Legislature(2007 - 2008)SENATE FINANCE 532
02/22/2007 09:00 AM Senate FINANCE
| Audio | Topic |
|---|---|
| Start | |
| SB61 | |
| SB82 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| *+ | SB 61 | TELECONFERENCED | |
| *+ | SB 82 | TELECONFERENCED | |
| *+ | SB 83 | TELECONFERENCED | |
MINUTES
SENATE FINANCE COMMITTEE
February 22, 2007
9:03 a.m.
CALL TO ORDER
Co-Chair Lyman Hoffman convened the meeting at approximately
9:03:03 AM.
PRESENT
Senator Lyman Hoffman, Co-Chair
Senator Bert Stedman, Co-Chair
Senator Charlie Huggins, Vice Chair
Senator Kim Elton
Senator Donny Olson
Senator Joe Thomas
Senator Fred Dyson
Also Attending: KAREN REHFELD, Director, Office of Management
and Budget, Office of the Governor; MIKE BARNHILL, Assistant
Attorney General, Labor and State Affairs Section, Civil
Division, Department of Law; JIM MERRINER, Chief of Staff,
Office of the Lieutenant Governor; LARRY OSTROVSKY, Chief
Assistant Attorney General, Statewide Section Supervisor, Oil,
Gas and Mining Section, Civil Division, Department of Law; NICO
BUS, Director, Division of Support Services, Department of
Natural Resources; JERRY BURNETT, Director, Administrative
Services Division, Department of Revenue; ERIC SWANSON.
Director, Division of Administrative Services, Department of
Administration;
Attending via Teleconference: From an offnet location: KEVIN
BANKS, Acting Director, Division of Oil and Gas, Department of
Natural Resources.
SUMMARY INFORMATION
SB 61 -SUPPLEMENTAL APPROPRIATIONS
The Committee heard from the Office of Management and Budget,
the Department of Law and the Office of the Lieutenant Governor.
The bill was held in Committee.
SB 82 -SUPPLEMENTAL APPROPRIATIONS: OIL & GAS
The Committee heard from the Office of Management and Budget,
the Department of Law, the Department of Natural Resources, the
Department of Revenue and the Department of Administration. The
bill was held in Committee.
SB 83 -SUPPLEMENTAL APPROPRIATIONS
This bill was scheduled but not heard.
9:04:42 AM
Co-Chair Hoffman directed attention to materials providing
additional information on the supplemental appropriation
requests [copies on file.]
9:05:26 AM
Co-Chair Hoffman noted that Karen Rehfeld, Director, Office of
Management and Budget and David Teal, Director, Division of
Legislative Finance, would update the Committee on the history
of oil and gas matters.
9:06:21 AM
SENATE BILL NO. 61
"An Act making appropriations for qualified regional
seafood development associations, for investigation and
litigation relating to the public employees' retirement
system and the teachers' retirement system, and for a
special advisory election; and providing for an effective
date."
This was the first hearing for this bill in the Senate Finance
Committee.
9:07:31 AM
KAREN REHFELD, Director, Office of Management and Budget, Office
of the Governor, introduced the legislation. She noted the total
appropriation request was $13,156,300, of which $1,156,300 was
general funds and $12 million was other funds.
Ms. Rehfeld informed that the original submission of the bill
had been amended. One amendment changed an effective date to
allow the Department of Law, Civil Division, Labor and State
Affairs section to pay outstanding investigation invoices for
services rendered in October 2006.
9:07:55 AM
Department of Commerce, Community and Economic Development
Section: 1
Department: Commerce
Results Delivery Unit (RDU) or Component: Office of
Economic Development
Supplemental Need: Regional Seafood Development Tax pass-
through to the Copper River/Prince William Sound Marketing
Association. This appropriation was inadvertently omitted
from the FY 07 budget bills. The 1% tax assessment
generated $152,464 during calendar year 2005, which was to
be appropriated to the association as of July 1, 2006.
Legislative Finance Division (LFD) Notes: The Department
informed Leg. Finance about this problem in August, 2006.
The Department is using Fisheries Revitalization funding to
fill the gap until this tax can be appropriated.
$0
Ms. Rehfeld overviewed this item.
9:08:40 AM
Department of Law
Section: 2(a) - (b)
Department: Law
RDU or Component: Civil Division, Labor and State Affairs
Supplemental Need: Funding for the investigation and
proposed litigation related to actuarial services received
by the State of Alaska. The investigation would be
completed during FY 07. The amount of the appropriations is
the estimated cost to complete the investigation and take
the case from inception through trial.
Amendment Date: 2/16/07
Amendment No.: ES Law A
Amendment Explanation: Revise the funding split in sec. 2
to be in accordance with the Division of Retirement and
Benefit's cost allocation plan and thus reflect:
72% PERS, and increase of $369,000 to $8,640,000, and
28% TRS, a decrease of $369,000 to $3,360,000
LFD Notes: It is unclear how long the litigation is
expected to continue, but this funding is available for the
life of the project. The Department of Law believes there
is sufficient evidence of gross negligence to warrant
pursuing the case. There is no guarantee that the state
will receive any compensation if the state prevails.
Funding is requested to cover current attorney fees.
$8,271,000 PERS
$3,729,000 TRS
$12,000,000 Total Funds
Ms. Rehfeld reviewed this request.
9:09:23 AM
Co-Chair Hoffman asked if $100,000 was appropriated for this
effort in FY 07.
9:09:31 AM
Ms. Rehfeld responded that approximately $400,000 was
appropriated to "begin an investigation" and this supplemental
request was for funding to complete the investigation. The total
cost of the investigation was estimated to be $850,000. The
remainder of the supplemental appropriation would be expended to
"proceed with litigation."
