Legislature(2013 - 2014)SENATE FINANCE 532

03/06/2014 09:00 AM FINANCE

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09:08:06 AM Start
09:08:30 AM SB138
10:03:06 AM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
Heard & Held
-- Testimony <Invitation Only> --
+ Bills Previously Heard/Scheduled TELECONFERENCED
                 SENATE FINANCE COMMITTEE                                                                                       
                       March 6, 2014                                                                                            
                         9:08 a.m.                                                                                              
9:08:06 AM                                                                                                                    
CALL TO ORDER                                                                                                                 
Co-Chair Meyer called the Senate Finance Committee meeting                                                                      
to order at 9:08 a.m.                                                                                                           
MEMBERS PRESENT                                                                                                               
Senator Pete Kelly, Co-Chair                                                                                                    
Senator Kevin Meyer, Co-Chair                                                                                                   
Senator Anna Fairclough, Vice-Chair                                                                                             
Senator Click Bishop                                                                                                            
Senator Mike Dunleavy                                                                                                           
Senator Donny Olson                                                                                                             
MEMBERS ABSENT                                                                                                                
Senator Lyman Hoffman                                                                                                           
ALSO PRESENT                                                                                                                  
Mike Navarre, Mayor, Kenai Peninsula Borough; Luke Hopkins,                                                                     
Mayor, Fairbanks Northstar Borough;                                                                                             
PRESENT VIA TELECONFERENCE                                                                                                    
Clay Walker, Mayor, Healy-Denali Borough; Charlotte Brower,                                                                     
Mayor, North Slope Borough.                                                                                                     
SB 138    GAS PIPELINE; AGDC; OIL & GAS PROD. TAX                                                                               
          SB 138 was HEARD and HELD in committee for                                                                            
          further consideration.                                                                                                
SENATE BILL NO. 138                                                                                                           
     "An Act relating to the purposes of the Alaska Gasline                                                                     
     Development Corporation to advance to develop a large-                                                                     
     diameter natural gas pipeline project, including                                                                           
     treatment  and  liquefaction  facilities;  establishing                                                                    
     the large-diameter  natural gas pipeline  project fund;                                                                    
     creating  a  subsidiary  related  to  a  large-diameter                                                                    
     natural gas  pipeline project, including  treatment and                                                                    
     liquefaction facilities;  relating to the  authority of                                                                    
     the  commissioner  of  natural resources  to  negotiate                                                                    
     contracts related to North  Slope natural gas projects,                                                                    
     to enter into confidentiality  agreements in support of                                                                    
     contract negotiations  and implementation, and  to take                                                                    
     custody  of  gas  delivered  to   the  state  under  an                                                                    
     election  to pay  the  oil and  gas  production tax  in                                                                    
     kind; relating  to the sale,  exchange, or  disposal of                                                                    
     gas delivered  to the  state under  an election  to pay                                                                    
     the oil  and gas  production tax  in kind;  relating to                                                                    
     the  duties of  the commissioner  of revenue  to direct                                                                    
     the   disposition  of   revenues   received  from   gas                                                                    
     delivered to the state in  kind and to consult with the                                                                    
     commissioner of  natural resources  on the  custody and                                                                    
     disposition  of gas  delivered to  the  state in  kind;                                                                    
     relating  to  the  authority  of  the  commissioner  of                                                                    
     natural resources to  propose modifications to existing                                                                    
     state oil  and gas  leases; making  certain information                                                                    
     provided  to the  Department of  Natural Resources  and                                                                    
     the Department  of Revenue exempt from  inspection as a                                                                    
     public record;  making certain tax  information related                                                                    
     to an  election to pay  the oil and gas  production tax                                                                    
     in  kind exempt  from  tax confidentiality  provisions;                                                                    
     relating  to   establishing  under  the  oil   and  gas                                                                    
     production tax  a gross  tax rate  for gas  after 2021;                                                                    
     making  the  alternate  minimum  tax  on  oil  and  gas                                                                    
     produced north of 68 degrees  North latitude after 2021                                                                    
     apply only  to oil;  relating to  apportionment factors                                                                    
     of  the  Alaska  Net  Income  Tax  Act;  authorizing  a                                                                    
     producer's election  to pay the oil  and gas production                                                                    
     tax  in  kind  for  certain gas  and  relating  to  the                                                                    
     authorization;   relating    to   monthly   installment                                                                    
     payments of  the oil and  gas production  tax; relating                                                                    
     to  interest payments  on monthly  installment payments                                                                    
     of  the  oil  and   gas  production  tax;  relating  to                                                                    
     settlements  between producers  and royalty  owners for                                                                    
     oil  and   gas  production  tax;  relating   to  annual                                                                    
     statements  by  producers  and explorers;  relating  to                                                                    
     annual  production   tax  values;  relating   to  lease                                                                    
     expenditures;  amending the  definition of  gross value                                                                    
     at the  'point of production'  for gas for  purposes of                                                                    
     the  oil and  gas  production  tax; adding  definitions                                                                    
     related to  natural gas  terms; clarifying  that credit                                                                    
     may not  be taken against  the in-kind levy of  the oil                                                                    
     and  gas production  tax for  gas for  purposes of  the                                                                    
     exploration incentive  credit, the oil or  gas producer                                                                    
