Legislature(2009 - 2010)

04/16/2010 02:55 PM Senate FIN

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02:55:22 PM Start
02:55:44 PM HB126
03:01:40 PM HB184
03:03:07 PM HB421
03:08:46 PM HB412
03:25:12 PM HB226
04:11:48 PM Presentation by Dnr on Agia Regulations
05:24:36 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
                 SENATE FINANCE COMMITTEE                                                                                       
                      April 16, 2010                                                                                            
                         2:55 p.m.                                                                                              
2:55:22 PM                                                                                                                    
CALL TO ORDER                                                                                                                 
Co-Chair  Stedman   called  the  Senate   Finance  Committee                                                                    
meeting to order at 2:55 p.m.                                                                                                   
MEMBERS PRESENT                                                                                                               
Senator Lyman Hoffman, Co-Chair                                                                                                 
Senator Bert Stedman, Co-Chair                                                                                                  
Senator Charlie Huggins, Vice-Chair                                                                                             
Senator Johnny Ellis                                                                                                            
Senator Dennis Egan                                                                                                             
Senator Donny Olson                                                                                                             
Senator Joe Thomas                                                                                                              
MEMBERS ABSENT                                                                                                                
ALSO PRESENT                                                                                                                  
Representative Les  Gara; Mide Lesmann,  Community Relations                                                                    
Manager,  Department of  Health and  Social Services;  Derek                                                                    
Miller,  Staff,  Representative  Mike Kelly;  Kevin  Brooks,                                                                    
Deputy  Commissioner,  Department  of  Administration;  Greg                                                                    
Winegar,   Director,   Alaska   Division   of   Investments,                                                                    
Department of Commerce,  Community and Economic Development;                                                                    
Ted  Leonard,  Executive  Director, AIDEA;  Tracy  LarBarge,                                                                    
Tracy's King  Crab Shack;  Representative Wes  Keller; Kevin                                                                    
Banks,  Director, Division  of  Oil and  Gas, Department  of                                                                    
Natural Resources; Fred  Hagemeyer, Managing Director, Black                                                                    
and Veatch Corps.                                                                                                               
PRESENT VIA TELECONFERENCE                                                                                                    
Amanda Metivier,  Statewide Coordinator, Facing  Foster Care                                                                    
in Alaska; Carl Berger,  Executive Director, Lower Kuskokwim                                                                    
Economic  Council; Mike  Borgford,  made  in Mat-Su,  MatSu;                                                                    
Marty  Metiva, President,  Alaska  Partnership for  Economic                                                                    
Development; Yukon Tanner, Talkeetna, Veterans and Family.                                                                      
HB 126-EXTEND/RESUME STATE CUSTODY OF CHILDREN                                                                                  
     HB  126 was  HEARD and  HELD in  Committee for  further                                                                    
HB 184-DEBT AUTHORIZATION FOR UNIVERSITY                                                                                        
     HB  184 was  HEARD and  HELD in  Committee for  further                                                                    
HB 421-PUBLIC EMPLOYEE SALARIES                                                                                                 
     HB  421 was  HEARD and  HELD in  Committee for  further                                                                    
HB 412-MICROLOAN REVOLVING FUND                                                                                                 
     HB  412 was  HEARD and  HELD in  Committee for  further                                                                    
HB 226-NAMING VETERANS' WAY IN MAT-SU                                                                                           
     HB  226 was  HEARD and  HELD in  Committee for  further                                                                    
CS FOR HOUSE BILL NO. 126(FIN)                                                                                                
     "An  Act  relating  to extensions  and  resumptions  of                                                                    
     state  custody  of  children;   and  providing  for  an                                                                    
     effective date."                                                                                                           
2:55:44 PM                                                                                                                    
Co-Chair  Stedman explained  that  the  bill addresses  debt                                                                    
authorization at  the university. He mentioned  three fiscal                                                                    
notes  from the  Department  of Health  and Social  Services                                                                    
(DHSS). One  fiscal note is designated  for children service                                                                    
management  for $103,700  in general  funds  and $73,500  in                                                                    
federal  match,  one fiscal  note  for  foster care  special                                                                    
needs for  $38,800 in  general funds  and $2,200  in federal                                                                    
match. The  final fiscal note  is for foster care  base rate                                                                    
in the  amount of $186,800  in general funds and  $37,200 in                                                                    
federal match.                                                                                                                  
2:57:40 PM                                                                                                                    
AMANDA METIVIER,  STATEWIDE COORDINATOR, FACING  FOSTER CARE                                                                    
IN ALASKA  (via teleconference)  testified in support  of HB
126 which  extends foster care  to age 21 and  allows youths                                                                    
to  reenter foster  care.  She claimed  that  40 percent  of                                                                    
youth who age  out of foster care in Alaska  end up homeless                                                                    
and  30 percent  incarcerated. She  spoke of  her successful                                                                    
experience of extending foster care  until age 22 because of                                                                    
foster parents  allowing her  to remain  in their  care. She                                                                    
appreciated the  proposed extension  of the foster  care age                                                                    
to 21 years.                                                                                                                    
2:59:49 PM                                                                                                                    
MIDE  LESMANN, COMMUNITY  RELATIONS  MANAGER, DEPARTMENT  OF                                                                    
HEALTH  AND  SOCIAL  SERVICES, stated  that  the  department                                                                    
recognizes the value  of the legislation. He  noted that the                                                                    
legislation  may be  valuable  for some  youth  who are  not                                                                    
equipped to  exit care before  age 21. He added  that policy                                                                    
and  procedure  revisions  and  updates  to  the  management                                                                    