9:09:51 AM
Co-Chair Hoffman asked if the funding were appropriated in this
legislation, when the Department of Law would proceed with the
lawsuit.
9:10:05 AM
MIKE BARNHILL, Assistant Attorney General, Labor and State
Affairs Section, Civil Division, Department of Law, testified
that once the funds were received, the Department would file the
lawsuit.
9:10:37 AM
Co-Chair Hoffman asked what options other than the calculation
of an hourly fee, had been considered in estimating the cost of
this undertaking.
9:10:49 AM
Mr. Barnhill had considered utilizing a contingency fee as well
as the cost to the State as measurements of the estimated cost
and had determined that an hourly fee method would generate the
best return for the State.
9:11:10 AM
Co-Chair Hoffman asked whether the Alaska Retirement Board (ARM)
supported this litigation effort.
9:11:20 AM
Mr. Barnhill affirmed the Board was in support, noting a
resolution indicating such [copy on file].
9:11:29 AM
Senator Thomas asked if an anticipated recovery amount had been
estimated.
9:11:55 AM
Mr. Barnhill replied that such an amount had been projected.
However, because the compliant had yet to be filed, the amount
should only be disclosed to the Committee in the confines of an
executive session.
9:12:22 AM
Senator Thomas asked if the basis of the case would be errors or
omissions on the part of the actuarial contractor.
9:12:37 AM
Mr. Barnhill affirmed that the Department has researched the
situation extensively. He again declined to divulge further
detail, as it would be a more appropriate discussion held in an
executive session.
9:12:59 AM
Co-Chair Hoffman announced his intent to convene an executive
session in the future to receive a detailed overview on the
situation. The issue was significant and had the potential to
generate "several million dollars" for the State.
9:13:21 AM
Co-Chair Stedman surmised the $12 million requested would fund
the process through obtainment of a trial date and that an
additional appropriation would be requested to fund the actual
trial expenses.
9:13:48 AM
Mr. Barnhill corrected that $12 million was the anticipated
total cost, including a trial and any appeal. He could not
guarantee the amount would be accurate, but assured it was the
Department's best estimate.
9:14:14 AM
Senator Elton noted that the $850,000 cost of the investigation
portion of this effort had not been detailed. He asked whether
the investigation was complete.
9:14:38 AM
Mr. Barnhill responded that "for all intents and purposes" the
investigation was complete and that $850,000 was the accurate
cost.
9:15:02 AM
Senator Olson spoke to the process involved in lawsuits, noting
that the case would not reach trial for one to two years. He
therefore questioned the need to provide these funds as a FY 07
supplemental appropriation.
9:15:36 AM
Mr. Barnhill explained that the funding was requested before FY
08 to allow the Department to "get started now". The
investigation was complete and the Department entered into a
"tolling agreement" with Mercer Consulting last summer, which
was anticipated to expire March 8, 2007.
9:16:04 AM
Co-Chair Hoffman contended that the State was ultimately
responsible for funding the $8 to $10 billion unfunded
liability. In retrospect the original employer contribution
rates were too low and should have been higher. He asked why the
Department of Law "feels" that the State had a "strong case"
sufficient to justify a $12 million expenditure.
9:17:12 AM
Mr. Barnhill reiterated the due to the nature of the claims he
would defer his response until the executive session was
convened.
Mr. Barnhill did share that in the investigation process, the
Department contracted with other actuaries and a law firm with
experience in this area. After review of the situation between
the State and Mercer Consulting, these consultants concluded
that the State has "good claims" for actuarial malpractice. This
is consistent with the State's and the ARM Board's fiduciary
duty to pursue these claims.
9:18:03 AM
Co-Chair Hoffman asked the "track record" of other companies'
suits against actuaries.
9:18:20 AM
Mr. Barnhill answered that approximately six cases have occurred
involving a pension fund claim of actuarial malpractice against
an actuarial. The outcome of these cases was "mixed". Mercer
Consulting had been sued by a company and the judge issued an
award of $3 million against a claim of $23 million. Los Angeles
County filed a claim for $2 million against an actuary, which
was settled for a confidential amount. A claim by the State of
Texas was dismissed on summary judgment and is now being
appealed. However, instances of success exist. The firm
contracted by the Department has had "great success" and
therefore "we think we'll have great success".
9:20:26 AM
Office of the Governor
Section: 3
Department: Governor
RDU or Component: Elections
Supplemental Need: Funding for the costs associated with
the April 3, 2007, special advisory election required by
ch. 1, FSSLA 2006, on the subject of employment benefits
for same-sex partners of public employees and retirees.
LFD Notes: Although a fiscal note identified costs
associated with this election, the note never became an
appropriation; this request does not provide duplicate
funding.
$1,156,300 General Funds
Ms. Rehfeld explained this item pertains to costs associated
with the scheduled statewide election. The Division of Elections
had begun efforts and had obligated funds.
9:21:17 AM
Senator Elton asked the amount spent to date.
9:21:27 AM
JIM MERRINER, Chief of Staff, Office of the Lieutenant Governor,
testified that $228,000 had been obligated to date.
9:21:47 AM
Senator Dyson understood that some absentee ballots had been
mailed to voters. He asked the cost to stop the election process
were this appropriation request not funded.
9:22:12 AM
Mr. Merriner answered, "Like I said, from what I understand, and
I have the documentation here, it appears that $228,000 had been
obligated to date. In other words, by April 3rd, $228,000 have
already been obligated in terms of printing and so if for some
reason this supplemental was not to pass, we would have $228,000
that the Elections would have to somehow come up with that
money."
9:22:56 AM
Senator Dyson repeated his question that, if the election were
cancelled, what would be the cost to mail notices to those who
were mailed absentee ballots to disregard the ballots.