     education credit,  and the film production  tax credit;                                                                    
     making  conforming  amendments;  and providing  for  an                                                                    
     effective date."                                                                                                           
9:08:30 AM                                                                                                                    
Co-Chair Kelly  discussed the  meeting's agenda.  He related                                                                    
that  Vice-Chair  Fairclough  had   a  bill  hearing  before                                                                    
another committee, but would join the meeting in progress.                                                                      
MIKE  NAVARRE, MAYOR,  KENAI PENINSULA  BOROUGH, appreciated                                                                    
the opportunity  to discuss the  impacts of SB 138  on local                                                                    
governments.  He related  that the  Kenai Peninsula  Borough                                                                    
was in agreement that a  liquefied natural gas (LNG) project                                                                    
could and  should be in the  best interest of the  state and                                                                    
could provide long-term revenues for  both the state and the                                                                    
municipalities.  He  stated  that  there were  a  number  of                                                                    
issues  that he  wanted  to discuss  that  were relevant  to                                                                    
local government, as well as  concerns regarding some of the                                                                    
things  that   the  borough  had  reviewed,   including  the                                                                    
legislation  and the  heads of  agreement (HOA).  He related                                                                    
that a group consisting of  the Kenai Peninsula Borough, the                                                                    
North Slope  Borough, the Fairbanks North  Star Borough, and                                                                    
Valdez had got  together as a group to discuss  the issue of                                                                    
an  Alaska  LNG project;  the  group  had also  invited  the                                                                    
Denali  Borough, the  Mat-Su Borough,  and Anchorage,  which                                                                    
may  be along  the  route,  to participate  in  some of  the                                                                    
discussions  regarding what  the impacts  of such  a project                                                                    
might  be  to municipalities,  as  well  as what  issues  of                                                                    
concern  the municipalities  might raise.  He reported  that                                                                    
the biggest  concern to municipalities  was the  language in                                                                    
the HOA  that referenced  legislation that would  be brought                                                                    
forward,  presumably next  year, which  would allow  for the                                                                    
construction  of  a  pipeline and  facilities  necessary  to                                                                    
monetize  the  natural gas  resources.  He  stated that  the                                                                    
concern involved  a reference made  to a payment in  lieu of                                                                    
taxes (PILT) and  other items that might be  needed in order                                                                    
to have  a successful project.  He stated that the  group of                                                                    
municipalities  recognized that  there might  be concessions                                                                    
for a project of this  size and would probably support them;                                                                    
however,  they  did  not know  what  those  concessions  and                                                                    
impacts  would be.  He noted  that the  language in  the HOA                                                                    
said that  the state would consult  with the municipalities,                                                                    
but observed  that consult was  not a very strong  word; the                                                                    
group  would rather  have  agreement in  the  process or  it                                                                    
would rather negotiate a deal on its own behalf.                                                                                
Mr. Navarre continued  to speak to language in  the bill and                                                                    
related  that past  negotiations between  the state  and the                                                                    
major  companies  had  resulted  in a  discussion  of  other                                                                    
fiscal certainty  terms such as existing  oil properties. He                                                                    
explained that  there was a  concern that because  tax bases                                                                    
for existing  oil infrastructure  were a  big part  of local                                                                    
government  tax  revenue, they  should  not  be changed  and                                                                    
included  in the  concession with  respect to  a natural-gas                                                                    
facility and  pipeline. He  noted that  the group  of mayors                                                                    
recognized  that companies  would  be  taking a  significant                                                                    
risk, but that  the State of Alaska was also  taking a large                                                                    
risk.  He expected  that companies  that came  to the  table                                                                    
would do the  best they could and would  bring everything to                                                                    
the negotiations that would benefit  them; likewise, he knew                                                                    
that members of the legislature  would look out for Alaska's                                                                    
interests. He noted that the  group was before the committee                                                                    
to make  sure that  in the course  of discussion,  they were                                                                    
able  to  raise the  issues  that  were important  to  local                                                                    
governments  that  would impact  them.  He  stated that  the                                                                    
contractual provisions  regarding what the  legislative role                                                                    
over   the  project   would  be   over   time  had   changed                                                                    
significantly  and that  it  was  a way  to  lock in  fiscal                                                                    
certainty.  He  concluded  that  the  group's  goal  was  to                                                                    
identify  their concerns  during  the process  and ask  that                                                                    
they be addressed.                                                                                                              
9:15:35 AM                                                                                                                    
LUKE HOPKINS, MAYOR,  FAIRBANKS NORTHSTAR BOROUGH, indicated                                                                    
that the  group of mayors had  been tracking SB 138  and the                                                                    
conditions that it allowed the  administration to go forward                                                                    
with and  negotiate. He  noted that  he had  experience with                                                                    
PILT agreements and  that both sides agreed to  a value that                                                                    
went forward to the legislative  bodies for approval. He and                                                                    
the other  mayors in the  group were concerned that  if they                                                                    
sat down and  negotiated, they might not be able  to come to                                                                    
conclusion, which  would be unfortunate. He  stated that the                                                                    
group  wanted  amendments  to the  legislation  that  stated                                                                    
specifically   that   there   needed  to   be   consent   by                                                                    
municipalities,  the  commissioner   of  the  Department  of                                                                    