information  system and  the office  of children's  services                                                                    
can implement the legislation.                                                                                                  
HB  126  was  HEARD  and   HELD  in  Committee  for  further                                                                    
HOUSE BILL NO. 184                                                                                                              
     "An Act relating to the debt authorization of the                                                                          
     University of Alaska."                                                                                                     
3:01:40 PM                                                                                                                    
DEREK  MILLER, STAFF,  REPRESENTATIVE  MIKE KELLY  explained                                                                    
that  the bill  raises the  current  bond debt  cap for  the                                                                    
University  of   Alaska  to  reflect   today's  construction                                                                    
Co-Chair Stedman asked if the  bill allows the university to                                                                    
increase bonding for the Life  Sciences Building. Mr. Miller                                                                    
responded  that if  the bill  passes, the  additional notice                                                                    
requirement for the bonding would not be necessary.                                                                             
Co-Chair Stedman pointed out one zero fiscal note.                                                                              
HB  184  was  HEARD  and   HELD  in  Committee  for  further                                                                    
HOUSE BILL NO. 421                                                                                                              
     "An Act relating to the  compensation of certain public                                                                    
     officials,  officers,  and  employees  not  covered  by                                                                    
     collective bargaining agreements;  and providing for an                                                                    
     effective date."                                                                                                           
3:03:07 PM          AT EASE                                                                                                   
3:06:04 PM          RECONVENED                                                                                                
KEVIN   BROOKS,    DEPUTY   COMMISSIONER,    DEPARTMENT   OF                                                                    
ADMINISTRATION  explained  that  the  department  negotiated                                                                    
with the  five largest  labor unions resulting  in voluntary                                                                    
agreements.  The  monetary  terms   were  submitted  to  the                                                                    
legislature. The  bill addresses 3000  non-covered employees                                                                    
in the three branches of government.                                                                                            
Co-Chair  Stedman  pointed  out  one fiscal  note  from  the                                                                    
executive  branch  for  $4,182,300  in FY11  with  the  cost                                                                    
doubling in FY12.  The second fiscal note is  from the court                                                                    
system  for $1,346,000  in FY11  with the  cost doubling  in                                                                    
FY12 and one  fiscal note from the  legislature for $741,800                                                                    
in FY 11 also doubling in FY12.                                                                                                 
Mr.  Brooks explained  that the  amount doubles  because the                                                                    
FY11 amount rolls into the base.                                                                                                
HB  421  was  HEARD  and   HELD  in  Committee  for  further                                                                    
CS FOR HOUSE BILL NO. 412(FIN)                                                                                                  
     "An  Act establishing  the  Alaska microloan  revolving                                                                    
     fund;  making loans  for commercial  purposes from  the                                                                    
     fund;  relating to  the fund  and loans;  and providing                                                                    
     for an effective date."                                                                                                    
3:08:46 PM                                                                                                                    
GREG  WINEGAR,  DIRECTOR,  ALASKA DIVISION  OF  INVESTMENTS,                                                                    
DEPARTMENT OF COMMERCE,  COMMUNITY AND ECONOMIC DEVELOPMENT,                                                                    
explained that  the bill is  modeled after  other micro-loan                                                                    
programs  offered throughout  the United  States. A  similar                                                                    
program is  not yet available in  Alaska due to a  lack of a                                                                    
qualified  intermediary  lender  as required  by  the  Small                                                                    
Business  Association  (SBA).  He   expounded  the  goal  of                                                                    
providing loans  for up  to $35  thousand for  an individual                                                                    
and  $70 thousand  for  two or  more  individuals. The  loan                                                                    
proceeds  are  available  for  working  capital,  inventory,                                                                    
lease   hold  improvements,   and  other   business  related                                                                    
matters. The loans must be  collateralized. He informed that                                                                    
the fiscal note requests  $81 thousand in operating expenses                                                                    
to hire  a loan officer  to process loan requests.  The fund                                                                    
is established as a revolving  fund. The department supports                                                                    
the bill.                                                                                                                       
3:11:13 PM                                                                                                                    
Co-Chair  Stedman  pointed  out  one fiscal  note  from  the                                                                    
Department of  Commerce, Community and  Economic Development                                                                    
(DCCED) for $3,577,700 in  Alaska Industrial Development and                                                                    
Export Authority  (AIDEA) dividends to capitalize  the fund.                                                                    
He expressed concern with the  issue of capitalization as it                                                                    
is  abnormal to  capitalize a  fund with  a fiscal  note. He                                                                    
cited  an  over  appropriation  of the  fund.  According  to                                                                    
Legislative Finance,  the AIDEA funds have  been expended in                                                                    
the  FY11 budget.  He asked  about  the state  as a  banking                                                                    
institution versus the private sector.                                                                                          
Mr. Winegar responded that he  was under the assumption that                                                                    
a  new fiscal  note had  been prepared.  He stated  that the                                                                    
loan amounts are  small and short term with  higher risk. He                                                                    
stated that the SBA makes  the program available in 46 other                                                                    
states for the same reason.                                                                                                     
3:13:09 PM                                                                                                                    
TED  LEONARD,  EXECUTIVE  DIRECTOR, AIDEA  stated  that  the                                                                    
proposed loan program is not  an AIDEA program. He mentioned                                                                    
that  AIDEA's  strategic  planning  process  during  a  spot                                                                    