9:23:22 AM
Mr. Merriner did not have an estimate.
9:23:28 AM
Senator Dyson asked if any ballots had actually been mailed.
9:23:33 AM
Mr. Merriner responded that ballots had been printed, but he was
unsure whether any absentee ballots had been mailed to voters.
9:23:44 AM
Co-Chair Hoffman asked if the election could only be cancelled
through the passage of legislation; the election would still be
held even if funding were not allocated.
9:24:11 AM
Ms. Rehfeld affirmed that without a change in statue, the
Division would be required to continue with the election. The
Department of Law has advised the Division on the actions
necessary to conduct this election.
9:24:42 AM
Co-Chair Hoffman clarified that the only way the election could
be canceled would be to pass legislation before the date of the
election.
9:24:55 AM
Ms. Rehfeld shared this understanding.
9:24:59 AM
Mr. Merriner furthered that if the appropriation were not made,
the Division would still incur costs, including the hiring of
poll workers. However, the Division would be unable to pay the
vendors and poll workers, ensuing in lawsuits for payment.
9:25:55 AM
Ms. Rehfeld then noted that Sections 4 through 7 pertain to
Lapse Provisions, Retroactivity, and Effective Date.
9:26:16 AM
Co-Chair Hoffman established that the Committee had no questions
on these items.
Co-Chair Hoffman ordered the bill HELD in Committee.
9:26:24 AM
SENATE BILL NO. 82
"An Act making supplemental appropriations and other
appropriations; amending the lapse dates of certain
appropriations; and providing for an effective date."
This was the first hearing for this bill in the Senate Finance
Committee.
9:26:29 AM
Ms. Rehfeld stated that the total appropriation request in this
legislation was $33,071,700, all of which is general funds. The
intent was to assist efforts to construct a natural gas
pipeline, get natural gas to market and address other oil-
related issues.
9:27:27 AM
Department of Law
Section: 1
Department: Law
Results Delivery Unit (RDU) or Component: Capital - Oil,
Gas & Mining
Supplemental Need: Work related to the state gas pipeline
and bringing North Slope natural gas to market, and other
oil and gas projects. The Department of Law's Oil, Gas &
Mining section continues to play a major role in the
State's top priority project related to the construction of
a gas pipeline and bringing natural gas to market. A number
of contracts with outside counsel and experts are underway
and will continue to be needed as negotiations continue. In
addition the Department of Law anticipates the Exxon
Royalty Reopener will go to trial in either FY 07 or FY 08
and continues to prepare for a four to five week hearing
before the Federal Energy Regulation Committee (FERC)
considering (in part) the state's and Anadarko's challenges
to the TransAlaska Pipeline Service (TAPS) 2005 FERC
tariff.
Legislative Finance Division (LFD) Notes: Anticipated
expenditures: FY 07: $8,700,000; FY 08: $12,800,000
$21,500,000 General Funds
LARRY OSTROVSKY, Chief Assistant Attorney General, Statewide
Section Supervisor, Oil, Gas and Mining Section, Civil Division,
Department of Law, testified that he would "put this request
from the Oil, Gas and Mining Section into some context", given
the significant amount. The appropriation was "divided between"
approximately $9 million for expenditure in FY 07 and
approximately $12.8 million for expenditure in FY 08. He
explained, "The reason we rolled these together is because we
tend to look at lawsuits not in terms of fiscal years, but in
terms of the life of a suit. So we looked at the year ahead,
especially since it's February already."
Mr. Ostrovsky spoke to the decision to submit the request as a
supplemental appropriation rather than included in the FY 08
budget. He divided the Oil, Gas and Mining Section into two
categories; litigation and non-litigation, the second of which
he defined as "gasline".
9:29:29 AM
Mr. Ostrovsky stressed that the natural gas pipeline project was
the highest priority of the Murkowski Administration, and was
likely the highest priority of the Palin Administration as well.
Combined in FY 06 and FY 07, almost $10.5 million was expended
on this effort. This amount was more than anticipated during the
drafting of the regular budget proposals. It was expected that a
contract would be agreed upon with producers by January 2006 and
that the Legislature would approve that contract during that
legislative session. Instead, the contract was not released
until May, two special sessions were held and the contract was
still not approved.
9:30:43 AM
Mr. Ostrovsky informed that 90 percent of the Section's efforts
were spent on activities not related to the natural gas
pipeline, but rather on litigation and providing advice to State
agencies. In FY 06 and FY 07, the Division expended $8.89
million for outside council. The recovery from that expenditure
was over $92 million; a "better than ten-to-one ratio." This
ratio was "historically typical". He knew of no case that the
Division prosecuted in which the State had not recovered the
fees invested as well as "quite a bit more." This was not
"necessarily because we're the world's greatest lawyers," but
because the State only pursues those cases in which it
determines to have the strongest evidence to support a favorable
verdict, such as payments owed by taxpayers, royalty owed by a
lease holder, or issues pertaining to pipeline tariff.
9:32:08 AM
Mr. Ostrovsky identified the Trans Alaska Pipeline System (TAPS)
tariff as requiring the largest portion of the requested
appropriation, with the exception of the natural gas pipeline
efforts. A proceeding was currently before the Federal Energy
Regulatory Commission (FERC). A hearing lasting two and one-half
months recently concluded in Washington D.C. and the matter was
"in the post hearing briefing."
Mr. Ostrovsky remarked that this case had "enormous consequences
to the State." Three years ago, the Regulatory Commission of
Alaska (RCA) determined that the "just and reasonable" tariff on
oil transported through TAPS for in-state use was approximately
$1.96 per barrel.