Natural   Resources,  and   others   negotiating  with   the                                                                    
producers.  He mentioned  fiscal  certainty  and noted  that                                                                    
Section  10 of  the HOA  spoke  to a  healthy long-term  oil                                                                    
business, reducing  valuation, and other  potential disputes                                                                    
between the producer  parties and the state;  he stated that                                                                    
the group of  mayors wanted language added to  the bill that                                                                    
specified that this  did not affect those items  in Title 29                                                                    
and AS 43.56  on existing oil and gas  properties. He stated                                                                    
that there  were methodologies and sideboards  regarding how                                                                    
impact aid  was computed and  that the group could  speak to                                                                    
that as well;  however, so far, the  group's in-depth review                                                                    
of  the  bill  brought  forward the  existing  oil  and  gas                                                                    
infrastructure  concerns, as  well as  how a  PILT agreement                                                                    
was arrived at.                                                                                                                 
Co-Chair Kelly inquired  what the group of  mayors' level of                                                                    
discussion had  been with the administration  about the bill                                                                    
and their  concerns. Mr.  Navarre thought  that both  he and                                                                    
Mr. Hopkins had spoken  with the administration and recalled                                                                    
speaking to  Mr. Pawlowski  the prior  day. He  thought that                                                                    
Mr.  Pawlowski  had  a  better  understanding  of  what  the                                                                    
group's  concerns  were and  that  he  had stated  that  the                                                                    
Department of  Revenue was able  to negotiate  away existing                                                                    
oil properties  in a contract;  however, what  concerned the                                                                    
mayors was that the HOA  stated that once the parties agree,                                                                    
they brought  forward and  supported legislation  before the                                                                    
legislature. He  explained that  the agreeing  parties could                                                                    
bring forward  any legislation and  while they may  not have                                                                    
statuary authority  currently to do some  things, they would                                                                    
ask for  it. He expounded that  the concern was that  if the                                                                    
group of  mayors did  not at least  raise their  issues now,                                                                    
the next  year the  legislature would  say that  they should                                                                    
have been  before them  earlier in the  process or  that the                                                                    
dynamic of  the discussion  and debate  over the  issue next                                                                    
year would  be that  it was  too late to  change any  of the                                                                    
terms that had been agreed on going forward.                                                                                    
9:19:59 AM                                                                                                                    
Mr. Hopkins related  that the group of  mayors had submitted                                                                    
letters  asking  to  meet with  the  governor,  Commissioner                                                                    
Rodell, and Commissioner Balash. He  related that he had met                                                                    
with  Commissioner Balash  and Commissioner  Rodell the  day                                                                    
before yesterday and had very  good conversations with them.                                                                    
He noted  that he spoken  with the administration  about the                                                                    
concerns  in   depth  and   that  Commissioner   Balash  had                                                                    
understood  their points,  as well  as the  need to  discuss                                                                    
them as sideboards in the legislation.                                                                                          
Co-Chair Kelly  noted that  the Memorandum  of Understanding                                                                    
(MOU)  and  the   HOA  would  be  signed   and  would  exist                                                                    
regardless  of  the  legislation and  that  the  legislature                                                                    
would trigger the  next step. He related  that the challenge                                                                    
with SB  138 was that  people tended  to talk about  so many                                                                    
things  that were  not in  the bill  and that  huge gas-line                                                                    
issues  were  being discussed  when  the  project was  still                                                                    
trying to  get to the pre-FEED  stage. He wanted to  be sure                                                                    
that there  was a mechanism  to address the concerns  of the                                                                    
group of mayors.                                                                                                                
Mr. Navarre stated  that he had met with the  governor a few                                                                    
weeks  prior and  that  the governor  had  related that  the                                                                    
state did  want to talk to  communities but that it  was too                                                                    
early in the process for a  lot of the discussion. He opined                                                                    
that    particularly    with    contractual    arrangements,                                                                    
municipalities knew  that they  were unlikely  to be  in the                                                                    
negotiating room and that they  would not see anything until                                                                    
legislation was  brought forward; while it  may be premature                                                                    
for municipalities to have specific  discussions, it was not                                                                    
premature  to  raise  issues of  concern.  He  thought  that                                                                    
during the  negotiations, sideboards in the  legislation for                                                                    
the  administration would  be important  and would  be given                                                                    
attention. He  related that  the sideboards  could recommend                                                                    
against  certain  types of  things  being  written into  the                                                                    
agreements;  he thought  that instructions  like this  would                                                                    
change the dynamics of the  negotiations and what would come                                                                    
back  from it.  He offered  that all  Alaskans had  a vested                                                                    
interest  in the  project and  that all  of the  communities                                                                    
would  be  impacted because  they  were  part of  state  and                                                                    
received a lot of support from the state.                                                                                       
9:24:42 AM                                                                                                                    
Co-Chair Kelly  noted that Mr.  Navarre had  previously been                                                                    
co-chair  of  the  House  Finance  Committee  and  that  his                                                                    
opinion  carried a  lot  of weight.  He  inquired if  intent                                                                    
language  would suffice  to meet  the goal  of the  group of                                                                    
mayors.  Mr. Navarre  replied that  the  group had  proposed                                                                    