analysis  of the  Alaska  economy identified  a  gap in  the                                                                    
tools available to help small  businesses. He voiced that he                                                                    
was  once the  Chief  Financial Officer  (CFO)  for a  small                                                                    
corporation. He explained  that cash flow is the  blood of a                                                                    
small  business. The  business cycles  do ebb  and flow  and                                                                    
occasionally a business requires a  loan to allow a business                                                                    
to continue.  He stated that the  small economic development                                                                    
supported  the  need  for   helping  small  businesses  with                                                                    
capital. While the  program is not an AIDEA  program, he did                                                                    
support the  goal of helping  small businesses  with working                                                                    
3:15:06 PM                                                                                                                    
CARL  BERGER, EXECUTIVE  DIRECTOR, LOWER  KUSKOKWIM ECONOMIC                                                                    
COUNCIL  (via teleconference)  testified in  support of  the                                                                    
legislation.  He noted  that the  support  extends to  other                                                                    
small  communities.  The  amount provided  is  exactly  what                                                                    
communities require.  He stated that  Alaska is one  of four                                                                    
states without a microloan program.                                                                                             
MIKE BORGFORD,  MADE IN MAT-SU, MATSU  (via teleconference),                                                                    
testified in support of the  legislation. He claimed that HB
412  was the  most important  small business  legislation in                                                                    
the last 30 years.                                                                                                              
MARTY  METIVA, PRESIDENT,  ALASKA  PARTNERSHIP FOR  ECONOMIC                                                                    
DEVELOPMENT  (via teleconference),  testified in  support of                                                                    
the legislation.  He stated that  the situation  analysis of                                                                    
the state's  economy provided a statewide  economic strategy                                                                    
implementation plan.  He stated that  the raw data  from the                                                                    
analysis  includes that  from  over  300 business  community                                                                    
leaders.  He  noted  that the  two  key  findings  addressed                                                                    
include the access  to the capitol. He believed  that HB 412                                                                    
compliments the existing financing opportunities.                                                                               
3:20:47 PM                                                                                                                    
TRACY LABARGE,  TRACY'S KING CRAB SHACK,  testified that she                                                                    
is a small  business owner who purchases  her inventory form                                                                    
local   fisheries.   She   worked   with   Juneau   Economic                                                                    
Development  Council (JEDC)  and  local  banks to  establish                                                                    
creative methods of financing.  She stated that she requires                                                                    
a loan for inventory. She  stressed that the bill allows her                                                                    
business the opportunity for success.                                                                                           
3:23:17 PM                                                                                                                    
Senator  Olson   asked  if  $35   thousand  was   enough  to                                                                    
capitalize a small business. Mr.  Winegar responded that the                                                                    
amount of $35  thousand is patterned after  the SBA program.                                                                    
The  private  sector is  a  better  place to  obtain  larger                                                                    
amounts  of  capital.  He  specified  that  HB  412  targets                                                                    
smaller loans.                                                                                                                  
HB  412  was  HEARD  and   HELD  in  Committee  for  further                                                                    
CS FOR HOUSE BILL NO. 226(TRA)                                                                                                  
     "An Act renaming Seldon Road and that portion of                                                                           
     Bogard Road that extends between Palmer and Meadow                                                                         
     Lakes as Veterans' Way."                                                                                                   
3:25:12 PM                                                                                                                    
REPRESENTATIVE WES  KELLER discussed  the legislation  as an                                                                    
opportunity  to honor  veterans. He  described the  need for                                                                    
the  signage as  the current  situation proves  confusing to                                                                    
Co-Chair Stedman  mentioned the fiscal note  from Department                                                                    
of  Transportation  and  Public  Facilities  for  $8,500  in                                                                    
general funds to install signs.                                                                                                 
Senator Huggins  supported the legislation and  spoke to the                                                                    
popularity of the bill.                                                                                                         
3:27:14 PM                                                                                                                    
YUKON   TANNER,   TALKEETNA,   VETERANS  AND   FAMILY   (via                                                                    
teleconference) stated  that the  opportunity to  rename the                                                                    
signs  on the  street  was supported  by  the community.  He                                                                    
noted further support from the veterans.                                                                                        
Representative Keller affirmed the  positive support for the                                                                    
legislation  expressed to  him  during  his travels  between                                                                    
Palmer and Meadow Lakes.                                                                                                        
HB  226  was  HEARD  and   HELD  in  Committee  for  further                                                                    
3:29:05 PM     AT EASE                                                                                                        
4:07:27 PM     RECONVENED                                                                                                     
^Presentation by DNR on AGIA regulations                                                                                      
KEVIN BANKS,  DIRECTOR, DIVISION OF OIL  AND GAS, DEPARTMENT                                                                    
OF  NATURAL  RESOURCES,   explained  that  the  presentation                                                                    
includes regulations  regarding oil  and gas and  the Alaska                                                                    
Gas Inducement Act (AGIA) as  a potential inducement for the                                                                    
calculation  for   the  royalties  for  oil   and  gas.  The                                                                    
presentation  includes  regulations  designed  to  establish                                                                    
value for  natural gas and  other royalty issues.  He stated                                                                    
that  he had  colleagues available  to answer  questions. He                                                                    
spoke to the challenges in statute and regulations.                                                                             