9:33:07 AM
Mr. Ostrovsky stated that the TAPS owners "filed with the FERC
for a tariff" for 2005 "and going forward a tariff north of
$5.00". This was the same "barrels of oil traveling through the
same pipeline" with a tariff of $1.96 for intrastate-bound oil
and over $5 for interstate-bound oil. The State's royalties and
taxes were "based on a net back". He described this as follows.
"You look at a barrel of oil - you back out the transportation
costs."
Mr. Ostrovsky explained, "Where the two sides are now, between
$5 and $1.96, has an impact we estimate in taxes and royalties
of almost $100 million a year through the life of TAPS"
according to the provisions of the TAPS settlement agreement.
The agreement could "end as soon as 2009 or continue to 2011".
Mr. Ostrovsky reiterated, "This is a case with large stakes",
and noted that "big cases such as this tend to be very expensive
cases" due to higher rates for attorneys with experience before
the FERC. The Department estimated approximately $2.5 million
would be expended on this case in the current year and
approximately $1.3 million on this case "and some other tariff
related cases" in the following year.
Mr. Ostrovsky informed that the TAPS owners "did a strategic
reconfiguration" of the TAPS "line", which had "exceeded costs
by hundreds of millions of dollars", which may not be "prudently
incurred costs." Those costs not prudently incurred should not
be "rolled into the rate base."
Mr. Ostrovsky then told of several corporate income tax cases.
He was unable to discuss the details of these cases in a public
session because the name of the taxpayer must be kept
confidential. These cases were "worth many many millions of
dollars" and due the size and nature of the cases, which were
"document intensive", are also expensive to pursue. The
taxpayers are international corporations and the process of
determining the income subject to Alaskan taxes is extensive.
Mr. Ostrovsky gave an example of a case in which the first set
of materials received in the discovery process contained over
200,000 documents. He predicted that the State would receive
"many many times this" before the case was complete.
Mr. Ostrovsky reported that the Department was also involved in
"a number of royalty matters that probably won't be that
expensive" and would likely be handled in arbitration. Royalty
matters were addressed almost every year and subjected to
arbitration. Approximately $1.5 million had been expended on
these matters involving outside counsel in the past year with a
return to the State of over $23 million. Of the cases handled
internally, the Department had recovered approximately $44
million.
9:36:43 AM
Mr. Ostrovsky admitted that expenses were underestimated for the
Point Thomson litigation. He originally projected the cost at
approximately $1 million because it was expected to be addressed
as an administrative appeal. Administrative appeals "tend to be
easier cases to handle because there's a finite record …
briefing and oral argument in front of the court". The expenses
of discovery and trial preparation are not incurred. However,
"that case has morphed into something far larger" and currently
involve five lawsuits. Exxon Mobil, Chevron, Conoco Phillips and
BP filed appeals, each in separate cases. Additionally, Exxon
Mobile filed an "original action for breach of contract to the
Point Thomson Unit Agreement" and was requesting damages.
Outside counsel would be employed for these cases, some of which
have been consolidated. These cases would be "very expensive to
manage."
9:38:23 AM
Mr. Ostrovsky stated that efforts related to the proposed
natural gas pipeline project would also require funding. He had
anticipated expenditures for the previous year to be $500,000
per month, an amount precipitated by the use of "$500 per hour
lawyers". The continuation of this level of expenditure would be
dependant upon Governor Palin's "approach". The approach taken
by former Governor Murkowski was "very very lawyer intensive"
involving "many many months of negotiations." The Governor's
office had "controlled the pace and scope of things" through
"meeting law" with many qualified attorneys spending
considerable time in Juneau and Anchorage "a lot of times sort
of waiting for things to happen."
Mr. Ostrovsky noted that the current Administration had
indicated a different approach. The Department of Law had been
given more control over budgetary items, including costs related
to the natural gas pipeline project. A new firm had been engaged
to assist the Department in addition to Morse and Forrester, a
firm used by the State for 35 years. A third firm, based in
Washington D.C., had represented the Alaska Legislature and had
also been hired by the Department.
9:40:20 AM
Mr. Ostrovsky reported that "almost nothing", which he defined
as "the few hundreds of thousands" of dollars had been spent on
the natural gas pipeline project effort during the months of
December 2006 and January 2007, while the Palin Administration
was being established. However, if a gas pipeline agreement was
passed, significant work would be required to progress the
matter through the FERC process. This process would "define the
scope and the tariffs and this and that."
9:41:19 AM
Mr. Ostrovsky totaled the aspects of his comments as
justification of his request of $8.75 million for FY 07 and
$12.8 million for FY 08. Approximately $500,000 per month would
be expended on natural gas pipeline efforts and the remainder
would be expended on litigation matters.
9:41:37 AM
Mr. Ostrovsky remarked that a "perfect storm of important
matters - matters that are really significant to the State
treasury at this time" has occurred.
9:41:47 AM
Co-Chair Hoffman commented on the large amount of this proposed
appropriation. He requested a detailed accounting of
expenditures intended for FY 07 and those anticipated for FY 08,
as well as projected expenditures on the matter before FERC
regarding justification of a $5 per barrel tariff and
expenditures relating to the proposed natural gas pipeline.
9:42:42 AM
Co-Chair Hoffman asked the witness's opinion of whether the
decrease in the amount of oil transported through the TAPS was
the justification of the increased tariff.
9:43:07 AM
Mr. Ostrovsky deferred to the Assistant Attorney General
assigned to this case to provide details. He agreed that, as the
flow decreases in the pipeline, the cost per barrel increases.
Conversely, this was balanced against depreciated assets, which
were also countered with new investment in the pipeline. The RCA
had considered all these factors, in addition to "a reasonable
rate of return" to the TAPS owners, to determine the $1.96 per
barrel rate. The TAPS owners subsequently requested "more for
interstate" transport. The State argued based on the "Interstate
Commerce Clause", that discrimination should not be allowed
between interstate and intrastate "barrels" and requested that
FERC utilize the RCA methodology for determining a reasonable
rate of return. However, the TAPS owners argue in support of
"exactly the opposite" solution, which would require the FERC to
increase its tariff to match the RCA tariff.
