipate any
problems. For the Alaska component of the project, the
process would start from scratch.
4:30:28 PM
REPRESENTATIVE KURT OLSON asked for verification regarding
Goldman Sachs' indication the contingent liability would not
go above $250 million dollars.
MR. PALMER recalled that the $250 million dollars was the
original monies expended by those partners, including
TransCanada subsidiaries (not the AGIA applicant). That was
the original money expended in the late 1970s and early
1980s. He recalled that there would be no Allowance for
Funds Used During Construction (AFUDC), no cost of money
allowable. The cost of money at 14 percent per year
compounded is how $250 million becomes a large amount like
$10 billion today.
COMMISSIONER GALVIN interjected that even though the risk
of success of a claim is miniscule from any legal vantage
point, when coupled with the fact that the potential payoff
is so huge, people don't want to participate. When the
issues are broken down, however, the potential liability is
capped.
[SB 3001 and HB 3001 were held in committee.]
ADJOURNMENT
The meeting was adjourned at 4:33:35 PM.
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