4:11:48 PM                                                                                                                    
Mr.   Banks   began   with  the   "Proposed   AGIA   Royalty                                                                    
Regulations"  (copy  on  file). He  presented  the  overview                                                                    
beginning  with  Slide  3, "Overview  of  the  AGIA  Royalty                                                                    
   zPurpose of the regulation is to make offer to modify                                                                       
     state lease contracts, consistent with requirements of                                                                     
     the Alaska Gas Inducement Act (AGIA)                                                                                       
        zEstablish method to determine "fair market value"                                                                     
          (FMV) of the state's royalty share of gas                                                                             
          production    that     increases    clarity    and                                                                    
          predictability of royalty value                                                                                       
        zEstablish terms under which the state will modify                                                                     
          its ability  to exercise current rights  to switch                                                                    
          between taking  royalty in value (as  money) or in                                                                    
          kind (as  gas), that  reduces lessees  exposure to                                                                    
          stranded or insufficient transportation                                                                               
        zLessee who qualifies for royalty inducements can                                                                      
          elect either (or both) Valuation or Royalty                                                                           
          Switching provisions                                                                                                  
4:15:33 PM                                                                                                                    
Mr. Banks continued with Slide 4: "Requirements in AGIA"                                                                        
   zValuation regulations must:                                                                                                
        zMinimize retroactive adjustments in royalty value                                                                     
        zEstablish    FMV   based    on   reliable    trade                                                                    
        zAllow reasonable and actual deductions for                                                                            
          transportation and processing                                                                                         
        zAllow for reasonable share of unused capacity                                                                         
        zAllow deductions under the 1980 settlement                                                                            
4:18:44 PM                                                                                                                    
Mr. Banks addressed Slide 5:  "Dynamic North America Natural                                                                    
Gas Market"  He explained that  oil travels down  a pipeline                                                                    
and  is   evaluated  at  "pump  station   one,"  Valdez,  or                                                                    
refineries on  the west coast.  The oil values  are reported                                                                    
effectively. He  noted that the North  Slope adds complexity                                                                    
with the assumption that the  gas will flow into Alberta. He                                                                    
noted that the gas might bypass  Alberta to go into the West                                                                    
Coast.  He pointed  out that  other areas  exist within  the                                                                    
pipeline  system  to  capture  value  for  the  purposes  of                                                                    
calculating  royalty and  to  provide  relevant and  correct                                                                    
transportation tax  deduction. Thirty years ago,  gas in the                                                                    
United  States was  under strict  regulation by  the federal                                                                    
government.  He spoke  of a  current liquid  market for  gas                                                                    
throughout the country.  He observed that the  market of the                                                                    
changes  include the  development of  a royalty  system that                                                                    
captures enough flexibility and  allows for understanding of                                                                    
the expectations.                                                                                                               
4:22:10 PM                                                                                                                    
Mr. Banks described Slide 6: "Overarching Principles"                                                                           
        1. Reduce lessee uncertainty                                                                                            
        2. Maintain state's full royalty value                                                                                  
        3. Incorporate natural gas industry practices to the                                                                    
          extent doing so is consistent with (1) and (2)                                                                        
He stated that  the lessees account for  royalties using the                                                                    
same   accounting  systems   and  marketing   tools  already                                                                    
established.  He   explained  that   a  prediction   of  the                                                                    
royalties is not possible.                                                                                                      
4:24:29 PM                                                                                                                    
Mr.   Banks   discussed   "Overarching   Principle:   Reduce                                                                    
Uncertainty" on Slide 7.                                                                                                        
   · Eliminate "higher-of" lease valuation terms                                                                                
   · Establish value based on published prices                                                                                  
   · Minimize or eliminate retroactive adjustments                                                                              
   · Allocate volumes Pro rata to increase clarity of gas                                                                       
     value and costs of transportation and processing                                                                           
Mr. Banks  elaborated on the  various slides.  The published                                                                    
prices  will be  a  mechanism to  capture  full fair  market                                                                    
value. He commented on the need for regulations to allow                                                                        
updates of the price publications, destination markets, and                                                                     
location differentials as the market evolves.                                                                                   
4:27:31 PM                                                                                                                    
Mr. Banks elaborated on Slide 8: " Overarching Principle:                                                                       
Full Value Under Lease"                                                                                                         
   z"Full Value" without gross proceeds                                                                                        
         Gas components are valued for residue gas, gas                                                                        
          plant products, unprocessed gas, LNG                                                                                  
         Published prices in destination markets establish                                                                     
         Ability to update price publications, destination                                                                     
          markets, location differentials                                                                                       
         Valuation      backstop      "basket"      ensures                                                                    