some  amendments to  the  legislation  that would  basically                                                                    
state that contracts "may not  change these specific items."                                                                    
He noted  that even with the  amendments, the administration                                                                    
could  go forward  with negotiations  and bring  anything to                                                                    
legislature  that  the  HOA allowed;  however  it  would  be                                                                    
stated by the  legislature that extra scrutiny  would be put                                                                    
on certain issues that were brought back from negotiations.                                                                     
Mr. Hopkins  stated that  as you looked  at the  bill, there                                                                    
were a lot  of specifics regarding what  would move forward;                                                                    
the  group's amendments  represented  another  piece to  add                                                                    
more specificity to  the two areas of  concern. He expressed                                                                    
concern with  using intent language instead  of an amendment                                                                    
to affect the change.                                                                                                           
9:26:07 AM                                                                                                                    
CLAY    WALKER,    MAYOR,    HEALY-DENALI    BOROUGH    (via                                                                    
teleconference),  related  that   the  Healy-Denali  Borough                                                                    
supported  the methodology  of a  PILT  payment with  impact                                                                    
funds. He  looked forward  to being  part of  the discussion                                                                    
and  that Mr.  Hopkins  had brought  up  an important  point                                                                    
about the meaning of negotiation relative to consultation.                                                                      
Co-Chair Kelly  noted that Vice-Chair Fairclough  had joined                                                                    
the committee in progress.                                                                                                      
Senator Olson  noted that there had  been amendments drafted                                                                    
to  protect the  municipalities and  inquired if  Mr. Walker                                                                    
had seen  those and agreed  with them. Mr.  Walker responded                                                                    
that he had not seen the proposed amendments.                                                                                   
9:27:59 AM                                                                                                                    
Co-Chair Kelly  inquired if the municipalities  were working                                                                    
as a group. Mr. Navarre replied in the affirmative.                                                                             
Co-Chair Kelly stated that he  had asked Senator Micciche to                                                                    
work  with  the  group  of  mayors  regarding  some  of  the                                                                    
language  and how  to  proceed forward.  He  noted that  the                                                                    
committee wanted  to get a  new CS out the  following Monday                                                                    
and  that  any language  that  could  be provided  would  be                                                                    
appreciated. He stated  that from memory, he  saw about four                                                                    
things that needed  to be addressed in the  bill. He thought                                                                    
that  the concerns  of the  group of  mayors were  worthy of                                                                    
consideration  and should  to be  addressed before  the bill                                                                    
left the committee.                                                                                                             
Vice-Chair Fairclough  apologized for  being late  and noted                                                                    
that  she had  had a  bill before  the Senate  State Affairs                                                                    
Committee. She  thought that the state  absolutely wanted to                                                                    
protect its  municipalities, but also wanted  to keep enough                                                                    
leverage for  a project to  actually happen. She  noted that                                                                    
at least for her, any  language for consideration would need                                                                    
to leave flexibility in the  state's position in negotiating                                                                    
with the  parties involved. She  explained that  the project                                                                    
involved  a commercial  agreement  that  was much  different                                                                    
than  telling people  what  to do  inside  of a  contractual                                                                    
obligation.  She  offered  that the  state  could  negotiate                                                                    
certain  arrangements  and  could  also not  get  a  project                                                                    
depending on what was placed  inside of the legislation. She                                                                    
was cautiously optimistic at arriving  at a process that met                                                                    
both expectations.                                                                                                              
Mr. Navarre  thought that everyone  was in agreement  that a                                                                    
project   was  desired   and  that   the  HOA   specifically                                                                    
referenced the alignment of interests  between the state and                                                                    
the other parties  to that agreement. He  thought that there                                                                    
should really  be an alignment  between the state  and local                                                                    
governments  on  the  issues   strictly  because  it  was  a                                                                    
significant change  from the status  quo. He noted  that the                                                                    
group  did  not want  to  stop  the  project, but  was  also                                                                    
concerned  about what  was negotiated  into  it. He  thought                                                                    
that  everyone   should  be  concerned   if  the   bill  was                                                                    
discussing rolling  existing taxable oil properties  into an                                                                    
agreement because there was  already a significance reliance                                                                    
on those taxes at the  local-government level. He noted that                                                                    
things could  change over time  and recalled the  passage of                                                                    
SB  21 the  prior  year; however,  drafting  things into  an                                                                    
arrangement  or compromising  them  at the  front  end of  a                                                                    
project was  something that was significant.  He opined that                                                                    
no  one was  in disagreement  with monetizing  the gas,  but                                                                    
that it  was a matter  of figuring  out who got  what share;                                                                    
furthermore,  the  group  of mayors  recognized  that  total                                                                    
government take  was a  key component of  that and  that the                                                                    
state  was impacted  as much  as  anyone by  a project  like                                                                    
9:31:42 AM                                                                                                                    
Senator Dunleavy  imagined that  in the process  of figuring                                                                    
things up front, the municipalities  would have come in as a                                                                    
group.  He   inquired  if  the   group  of   mayors  foresaw                                                                    
municipalities having  veto power down  the road and  if the                                                                    