9:44:44 AM
Co-Chair Hoffman asked whether, given the significance of the
FERC determination, it would set a precedence of increased
tariffs as production on the North Slope continues to decline.
9:45:06 AM
Mr. Ostrovsky affirmed. The tariff methodology was "one of the
most significant fiscal issues facing us because the dollars are
so large."
9:45:28 AM
Co-Chair Hoffman asked if production was currently approximately
fifty percent of peak production.
9:45:34 AM
Mr. Ostrovsky guessed the peak flow was approximately two
million barrels per day and the current rate was approximately
800,000 barrels per day.
9:45:40 AM
Co-Chair Hoffman asked the history of tariffs at peak production
compared to the current FERC-recommended tariff of over $5 per
barrel.
9:45:53 AM
Mr. Ostrovsky deferred to Philip Reeves, the attorney handling
this matter. Mr. Reeves could provide a written or oral history
of the TAPS Settlement Agreement, which established the rates,
as well as information related to the current matter. Litigation
began on the rate system "almost as soon as the TAPS line was
built" and was resolved after "many years", addressing tariff
depreciation, cost per barrel allowances, and other relevant
matters. The settlement agreement was open to renegotiation
starting in 2007. The State could vacate that agreement two
years after providing notice and "attempting" to renegotiate its
provisions. The State provided such notice on January 1. He
anticipated that the State would enter into negotiations with
the TAPS owners to attempt to reduce tariffs. However, this
process was awaiting the outcome of the current litigation.
9:47:32 AM
Co-Chair Hoffman requested Mr. Reeves' information be submitted
in written form to the Committee.
9:47:44 AM
Senator Thomas, referencing testimony taken by the Senate
Resources Committee from industry representatives, asked if the
State had reserved adequate funding for litigation relating to
PPT.
9:48:07 AM
Mr. Ostrovsky was unsure. More information would be available
after the first tax payments were made and after the Department
of Revenue has reviewed the filings.
9:48:33 AM
Senator Thomas requested additional explanation of the cost
overruns of the TAPS litigation. He understood the process was
not completed.
9:48:53 AM
Mr. Ostrovsky replied that the project was originally budgeted
at approximately $250 million. An updated estimate of over $450
million was issued last year and the cost had increased since.
Factors included parts that were ordered with incorrect
specifications. Normal care and diligence in engineering and
design would prevent some of the expenditures.
9:49:37 AM
Senator Thomas asked the success rate of related litigation in
the past 30 years.
9:49:54 AM
Mr. Ostrovsky shared his experience of the last year and one-
half of a success ratio of ten to one. He recalled prior success
as "very substantial". Industry representatives claim that such
success "leads to a climate of uncertainty" because retroactive
payments were required. However, the Department considers its
duty to "hold people to their obligations". Asserting the
State's rights and requiring parties to fulfill their
obligations does not create such a climate of uncertainty.
Rather, the climate of uncertainty is created when a party pays
less then what is owed.
9:51:23 AM
Department of Natural Resources
Section: 2(a)
Department: Natural Resources
RDU or Component: Capital
Supplemental Need: Gas Pipeline Analysis
Outside experts and consultants will be retained for
work related to the gas pipeline, including outside
legal counsel and experts on federal pipeline law and
FERC procedures. A consultant to advise the state on
crafting an RFP [request for proposals] consistent
with the Alaska Gasline Inducement Act (AGIA) for
gasline proposals and with analyzing those proposals
under AGIA for gasline proposals and with analyzing
those proposals under AGIA will also be retained.
LFD Notes: RFP Consultant: $4.5 million
FERC Experts and Outside Counsel: $1.25 million
Additional Work Needs: $800,000
$6,550,000 General Funds
NICO BUS, Director, Division of Support Services, Department of
Natural Resources, detailed the request that would be expended
in two fiscal years. Experts would be contracted to address FERC
procedure, tariffs, cost overrun, royalty evaluation,
enforcement, remedies, lease terms and other matters. The
consultant would subcontract many of the activities. Of the
appropriation, $4.135 million would be expended in FY 07 and
$2.4 million would carry forward to FY 08.
9:53:12 AM
Co-Chair Hoffman asked the portion of this appropriation that
would be related to the Governor's proposed Alaska Gasline
Incentive Act.
9:53:29 AM
Mr. Bus responded that the entire appropriation would be
directed toward the effort.
9:53:48 AM
Co-Chair Hoffman asked why the funds were not requested in the
form of a fiscal note accompanying the proposed legislation
rather than as a supplemental appropriation request.
9:53:56 AM
Mr. Bus expressed intent to begin efforts in February, before
the effective date of the proposed legislation.
9:54:17 AM
Senator Elton asked if a system exists to overlap receipt of
services from outside counsel on FERC matters.
9:54:57 AM
Mr. Ostrovsky answered that such oversight is conducted. He
described in detail how the Department of Natural Resources
request included provisions pertaining to legal services and how
other expert services would be billed as subcontract work
through the primary legal services contractor. He told of the
legal advice necessary for drafting the request for proposals in
addition to other types of advice.
9:57:49 AM
Senator Elton recalled serving in the Executive Branch and the
requirement at the time that any outside legal counsel be
secured through the Department of Law.
9:58:15 AM
Mr. Ostrovsky affirmed that the Department of Law hires the
legal counsel. However, experts in other fields are sometimes
billed through legal counsel as subcontractors.
9:59:27 AM
Mr. Bus assured that duplication of services would not occur.