          unrepresentative destination market published                                                                         
          price doesn't distort reasonable value                                                                                
         No negative royalty                                                                                                   
    Pro rata allocation of value and costs back to the                                                                         
     lease establishes fair distribution and ensures full                                                                       
4:29:31 PM                                                                                                                    
Mr. Banks Slide 9: "Overarching Principle: Incorporate Gas                                                                      
Industry Practices"                                                                                                             
   zUse   well   established   regulatory   structure   and                                                                    
     methodology     where     practical    to     determine                                                                    
     transportation costs (i.e. FERC)                                                                                           
   zIncorporate use of published indices based on                                                                              
     commercial practices                                                                                                       
   zUsed elements of  MMS regulations                                                                                          
         Used as baseline; modified where necessary to                                                                         
          reflect differences in circumstances of Alaska                                                                        
         North Slope producers have extensive experience                                                                       
          in complying with MMS gas regulations in Lower 48                                                                     
FRED HAGEMEYER, MANAGING DIRECTOR, BLACK AND VEATCH CORPS,                                                                      
discussed Slide 10: "Key Valuation Concepts and Approaches"                                                                     
   1. Destination where gas is valued                                                                                           
   2. Publishing value at destination                                                                                           
   3. Backstop measure of FMV for residue gas                                                                                   
   4. "Actual and reasonable" transportation and processing                                                                     
   5. Appropriate deductions for unused capacity                                                                                
4:33:09 PM                                                                                                                    
Mr. Hagemeyer commented on Slide 11: "How to Determine                                                                          
  zA lessee's gas is valued for royalty at "Destination"                                                                       
   zA lessee's qualified gas is generally considered to be                                                                     
     at "Destination" when it first:                                                                                            
             1. Enters a first destination market;                                                                              
             2. Has  been   sold    in   an   arm's   length                                                                    
               transaction; or                                                                                                  
             3. Has been processed to extract residue gas                                                                       
               and gas plant product                                                                                            
   z"Destination values" are determined with reference to                                                                      
     "first destination markets"                                                                                                
   zFirst destination market is the first liquid market                                                                        
     where ANS gas is physically transported to and bought,                                                                     
     sold, processed, or regasified that has a reliable and                                                                     
     widely available published price                                                                                           
4:34:20 PM                                                                                                                    
Mr. Hagemeyer discussed Slide 12: "Department to Publish                                                                        
Information Necessary to Determine Destination Value"                                                                           
   zThe department will publish on its website prior to                                                                        
     the royalty reporting period:                                                                                              
        zThe location of all First Destination Markets                                                                         
        zThe name of the source of the published price for                                                                     
          residue gas, gas plant products at the First                                                                          
          Destination Market                                                                                                    
        zAppropriate location or quality differentials to                                                                      
          establish FMV with reference to First Destination                                                                     
        zReasonable gas treatment, processing, or re-                                                                          
          gasification cost allowances                                                                                          
4:36:15 PM                                                                                                                    
Mr. Hagemeyer discussed Slide 13: "Alternative Destination                                                                      
Value for Residue Gas"                                                                                                          
   zBasket  of  published  indices   used  to  calculate  a                                                                    
     "backstop" fair market value to published index prices                                                                     
     at destination markets                                                                                                     
   zBasket is relied upon only  when the published price at                                                                    
     a destination market is less than 95% of the basket                                                                        
     price; i.e. a safety valve                                                                                                 
   zThe  alternative destination  value protects  the State                                                                    
     from being locked in to a valuation rule that fails to                                                                     
     reflect fair market value                                                                                                  
   zPricing  elements making  up the  basket determined  by                                                                    
     market liquidity criteria                                                                                                  
   zBasket reflects  the volume  weighted average  of value                                                                    
     received by the market.                                                                                                    
4:37:44 PM                                                                                                                    
Mr. Hagemeyer discussed Slide 14: "Actual and Reasonable                                                                        
Cost of Transportation and Processing- Non Arms Length                                                                          
   zNon-arm's  length  transportation  cost  allowance  for                                                                    
     Alaska and Canadian mainline is based on the terms                                                                         
     proposed in the Open Season offer                                                                                          
        zIf affiliated lessee negotiates a lower rate,                                                                         
          then the transportation cost allowance will be                                                                        
          based on this negotiated lower rate                                                                                   
   zOther  pipelines  -  Cost deductions  calculated  using                                                                    