concerns needed  to be addressed  up front before  the state                                                                    
moved  on  with  the  project. He  wondered  how  the  group                                                                    
envisioned language  or a mechanism by  which municipalities                                                                    
acted as one  to provide alignment and  certainty as opposed                                                                    
to  having veto  power down  the road.  Mr. Navarre  did not                                                                    
think that municipalities should  have veto power. He stated                                                                    
that  a PILT  was different  than  the status  quo and  that                                                                    
determining  what  that  looked  like and  how  things  were                                                                    
allocated was a key part of  the agreement. He noted that he                                                                    
had  served in  the legislature  and that  there was  always                                                                    
competition  for  any available  money.  He  opined that  if                                                                    
there was a  PILT paid to the state, how  that was allocated                                                                    
could change  over time.  He stated that  all of  the mayors                                                                    
and municipalities that had participated  in the group had a                                                                    
little  bit different  interest and  take on  the issue.  He                                                                    
noted that currently, the lead  site for the terminus of the                                                                    
LNG  facilities was  Nikiski. He  explained that  if Nikiski                                                                    
was  the  terminus,  his   borough's  communities  would  be                                                                    
significantly  impacted;   as  a  result,  he   wanted  some                                                                    
relationship between where the  assets were sited, where the                                                                    
long-term impacts were, and what  a PILT would look like. He                                                                    
stated  that  impact  aid during  the  construction  of  the                                                                    
pipeline  would  look  significantly  different;  the  Kenai                                                                    
Peninsula  would  be  impacted,   but  so  would  Fairbanks,                                                                    
Anchorage, and  any other community  along the  corridor. He                                                                    
noted that  the project would  also impact port  cities that                                                                    
brought materials in.                                                                                                           
Co-Chair  Kelly stated  that he  would not  support language                                                                    
that resulted  in a veto  power for municipalities  and that                                                                    
Mr. Navarre  had stated that  he also did not  support that.                                                                    
He thought  that the  committee needed  to put  something in                                                                    
place  for the  next step  that guided  negotiations through                                                                    
that  "gate"  and inquired  if  that  was an  accurate.  Mr.                                                                    
Navarre replied in the affirmative.                                                                                             
Mr.  Hopkins  noted  that he  and  Commissioner  Balash  had                                                                    
discussed whether something  similar to a MAG  group that in                                                                    
the Stranded  Gas Act  would be  sufficient. He  stated that                                                                    
something  similar to  a MAG  group was  possible, but  that                                                                    
different  boroughs might  have different  values that  they                                                                    
would start at with the state  in the negotiation of a PILT;                                                                    
furthermore,  these pieces  should be  rolled in  somehow to                                                                    
ensure a fair process.                                                                                                          
9:35:24 AM                                                                                                                    
Co-Chair  Kelly did  not  want to  make  any commitments  or                                                                    
statements about how  the bill should look,  but agreed that                                                                    
there   needed   to   be    some   consideration   for   the                                                                    
municipalities before the next step  was taken. He noted for                                                                    
the record  that his  previous statements  about the  new CS                                                                    
had  not been  intended to  mean that  the group  of mayors'                                                                    
problems would be  fixed, but that he wanted  to discuss and                                                                    
decide what  to do  regarding the municipalities  before the                                                                    
CS came out.                                                                                                                    
9:35:58 AM                                                                                                                    
AT EASE                                                                                                                         
9:40:00 AM                                                                                                                    
9:40:17 AM                                                                                                                    
AT EASE                                                                                                                         
9:41:18 AM                                                                                                                    
9:41:28 AM                                                                                                                    
CHARLOTTE BROWER, MAYOR, NORTH SLOPE BOROUGH (via                                                                               
teleconference), spoke from prepared written testimony                                                                          
(copy on file).                                                                                                                 
     Good morning Co-chairman  Kelly, Co-chairman Meyer, and                                                                    
     My name  is Charlotte Brower.   I am honored to  be the                                                                    
     Mayor  of  the  North  Slope Borough,  the  wife  of  a                                                                    
     whaling captain,  and am blessed with  six children and                                                                    
     twenty-five grandchildren.                                                                                                 
     Thank  you for  the opportunity  to speak  on SB138,  a                                                                    
     bill  that  authorizes  the State  of  Alaska  to  move                                                                    
     forward on  developing a natural gas  pipeline from the                                                                    
     North Slope to tidewater.                                                                                                  
     Today I would  like to talk about some  of the concerns                                                                    
     and interests  of the North Slope  Borough regarding SB
     138 and  the Heads  of Agreement,  which is  a separate                                                                    
     document that  outlines the  guiding principles  of the                                                                    
     Alaska  LNG  Project.   I'm  also  here to  offer  some                                                                    
     suggestions on  how those  concerns could  be addressed                                                                    
     by this  committee, the Legislature, the  Governor, and                                                                    
     his Administration.                                                                                                        
     Before we talk about  concerns, it's important that say                                                                    
     'Thank You' to our Good  Lord for the opportunity to be                                                                    
     having  this discussion  on how  to  build a  40 to  50                                                                    