The Department of Natural Resources requires some legal
expertise, which it obtains through the Department of Law.
9:59:53 AM
Co-Chair Hoffman pointed out that $4.5 million was requested for
efforts to ensure that the proposed natural gas pipeline project
be competitive for all applicants. The projected cost of the
project itself had increased to $30 billion and would be one of
the largest construction projects in North America. He
questioned the expenditure of $4.5 million given the
unlikelihood that just one oil company would construct the
pipeline. Instead, a group of producers, such as those involved
in the contract negotiated by the Murkowski Administration,
would likely undertake the project.
10:01:39 AM
Mr. Bus replied that the request for proposals was necessary to
determine the benefit of such activities. If a party other than
the three producers that were involved in the previous pending
contract submitted a "better offer" the $4.5 million would have
been a worthwhile investment.
10:02:04 AM
Co-Chair Hoffman asked if this would apply given the parties
that owned the rights to the gas reserves.
10:02:16 AM
Mr. Bus answered yes.
10:02:22 AM
Section: 2(b)
Department: Natural Resources
RDU or Component: Capital
Supplemental Need: Oil and Gas Lease Litigation
This project will help offset the costs of litigation
arising out of the DNR's exercise of the state's
rights under its leases and the unit agreement (Point
Thomson appeal). This request will help fund the costs
of outside experts and legal counsel.
LFD Notes: The Point Thomson appeals were filed in December
2006, so funding is not included in the current FY 07 or FY
08 budget.
$1,500,000 General Funds
Mr. Bus outlined this request.
10:03:02 AM
Mr. Ostrovsky interjected that he had overviewed this matter in
his earlier statement. The Department of Natural Resources would
employ experts, which would be hired as subcontractors to
outside legal counsel secured by the Department of Law.
10:04:28 AM
Section: 4(a)
Department: Natural Resources
RDU or Component: Gas Pipeline
Supplemental Need: Extend lapse date from June 30, 2007, to
June 30, 2008, for the Bullen Pt. Road right-of-way
permitting multi-year allocation in sec. 7(d)(1), ch. 6,
SLA 2005, pg. 11, as amended by sec. 34(c), ch. 82, SLA
2006, pg. 151. The amount expected to be available is
$100,000. The lapse extension also applies to sec. 7(d)(2)
Division of Oil and Gas Increased Workload, which expects
$150,000 to be available. The lapse extension also applies
to sec. 7(d)(3) Commissioner's Office increased workload.
This allocation is expected to be fully expended by June
30, 2007.
LFD Notes: As of 2/20/07:
Bullen Pt. Road appropriation, original amount =
$2,400,000 and the current balance = $534,000
Oil & Gas Increased Workload appropriation, original
amount = $2,025,000 and the current balance = $776,300
Commissioner's Office. Workload appropriation,
original amount = $150,000 and the current balance =
$86,600
$0
Mr. Bus outlined the four elements of this item.
10:05:46 AM
Co-Chair Hoffman asked the status of the road project and why
the project was behind schedule.
10:05:55 AM
Mr. Bus explained the road would link Point Thomson to the North
Slope road system and must be completed to allow for development
of a natural gas pipeline.
10:06:26 AM
Co-Chair Hoffman again asked why the project was not on
schedule.
10:06:31 AM
Mr. Bus spoke to the lengthy permitting process through the US
Corps of Engineers, and the need to begin the process early to
allow for this project to proceed.
10:06:56 AM
Senator Olson asked the number of employees that would be hired.
10:07:06 AM
Mr. Bus responded that consultants, including surveyors, would
be utilized for the Bullen Point road project. The appropriation
requested for the increased workload of the Office of the
Commissioner would be utilized to continue funding staff
positions within the Commissioner's Office as well as the
Division of Oil and Gas.
10:07:32 AM
Senator Olson asked if all the positions would be located in
Anchorage.
10:07:35 AM
Mr. Bus affirmed.
10:07:37 AM
Senator Olson asked the intended status of the positions
employed to secure the right of way on the Bullen Point Road
once that project was permitted.
10:07:47 AM
Mr. Bus replied that the personnel needs of the Bullen Point
Road permitting process were mostly contracted. Once the
permitting process was complete, the Department of
Transportation and Public Facilities could begin construction of
the road.
10:08:01 AM
Senator Elton asked the location of the proposed road.
10:08:09 AM
Mr. Bus explained that the proposed road would connect Point
Thomson to the Haul Road.
10:08:17 AM
Senator Elton asked if the project should be held until other
issues involving Point Thomson were resolved.
10:08:28 AM
Mr. Bus stressed the need to develop the infrastructure
necessary to develop the resources at Point Thomson. The
reserves at the Point Thomson field were significant and
securing the right of way to the site was a critical aspect of
construction of a natural gas pipeline.
10:08:55 AM
Senator Elton understood but surmised that lease ownership
disputes of the Point Thomson resources were "getting in the
way" of infrastructure development.
10:09:15 AM
Mr. Bus gave an analogy of the unfeasibility of a subdivision
that had no access to it.
10:09:34 AM
Senator Elton asked the length of time to construct the road
once the permits were issued.
10:09:56 AM
Mr. Bus deferred to Mr. Banks.
10:10:04 AM
KEVIN BANKS, Acting Director, Division of Oil and Gas,
Department of Natural Resources, testified via teleconference
from an offnet location to the importance of an access road to
Point Thomson. This field contained one of the largest
concentrations of undeveloped resources in North America and
construction of a road would occur. Permits should be obtained
now because the litigation would not continue for "decades".
10:11:20 AM
Senator Thomas asked the location on the Haul Road that the
Bullen Point Road would intersect. He asked if the site would be
on the downhill side of the security gates, or through territory
with existing industry claims on the eastern side.