     FERC based cost of service methodology                                                                                     
   zGenerally  follow  MMS  methodology to  establish  non-                                                                    
     arm's length processing deductions                                                                                         
4:39:13 PM                                                                                                                    
Mr. Hagemeyer discussed Slide 15: "Deductions for Unused                                                                        
Transportation Capacity"                                                                                                        
   zUnused  capacity deductions  were  designed to  balance                                                                    
     the need to mitigate producers risk, but not expose                                                                        
     the State to bearing unintended costs                                                                                      
   zDeductions are  allowed for  Unused Capacity  on Alaska                                                                    
     and Canadian mainlines                                                                                                     
   zUnused  Capacity  =   Allocated  Capacity  -  Allocated                                                                    
        zAllocated    Capacity    -   Portion    of    firm                                                                    
          transportation  capacity  acquired  by  lessee  in                                                                    
          first binding open  season to transport production                                                                    
          from  state  leases;  measured with  reference  to                                                                    
          actual state lease production                                                                                         
        zAllocated  Shipments  -  greater of  shipments  of                                                                    
          production  from   state  leases  or   a  pro-rata                                                                    
          allocation of total shipments from all sources                                                                        
4:40:46 PM                                                                                                                    
Mr. Hagemeyer acknowledged Slide 16: "RIK/RIV Switching                                                                         
   zUnder lease the State has the option of taking its                                                                         
     royalty share of production either in kind (RIK) or in                                                                     
     value (RIV). This option creates a risk for shippers.                                                                      
        zIf the  State switches  from RIV to  RIK, shippers                                                                    
          may  have stranded  capacity corresponding  to the                                                                    
          royalty volumes                                                                                                       
        zIf the  State switches  from RIK to  RIV, shippers                                                                    
          may  not  have  sufficient capacity  on  a  timely                                                                    
        zAdditionally,  shippers'   marketing  arrangements                                                                    
          need  to be  reconciled with  the State's  RIK/RIV                                                                    
   zGiven the substantial tariffs on the Alaska project,                                                                       
     the potential exposure associated with the State's                                                                         
     RIV/RIK option is significant                                                                                              
4:42:27 PM                                                                                                                    
Mr. Hagemeyer noted Slide 17: "RIK/RIV Solution: "Capacity                                                                      
Follows the Gas"                                                                                                                
   zSwitching from RIV to RIK:                                                                                                 
        zState obligated to  seek capacity corresponding to                                                                    
          the State's  RIK share  ("RIK Capacity")  from the                                                                    
          Producers via a pre-arranged deal                                                                                     
        zReleased  capacity will  be  acquired at  original                                                                    
          contract rates  (state forgoes opportunity  to get                                                                    
          a better deal)                                                                                                        
   zSwitching from RIK to RIV:                                                                                                 
        zCapacity  corresponding to  the State's  RIK share                                                                    
          ("RIK Capacity")  reverts back  from the  State to                                                                    
          the Producers at contract rates                                                                                       
   zState requested and FERC approved a waiver to allow                                                                        
     pre-arranged deals for FT capacity at contract rates,                                                                      
     consistent with these terms                                                                                                
   zIncrease notice period for RIK/RIV switching                                                                               
        z120 days when between 100,000 & 200,000 MMbtu/d                                                                       
        z180  days when  quantity is  greater than  200,000                                                                    
4:45:18 PM                                                                                                                    
Mr. Hagemeyer detailed Slide 18: "Value of Royalty                                                                              
Inducement to Producers"                                                                                                        
   zThe AGIA regulations provide value to producers while                                                                      
     protecting State interests                                                                                                 
   zSome of the key provisions that provide value to                                                                           
     producers include:                                                                                                         
        zValuation   -   moving   away   from   "higher-of"                                                                    
        zTransportation -                                                                                                      
             zAdopting      FERC-like     approach      for                                                                    
               transportation deductions, rather than MMS-                                                                      
               like approach                                                                                                    
             zAllowing deductions for unused capacity                                                                          
        zRIK/RIV  switching -  FERC waiver  allows capacity                                                                    
          transfer deal at contract rates                                                                                       
4:47:54 PM                                                                                                                    
Mr. Banks discussed Slide 19: "Aggressive Assumptions were                                                                      
made to Establish Upper Bound of Value to Producers"                                                                            
   zRecognize that the value of and need for these                                                                             
     provisions may be lower depending on the facts of the                                                                      
     project going forward:                                                                                                     
        zMethane  valuation -    Assumed  impact of  moving                                                                    
          away from "higher-of" provision is not offset by                                                                      
          market basket concept                                                                                                 
        zTransportation  deduction   for  non-arm's  length                                                                    