     billion-dollar  project  to  develop our  natural  gas.                                                                    
     How  many other  legislators  or mayors  would love  to                                                                    
     trade places with us right now?                                                                                            
     The Alaska  LNG Project  envisions a  20 to  25 percent                                                                    
     ownership by  the State of  Alaska.  This  requires the                                                                    
     Legislature  to evaluate  complicated policy  decisions                                                                    
     and risks  and costs  on a  level equal  with decisions                                                                    
     made by  Fortune 500 companies.   Please let me  take a                                                                    
     moment  to   acknowledge  our  appreciation   for  your                                                                    
     efforts  on behalf  of our  residents.   You are  truly                                                                    
     deciding the future of our  state, and on behalf of the                                                                    
     North Slope Borough, I commend you.  Quyanaqpak.                                                                           
     As  Alaskans, we've  learned from  the past  that large                                                                    
     projects like  this can set  a positive course  for our                                                                    
     future.  But we also know  that in order to provide the                                                                    
     maximum possible  benefits, we have to  be prepared for                                                                    
     the  impacts.    For  example,  the  Trans  Alaska  Oil                                                                    
     Pipeline has  provided billions  of dollars  of revenue                                                                    
     and  jobs, but  we also  learned lessons  about demands                                                                    
     for public  services to deal with  social services, job                                                                    
     training,    infrastructure,    public   safety,    and                                                                    
     That brings me  to the points that  should be addressed                                                                    
     in Senate Bill 138 and  the Heads of Agreement document                                                                    
     before this committee.                                                                                                     
     The  Heads of  Agreement  has language  in Article  9.3                                                                    
     that  states the  "Parties"  intend  for the  project's                                                                    
     fiscal  terms   to  be  included   in  project-enabling                                                                    
     contracts.    Subject   to  "consultation"  with  local                                                                    
     governments,   the    Administration   will   establish                                                                    
     payments in lieu  of property tax (PILT),  which are to                                                                    
     be  based on  a unit  rate  per throughput  basis.   In                                                                    
     other  words, the  payment is  calculated as  cents per                                                                    
     thousand cubic feet of natural gas.                                                                                        
     The  reason  for  concern  is   that  the  process  for                                                                    
     "consultation"  is  not  defined.    We  see  that  the                                                                    
     process  for  enabling contracts  is  an  "up or  down"                                                                    
     ratification   vote  by   the  Legislature   after  the                                                                    
     Administration submits  them to  you for approval.   If                                                                    
     the local taxing authority  of municipal governments is                                                                    
     going to  be modified  to provide fiscal  certainty, we                                                                    
     must be part of the process.                                                                                               
    Let me turn now to the language in Senate Bill 138.                                                                         
     The  current language  in  SB138  addresses the  taxing                                                                    
     authority  of  local  municipal  governments  in  three                                                                    
     different sections.                                                                                                        
     First,   the    Senate   Resources    Committee   added                                                                    
     Legislative  Intent  language  in Section  1  that  the                                                                    
     interests  of  local  governmental  entities  "must  be                                                                    
     considered  in  contract  negotiations to  protect  the                                                                    
     financial   and   other   interests"   of   the   local                                                                    
     governmental entities.   The addition of  this language                                                                    
     is  recognized and  appreciated, but  it does  not have                                                                    
     the force of law, and does not go far enough.                                                                              
     Second,  in Section  8 of  the bill,  the state-created                                                                    
     subsidiary  is given  the legal  provisions created  in                                                                    
     current   law  for   the  Alaska   Gasline  Development                                                                    
     Corporation,  known  as  "AGDC".    This  includes  the                                                                    
     language  in Alaska  Statute  31.25.260, which  exempts                                                                    
     AGDC  from municipal  taxes for  any property  owned by                                                                    
     AGDC.    In  addition,  this  section  of  law  further                                                                    
     exempts  taxable  property  for any  joint  venture  or                                                                    
     partnership  with  AGDC   during  construction  of  the                                                                    
     This creates  confusion because the new  subsidiary for                                                                    
     the  large-diameter  project  is   given  the  all  the                                                                    
     benefits provided to AGDC, but  they are two completely                                                                    
     separate and  distinct projects.   In  the case  of the                                                                    
     Alaska  LNG Project  in SB138,  there is  a very  large                                                                    
     project  that   proposes  to  have   significant  state                                                                    
     ownership.  This was not  the model that was envisioned                                                                    
     when the  Legislature discussed  the formation  of AGDC                                                                    
     last year during the hearings on House Bill 4.                                                                             
     Third, the Commissioners of  the Departments of Natural                                                                    
     Resources  and   Revenue  are  provided   authority  to                                                                    
     negotiate enabling  contracts that must be  ratified by                                                                    
     the Legislature.   Based  on the  language in  the HOA,                                                                    
     these enabling  contracts will be  used to  establish a                                                                    
     PILT  system  and also  establish  a  series of  impact                                                                    
     payments during project construction.                                                                                      
     I  am  here today  to  request  your consideration  for                                                                    
     making amendments to SB138 and  other changes that will                                                                    
     protect  the interests  of local  governments.   Before                                                                    