10:11:45 AM
Mr. Banks would confirm his understanding that the new road
would intersect the Haul Road "above" the security gate.
10:12:00 AM
Senator Olson asked what entity would own and maintain the road
once it was completed.
10:12:13 AM
Mr. Banks responded that the State would initially own the right
of way, which would be transferred to the leaseholder. Similar
to the operation of other roads located on the North Slope, the
Bullen Point Road would be maintained by the owner of the right
of way. Timing would determine the party that would actually
construct the road. If the State transferred the right of way to
the lessee before construction, the lease holder would build and
maintain the road. This scenario was the expectation of the
Department.
10:14:09 AM
Senator Elton asked if the right of way were transferred after
construction was complete, whether the lessee would reimburse
the State for the construction cost.
10:14:33 AM
Mr. Banks was unsure.
10:14:42 AM
Senator Elton requested the history of instances in which the
State secured permits and right of ways then transferred
ownership.
10:15:05 AM
Mr. Bus assured he would provide this information.
10:15:09 AM
Co-Chair Hoffman asked who the current landowner was.
10:15:15 AM
Mr. Bus replied that the State and the federal government owned
different portions of the land in question.
10:15:23 AM
Co-Chair Hoffman clarified that none of the land was owned by a
Native corporation.
10:15:27 AM
Mr. Bus indicated he would verify this.
10:15:39 AM
Section: 4(b)
Department: Natural Resources
RDU or Component: Gas Pipeline
Supplemental Need: Extend lapse date from June 30, 2007, to
June 30, 2008, for the gas pipeline risk analysis and
royalty issues multi-year allocation in sec. 20(c)(1), ch.
3, FSSLA 2005, pg. 107, line 2. The amount expected to be
available is $1,500,000. The lapse extension also applies
to sec. 20(c)(2) gas pipeline corridor geologic hazards and
resource evaluation. This allocation is expected to be
fully expended by June 30, 2007.
LFD Notes: AS of 2/20/07:
Gas Pipeline Risk Analysis appropriation, original
amount = $2,500,000 and the current balance =
$1,661,600
Gas Pipeline Corridor Geologic Hazards & Resource
Evaluation appropriation, original amount = $2,000,000
and the current balance = $71,500
$0
Mr. Bus outlined portions of this request. The Corridor would be
located between Delta and the Canadian border.
10:16:55 AM
Section: 4(c)
Department: Natural Resources
RDU or Component: Gas Pipeline
Supplemental Need: Extend lapse date from June 30, 2007, to
June 30, 2008, for the Bullen Pt. Road right-of-way
permitting multi-year allocation in sec. 20(d), ch. 82, SLA
2006, Pg. 151. The amount expected to be available is
$800,000. The lapse extension also applies to sec. 20(d)(2)
Division of Oil and Gas Increased Workload. This allocation
is expected to be fully expended by June 30, 2007. The
lapse extension also applies to sec. 20(d)(3)
Commissioner's office increased workload, which expects
$10.0 to be available.
LFD Notes: As of 2/20/07:
Bullen Point Road Right-of-Way Permitting
appropriation, original amount = $800,000 and the
current balance = $800,000
Oil & Gas Increased Workload appropriation, original
amount = $675,000 and the current balance = $106,100
Commissioner's Office. Workload appropriation,
original amount = $50,000 and the current balance =
$20,000
$0
Mr. Bus explained this item was similar to that of Section 4(a).
10:17:48 AM
Co-Chair Hoffman requested an overview of the expenditures made
to date.
10:18:02 AM
Senator Thomas, returning to Section 4(b), asked for an
explanation of the resource evaluation.
10:18:16 AM
Mr. Bus replied that geologists would study the proposed
pipeline corridor to determine any geological hazards such as
fault lines. At the same time, the geologists would identify
gravel extraction sites for utilization during construction.
10:18:51 AM
Co-Chair Hoffman asked if this project would require an
Environmental Impact Statement (EIS) study.
10:19:06 AM
Mr. Banks responded that the portions of the corridor located on
federal lands could require an EIS; however, because the
corridor would be onshore, a full EIS might not be required.
Determination would depend upon the US Corp of Engineers
assessment of the construction project.
10:20:11 AM
Department of Revenue
Section: 3(a)
Department: Revenue
RDU or Component: Capital
Supplemental Need: Commercialization of North Slope Gas
$419,500 - two internal economists to work on gasline
issues
$1,630,000 for two contractual economists and/or
commercial analysts' firms to assist in modeling and
analyzing tax incentives and impacts, marketing
options and criteria to evaluate applicants and
proposed projects
$50,900 for other costs, including financial and legal
research
LFD Notes: The funding for the two economists (currently on
staff) is based on 17 months work; the funding for
contractual economic and legal analysis is an estimate of
what might be needed under AGIA
$3,000,000 General Funds
JERRY BURNETT, Director, Administrative Services Division,
Department of Revenue, outlined this item, testifying that the
Department would coordinate with the Department of Natural
Resources and the Department of Law to ensure that no
duplication of legal work occured.
10:21:17 AM
Co-Chair Hoffman again noting that this appropriation was
intended for expenditures related to legislation that would be
introduced at the request of Governor Palin, asked why it was
not contained in a fiscal note rather than as a supplemental
budget item.
10:21:39 AM
Mr. Burnett understood the pending legislation would be
introduced the following week and would pass into law after full
review by the Legislature. The intent is to begin working on
analysis efforts prior to the bill's adoption. This was
especially important with regard to upgrading the capabilities
of the Department's economists.
10:22:31 AM
Co-Chair Hoffman asked if the economists would be hired solely
for the term of this project.