          transactions - Assumed that alternative was MMS                                                                       
        zUnused capacity  deduction -  Assumed that  no YTF                                                                    
          gas is found                                                                                                          
        zRIK-RIV  switching -  Assumed that  entire royalty                                                                    
          volume is switched from in-value to in-kind                                                                           
   zVery approximate estimates of the value to producers                                                                       
     from provisions in the 1980 Royalty Settlement                                                                             
     Agreement have also been shown here to provide a more                                                                      
     complete picture of royalty value to producers                                                                             
4:52:41 PM                                                                                                                    
Co-Chair Stedman  wished to communicate the  amount of money                                                                    
discussed and the potential liability exposure.                                                                                 
Mr. Hagemeyer noted  that the assumption shown  on Slide 20:                                                                    
"Estimated Value  or Range  of Value  to Producers  from Key                                                                    
Provisions   in  AGIA   Regulations  and   1980  RSA."   The                                                                    
assumption is  that the state  takes the RIK for  the entire                                                                    
25 year period  without a waiver or  regulatory element. The                                                                    
exposure exemplified  in the graph  is to the  producer with                                                                    
RIK RIV switching.                                                                                                              
Mr. Hagemeyer noted that the  exposure to the producer could                                                                    
equal either zero or $17  billion. He spoke to the agreement                                                                    
that fuel  cost allowances, gas treatment  plant allowances,                                                                    
and the  central compressor  plant allowances  combined over                                                                    
twenty five years equal $6  billion. He highlighted that the                                                                    
calculation encompasses  25 years.  He pointed out  that the                                                                    
assumptions are aggressive.                                                                                                     
4:56:17 PM                                                                                                                    
Mr.  Banks  clarified  that "higher  up"  is  a  retroactive                                                                    
calculation involving  auditing to  capture the  "higher up"                                                                    
value.  Transportation  deduction  is   a  comparison  of  a                                                                    
methodology.  He estimated  that approximately  127 trillion                                                                    
cubic   feet   of  undiscovered   economically   recoverable                                                                    
reserves exist on  the North Slope, which means  that if any                                                                    
gas is found the number for unutilized capacity is altered.                                                                     
Co-Chair Stedman clarified that  the RIK-RIV switching is on                                                                    
the industry side  of the ledger with a  $7 billion exposure                                                                    
to  the  state.  Mr.  Hagemeyer  agreed,  in  a  worst  case                                                                    
4:58:49 PM                                                                                                                    
Co-Chair  Stedman asked  about  the  mid-range expected.  He                                                                    
referenced Slide  16 and asked  about the  comment regarding                                                                    
significance  to  switching.  He  asked  if  the  industry's                                                                    
liability was $17 billion. Mr.  Hagemeyer clarified that the                                                                    
reference  on   Slide  16  exhibits  the   exposure  to  the                                                                    
Mr. Banks  pointed out that  it is as  if one eighth  of the                                                                    
pipeline  is empty  regarding  the  industry's exposure.  He                                                                    
explained that  the state's royalty share  equals one eighth                                                                    
of total production.                                                                                                            
5:01:10 PM                                                                                                                    
Co-Chair  Stedman asked  for an  estimation  of current  gas                                                                    
consumption  with  five hundred  as  the  royalty share.  He                                                                    
estimated that  the current natural gas  consumption in Cook                                                                    
Inlet is  250 million cubic  feet per day. He  advocated for                                                                    
in-state development of our gas resources.                                                                                      
Co-Chair Stedman  stated that 500  is a large amount  of gas                                                                    
for the state. Mr. Banks agreed.                                                                                                
Mr.  Banks pointed  out that  RIK oil  is not  sold in  spot                                                                    
sales as long term contracts  are preferred allowing for the                                                                    
development of local refineries.                                                                                                
Co-Chair  Stedman asked  if the  regulations lock  the state                                                                    
down   under   AGIA.   Mr.    Banks   responded   that   the                                                                    
transportation  deduction might  provide  an entitlement  in                                                                    
terms of an interpretation of actual and reasonable.                                                                            
Co-Chair  Stedman  asked  about  a  deadline  of  May  first                                                                    
regarding regulations. Mr. Banks  responded that the comment                                                                    
period is over and the  regulations will be published by the                                                                    
end of the  open season. Co-Chair Stedman asked  if the AGIA                                                                    
lock down  date was May first.  Mr. Banks did not  agree. He                                                                    
explained that  regulations must  be promulgated  during the                                                                    
open season.                                                                                                                    
Co-Chair Stedman asked  if the tax structure  is locked down                                                                    
in  statute instead  of  the  regulations. Co-Chair  Stedman                                                                    
asked  how confident  Mr. Banks  was about  his answer.  Mr.                                                                    
Banks responded that  he would return to  the committee with                                                                    
a confident answer.                                                                                                             
Co-Chair  Stedman  understood  that  regulations  allow  the                                                                    
ability to expose the state  to billions of dollars and lock                                                                    
the state down.                                                                                                                 
5:06:20 PM                                                                                                                    
Mr.  Banks responded  that commitments  are  defined in  the                                                                    