     discussing those  amendments, I  would like  to provide                                                                    
     some background.                                                                                                           
     Less than  three weeks  ago I  was fortunate  enough to                                                                    
     offer  testimony to  the House  Resources Committee  in                                                                    
     Juneau  to support  of HJR26.   HJR26  is a  resolution                                                                    
     calling  upon  the  United   States  Congress  to  pass                                                                    
     legislation  that establish  a revenue  sharing program                                                                    
     from the  proceeds of  oil and  gas development  on the                                                                    
     outer continental  shelf off our shores.   Earlier this                                                                    
     week, HJR26  passed the  Senate on  a vote  of 17  - 0.                                                                    
     Thank  you  for your  vote.    By working  together  as                                                                    
     Alaskans,  we are  sending a  message  for receiving  a                                                                    
     fair and  equitable distribution of revenues  that come                                                                    
     from energy development off our shores.                                                                                    
     It  was  our  combined   message  as  state  and  local                                                                    
     governments  that we  will need  resources  to keep  up                                                                    
     with  infrastructure   requirements,  expand  emergency                                                                    
     response and  search and rescue capabilities,  and work                                                                    
     to   maintain  healthy   communities   and  a   healthy                                                                    
     When it  comes to dealing  with the impacts of  oil and                                                                    
     gas development, the  basic discussion between offshore                                                                    
     and onshore is not really  that much different.  As the                                                                    
     local  government   responsible  for   providing  basic                                                                    
     essential services,  the North  Slope Borough  is there                                                                    
     to  help   provide  for  cost  of   schools,  emergency                                                                    
     response,  health  and   social  services,  and  public                                                                    
     Like most other municipal  governments, the North Slope                                                                    
     Borough relies  upon our authority  to levy  a property                                                                    
     tax in order  to generate the revenue  to provide these                                                                    
     public services.  That is  why any discussion to exempt                                                                    
     property taxes  from a project of  this magnitude gives                                                                    
     me cause for concern.                                                                                                      
     This  is  not  the   first  time  we've  discussed  the                                                                    
     development of a natural gas  pipeline and the issue of                                                                    
     fiscal stability  for the project.   And I  continue to                                                                    
     believe  that municipal  taxes are  not the  issue that                                                                    
     makes  or breaks  the margin  on a  project that  could                                                                    
     exceed $50 billion.                                                                                                        
     On behalf of  the North Slope Borough, I  would like to                                                                    
     request   your   consideration    for   the   following                                                                    
     amendments to Senate Bill 138:                                                                                             
     The  newly created  subsidiary should  not be  provided                                                                    
     the tax exemptions  provided to AGDC for  the small in-                                                                    
     state  project.    In particular,  the  tax  exemptions                                                                    
     under  AS  31.25.260 should  not  apply  to the  large-                                                                    
     diameter project in SB138.                                                                                                 
     Let's  explore ways  for municipalities  to participate                                                                    
     in  the project.   For  the  all the  reasons that  the                                                                    
     project  benefits from  participation by  the State  of                                                                    
     Alaska, perhaps many of  the concerns of municipalities                                                                    
     could be  addressed in the  same manner.   For example,                                                                    
     perhaps  municipal  governments could  access  revenues                                                                    
     and get  access to natural  gas by having  an ownership                                                                    
     stake in a portion of the project.                                                                                         
     The  Governor  has  authority to  issue  Administrative                                                                    
     Orders that  could establish an advisory  working group                                                                    
     of   municipal  officials,   Administration  officials,                                                                    
     industry  participants,  and   others.    Perhaps  this                                                                    
     approach  could   be  explored  to   get  conversations                                                                    
     started to resolve some of these concerns.                                                                                 
     No one  wants to see  a natural gas pipeline  more than                                                                    
     myself.  I see the  opportunity for my grandchildren to                                                                    
     have  good jobs,  and  I  also want  to  see access  to                                                                    
    affordable energy for my grandchildren's children.                                                                          
     In order to  get jobs and access  to affordable energy,                                                                    
     our  villages  will  need good  schools,  housing,  and                                                                    
     other basic services in order  to take advantage of the                                                                    
     opportunities.   And for that  reason, I am  here today                                                                    
     to  speak   up  for   the  ability  of   our  municipal                                                                    
     government to have the authority to meet those needs.                                                                      
9:54:00 AM                                                                                                                    
Mr. Hopkins  stated that  as the group  of mayors  looked at                                                                    
questions regarding  legislation, the  MOU, and the  HOA, it                                                                    
looked at  how impact aid to  municipalities was determined.                                                                    
Additionally  it  had  looked  at where  the  five  take-off                                                                    
points  were, how  that was  decided, and  if municipalities                                                                    
had  a  role  in  that.  He noted  that  his  community  was                                                                    
concerned  with  a  possible take-off  point  close  by.  He                                                                    
reiterated that the group's main  concerns were the existing                                                                    
taxation   on    oil   properties   and   being    able   to                                                                    
negotiate/consent  with the  PILT agreements.  He was  clear                                                                    
that PILT agreements would be part of the project.                                                                              