10:22:37 AM
Mr. Burnett responded that the length of employment would depend
upon the terms of the contract as well as needs for additional
work. The positions would be hired as "project economists".
10:23:27 AM
Senator Olson pointed out that the previous expert hired by the
Department was Pedro Van Meurs. Senator Olson asked the intended
expenditure on expert services for AGIA, noting the request of
over one million for "specialized legal counsel".
10:23:59 AM
Mr. Burnett answered that during the Murkowski Administration
the departments of Law, Revenue and Natural Resources expended
approximately $24.9 million on legal counsel, economists and
other expert services. Mr. Van Meurs was paid a total of $2.8
million by the State. Mr. Burnett could not provide an estimate
of future expenditures.
10:24:59 AM
Section: 3(b)
Department: Revenue
RDU or Component: Tax Division
Supplemental Need: Petroleum Production Tax (PPT)
implementation costs:
$521,700 for three positions and contracts for
developing regulations, expenses for public hearings
and legal advice on regulations
Fiscal note identifies almost $1.4 million for a full years
implementation. That is the amount requested for FY 08.
This is identified as the bare minimum necessary for FY 07.
$521,700 General Funds
Mr. Burnett stated that this funding was necessary to implement
the provisions of HB 3001 adopted by the 24th Legislature. That
bill included a fiscal note for $1.4 million, although an
appropriation was never made and subsequently no funding was
provided to implement the Petroleum Profits Tax (PPT). The
Department had begun implementation efforts, including computer
programming and proposing regulation, to allow for the
collection of the tax. The first payment was due the following
week.
10:26:53 AM
Section: 3(c)
Department: Revenue
RDU or Component: Tax Division
Supplemental Need: Language to allow the department to make
refunds for capital expenditures and lease bids as provided
in the PPT, AS 43.55.023(f).
LFD Notes: This language appropriates the funding for the
transferable tax credit refunds in FY 07. Expected to be
significantly less the projected $25 million in the Gov's
FY 08 budget.
$0
Mr. Burnett relayed that Department analysis predicted that the
claimed tax credits would be less than $25 million as originally
projected.
10:27:44 AM
Section: 4(b)
Department: Revenue
RDU or Component: Commissioner's Office
Supplemental Need: Extend lapse date from June 30, 2007, to
June 30, 2008, for the gas pipeline development multi-year
appropriation made in sec. 20(e), ch. 3, FSSLA 2005, pg.
107, line 13. The amount expected to be available is
$100,000.
LFD Notes: Funding is being used in FY 07 to fund the 2
exempt gasline economists currently working for the
department. FY 08 funding for these positions is being
requested in the $3 million request in 3(a) above.
$0
Item: 12
Section: 4(b)
Department: Revenue
RDU or Component: Alaska Natural Gas Development Authority
Supplemental Need: Extend lapse date from June 30, 2007, to
June 30, 2008, for the gas pipeline development multi-year
appropriation made in sec. 20(f), ch. 3, FSSLA 2005, pg.
107, line 16. The amount expected to be available is
$500,000.
$0
Mr. Burnett explained these items pertain to lapse date
extensions.
10:28:19 AM
Senator Elton cited a memorandum dated February 9, 2007 from
Eric Swanson of the Department of Administration to Joan Brown
of the Office of Management and Budget [copy on file] in support
of this appropriation. The memorandum reads in part, "Litigation
with EXXON over Pt. Thomson has interrupted the flow of
necessary data from that operator to our staff and consultants."
Senator Elton requested background information. He remarked that
"some kind of mission" must continue regardless of litigation
and an obligation by the party to provide information.
10:29:10 AM
Mr. Burnett would provide additional information.
10:29:18 AM
Co-Chair Hoffman also expressed interest in this matter.
10:29:36 AM
Senator Thomas asked whether the State would provide funding to
the Alaska Natural Gas Development Authority (ANGDA) for efforts
to develop a natural gas pipeline.
10:30:11 AM
Mr. Burnett responded that funding for the Authority was not
included in the Governor's proposed budget. He alluded to a
request of $5 million for ANGDA. The Department of Revenue would
not "sponsor" this request, but would not oppose it either.
10:30:47 AM
Senator Thomas asked if the reason was to avoid indication of a
bias toward ANGDA because a natural gas pipeline proposal based
on interstate use of natural gas could be made in competition to
other proposals.
10:31:11 AM
Mr. Burnett affirmed.
10:31:22 AM
Department of Administration
Section: 4(b)
Department: Administration
RDU or Component: Alaska Oil and Gas Conservation
Commission
Supplemental Need: Extend the lapse date from June 30,
2007, to June 30, 2008, for the gas pipeline development
multi-year appropriation made in sec. 20(a), ch. 3, FSSLA
2005, pf. 106, line 21. The amount expected to be available
is $250,000
LFD Notes: $1.2 million was appropriated for FY 06-07.
$950,000 already obligated through the end of this year
leaving $250,000 balance. This extension will allow the
department to wrap up current work on studies needed to set
gas off take rates for Pt. Thomson.
$0
ERIC SWANSON. Director, Division of Administrative Services,
Department of Administration, testified to this item. The
Department expected to encumber approximately $322,000 of this
appropriation during the remainder of FY 07.
10:32:34 AM
Senator Elton asked if the witness was aware of the situation in
which Exxon was not supplying necessary data to staff and
consultants.
10:33:02 AM
Mr. Swanson did not have this information but would speak to the
chair of the Alaska Oil and Gas Commission (AOGC).
10:33:22 AM
Ms. Rehfeld announced this concluded overview of the
supplemental requests in this legislation.
Co-Chair Hoffman ordered the bill HELD in Committee.
ADJOURNMENT
Co-Chair Lyman Hoffman adjourned the meeting at 10:34:19 AM
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