regulations. The  access to the  regulations is made  in the                                                                    
open season  commitments. The lessee is  required to provide                                                                    
an  open  bid  in  the  open  season  to  have  a  precedent                                                                    
agreement  within 120  days.  The lock  down  occurs in  the                                                                    
acceptance of  the state's offer. The  qualification for the                                                                    
offer  is defined  in  the  regulations. The  transportation                                                                    
services  agreements  allow  for  the open  season  and  the                                                                    
regulations  accepted in  the offer.  The qualification  for                                                                    
the offer depends on the commitment to the pipeline.                                                                            
Co-Chair  Stedman   clarified  that  the  lock   down  is  a                                                                    
contractual bind  beginning on May  first, but there  may be                                                                    
ability  for   the  state  to  change   the  regulations  in                                                                    
September. He expressed concern  about the ability to expose                                                                    
the state  to up to $7  billion without much input  from the                                                                    
legislature.  When low  gas  and high  oil  prices occur,  a                                                                    
substantial offset to our revenue  stream exists. He claimed                                                                    
that he  asked to  have a cash  flow analysis  run regarding                                                                    
expected outcomes  for the  state. He  requested a  net cash                                                                    
flow analysis  for a worst  case scenario. He  stressed that                                                                    
the policy calls were sizeable.                                                                                                 
Mr. Banks stated that there  is an approximate indication of                                                                    
the cash flow analysis in the graph shown on Slide 20.                                                                          
5:09:51 PM                                                                                                                    
Mr. Banks noted the  consequences of making decisions during                                                                    
the  development of  regulations designed  to strike  middle                                                                    
ground. He cited fiction in  the valuation number because of                                                                    
the  assumption that  the state  will  acquire greater  than                                                                    
fair market value.                                                                                                              
Co-Chair Stedman stated his concern  involving $7 billion of                                                                    
exposure without any  state input. He discussed  the idea of                                                                    
a cash flow  analysis for the state. He asked  about the net                                                                    
cash flow  in the  worst case  scenario. He  expressed great                                                                    
concern that $7 billion is a sizable policy call.                                                                               
5:12:48 PM                                                                                                                    
Co-Chair Stedman  voiced that the legislature  was not privy                                                                    
to the full  exposure of the treasury. He  observed that the                                                                    
presentation included  only small snapshots of  the analysis                                                                    
run.   He  stressed   that  his   comfort  level   with  the                                                                    
information provided is low.                                                                                                    
5:15:09 PM                                                                                                                    
Co-Chair Stedman alleged that  the legislature receives only                                                                    
bits and  pieces of information from  the administration. He                                                                    
asserted  that  the  state might  face  a  fully  subscribed                                                                    
gasline  while the  ability to  maneuver under  AGIA remains                                                                    
Mr. Banks  responded that if  the department  was attempting                                                                    
to obscure the downside risk  assumed by the state, he would                                                                    
not have offered the presentation.  He noted the regulations                                                                    
mitigate for a balance and  resolve the exposure problem for                                                                    
the  companies.  He  did  not  believe  that  the  presented                                                                    
assumptions   would  be   the   outcome.  Co-Chair   Stedman                                                                    
responded   that    worst   case    scenarios   occasionally                                                                    
materialize. He wished  to see a worst case  scenario run on                                                                    
the proposal.                                                                                                                   
Mr.  Banks commented  on  past  proposals. Co-Chair  Stedman                                                                    
added  that the  past  proposals  were thoroughly  discussed                                                                    
with the  legislature. Mr. Banks clarified  that the current                                                                    
proposal  was  to build  a  pipeline  as opposed  to  merely                                                                    
planning one.                                                                                                                   
5:20:46 PM                                                                                                                    
Senator Thomas  asked about the mitigating  factors on Slide                                                                    
17.  He asked  about the  assumptions regarding  the reasons                                                                    
for  switching  that led  to  the  chart  on Slide  20.  Mr.                                                                    
Hagemeyer explained  that Slide  17 explains the  actions to                                                                    
mitigate the  risk perceived by the  producers. He continued                                                                    
that  Slide  20   suggests  the  potential  of   a  lack  of                                                                    
mitigation of risk.                                                                                                             
Senator  Thomas  asked  about  the  concerns  regarding  the                                                                    
reasons  for   switching  and   its  frequency.   Mr.  Banks                                                                    
responded  that  concerns  raised include  unused  capacity.                                                                    
Another  concern was  that a  producer may  have midterm  or                                                                    
long term contract commitments and  gas taken in the form of                                                                    
RIK would compromise those commitments.                                                                                         
5:24:36 PM                                                                                                                    
Co-Chair   Stedman   appreciated    the   presentation.   He                                                                    
maintained that  the magnitude of the  state's exposure must                                                                    
be  discussed. He  stressed the  hope  for a  gasline and  a                                                                    
successful open  season. He hoped  for the success  of AGIA,                                                                    
but wanted to ensure ample revenue.                                                                                             
The meeting was adjourned at 5:25 PM.                                                                                           

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