Senator  Olson requested  a comment  on the  three suggested                                                                    
amendments that  Ms. Brower had recommended.  He inquired if                                                                    
Mr. Hopkins  was in  favor of those  amendments or  if there                                                                    
were other things that he  felt should be included that were                                                                    
not. Mr.  Hopkins replied that had  not yet had a  chance to                                                                    
discuss  all of  the specifics  of the  amendments with  Ms.                                                                    
Brower.  He noted  that the  representatives from  the Kenai                                                                    
Peninsula Borough,  the North  Slope Borough,  the Fairbanks                                                                    
North  Star  Borough,  and Valdez  had  discussed  suggested                                                                    
amendments,   but  that   it  was   a   moving  target.   He                                                                    
acknowledged  the concern  with  AS 31  and  noted that  Ms.                                                                    
Brower had  spoken to  specific impact  pieces that  did not                                                                    
currently  have any  sideboards  for  discussion; he  looked                                                                    
forward to speaking  Ms. Brower as soon as  possible and see                                                                    
if other concerns could be submitted as a as a group.                                                                           
9:57:08 AM                                                                                                                    
Mr. Navarre  realized that municipalities would  not be part                                                                    
of the negotiations  in the HOA. He noted  that often times,                                                                    
someone  else had  to negotiate  on your  behalf. He  stated                                                                    
that,  in general,  people who  were  doing the  negotiation                                                                    
know  more about  how the  terms  were arrived  at and  also                                                                    
looked out for their own  interests first before they looked                                                                    
at the  interests of  people who  were not  in a  room; this                                                                    
reflected the groups  concern and why they  were raising the                                                                    
issue of impacts  to local governments. He  thought that 90-                                                                    
day sessions  were sometimes  inadequate for  complex issues                                                                    
and acknowledged  that the legislature  spent a lot  of time                                                                    
discussing and researching the issues.  He thought that when                                                                    
a bill  was introduced  the following year,  the legislature                                                                    
would do its due-diligence and  would look out for state and                                                                    
municipal  interests. He  offered  that it  was the  mayors'                                                                    
responsibility to  pay attention  to what  was going  and to                                                                    
express their concerns going forward  because the dynamic of                                                                    
the  debate  changed  when  there  was  a  bill  before  the                                                                    
legislature that  could result in a  $65 billion investment;                                                                    
at  this point,  the focus  would be  turned on  pushing the                                                                    
project  forward. He  noted  that most  people  would be  in                                                                    
favor of  moving the project  forward, but that  the details                                                                    
of what that meant long-term would only be known by a few.                                                                      
Mr. Navarre noted  that the people who would  know about the                                                                    
specifics of the agreements would  be legislators because it                                                                    
was their  job and responsibility.  He reported that  he had                                                                    
delved into  some of the  materials that had  been presented                                                                    
on the HOA and the legislation,  but that he could not do it                                                                    
full time.  He added  that the  legislature would  know more                                                                    
about the issue, would participate  in the negotiations, and                                                                    
would  be part  of discussions  with the  administration. He                                                                    
stated that  while it may not  be allowed in current  law, a                                                                    
line  could be  added to  the legislation  that stated  that                                                                    
"notwithstanding the  provisions of  whatever, this  is what                                                                    
we agreed to." He observed that  the group was not trying to                                                                    
stop the negotiations,  but was trying to  put sideboards on                                                                    
it that protected  what it viewed as  municipal concerns, as                                                                    
well as  what the  long-term impacts to  the state  were. He                                                                    
noted that the group was  concerned about the impacts to the                                                                    
state  long-term  because   municipalities  also  shared  in                                                                    
revenues that went  to the state as a result  of the state's                                                                    
resources base.                                                                                                                 
Senator Bishop  thanked the mayors  for their  testimony and                                                                    
thought none  of the raised  concerns were over the  top; he                                                                    
thought that the  mayors' concerns represented common-sense,                                                                    
good-question approaches  to the process. He  noted that the                                                                    
legislature  had  heard time  and  time  again how  big  the                                                                    
project was  and referenced Ms. Brower's  comments regarding                                                                    
how many  other legislators would  like to be  negotiating a                                                                    
$50 billion to  $65 billion deal. He noted  that the project                                                                    
was  huge  and that  expert  testimony  had stated  that  it                                                                    
needed to  be on  time and  on budget in  order to  meet the                                                                    
window of opportunity. He noted  that the state needed to be                                                                    
competitive to  have a  deal and  that part  of that  was in                                                                    
making sure  that the state's  municipalities were  on board                                                                    
with the deal. He concurred  with the comments of the mayors                                                                    
and  hoped  that an  agreement  could  be reached  that  got                                                                    
everyone in sync  in order to meet  the on-time, on-schedule                                                                    
process of the project.                                                                                                         
10:02:47 AM                                                                                                                   
Co-Chair Meyer discussed the following meeting's agenda.                                                                        
SB  138  was  HEARD  and   HELD  in  committee  for  further                                                                    
10:03:06 AM                                                                                                                   
The meeting was adjourned at 10:03 a.m.                                                                                         

Document Name Date/Time Subjects
SB138 NSB Testimony Brower.docx SFIN 3/6/2014 9:00:00 AM
SB 138