Legislature(2007 - 2008)SENATE FINANCE 532
04/28/2007 01:30 PM Senate FINANCE
| Audio | Topic |
|---|---|
| Start | |
| SB104 | |
| SB125 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| = | SB 125 | ||
| += | SB 104 | TELECONFERENCED | |
| + | TELECONFERENCED |
MINUTES
SENATE FINANCE COMMITTEE
April 28, 2007
1:44 p.m.
CALL TO ORDER
Co-Chair Bert Stedman convened the meeting at approximately
1:44:43 PM.
PRESENT
Senator Bert Stedman, Co-Chair
Senator Lyman Hoffman, Co-Chair
Senator Charlie Huggins, Vice Chair
Senator Kim Elton
Senator Donny Olson
Senator Joe Thomas
Senator Fred Dyson
Also Attending: TONY PALMER, Vice President, Alaska Business
Development, TransCanada Corporation and Chief Executive
Officer, Foothills Pipe Lines Limited; BILL WALKER, Project
Manager & General Council, Alaska Gasline Port Authority; PAUL
FULS, Legislative Liaison and Advisor, Alaska Gasline Port
Authority; MILES BAKER, Staff to Senator Stedman; ANNETTE
KRIETZER, Commissioner, Department of Administration
Attending via Teleconference: There were no teleconference
participants
SUMMARY INFORMATION
SB 104-NATURAL GAS PIPELINE PROJECT
The Committee heard testimony from representatives of
TransCanada Corporation and the Alaska Gasline Port Authority.
The bill was held in Committee.
SB 125-PERS /TRS CONTRIBUT'NS; UNFUNDED LIABILITY
The Committee was provided an explanation of a new committee
substitute by Co-Chair Stedman's staff and the Department of
Administration. The committee substitute was adopted and the
bill was held in Committee.
CS FOR SENATE BILL NO. 104(JUD)
"An Act relating to the Alaska Gasline Inducement Act;
establishing the Alaska Gasline Inducement Act matching
contribution fund; providing for an Alaska Gasline
Inducement Act coordinator; making conforming amendments;
and providing for an effective date."
1:44:58 PM
This was the eleventh hearing for this bill in the Senate
Finance Committee.
Co-Chair Stedman stated that the first order of business today
would be a presentation from TransCanada Corporation about the
Alaska Gasline Inducement Act (AGIA). He asked that the
testimony address "the interconnection between TransCanada and
Foothills Pipe Lines Limited", one of its subsidiaries operating
in the State.
1:45:18 PM
TONY PALMER, Vice President, Alaska Business Development,
TransCanada Corporation [TransCanada] and the Chief Executive
Officer, Foothills Pipe Lines Limited, explained that Foothills,
which is owned by TransCanada, has been "the licensee in Canada
for this project" for approximately 30 years.
1:46:35 PM
Mr. Palmer identified TransCanada as "the largest interstate
natural gas company in North America". Its holdings include
36,500 miles of large inch interstate/inter-provincial
pipelines. The 50 year old company transports 15 billion cubic
feet (BCF) of gas each day.
Mr. Palmer informed the Committee that TransCanada was
originally formed to construct a pipeline from the province of
Alberta in western Canada to eastern Canada. That pipeline is
longer than the pipeline that would be constructed from Prudhoe
Bay to Alberta. When the original pipeline began service in
1958, it initially transported 300 million cubic feet (MCF) or
approximately one-third of a BCF, each day.
Mr. Palmer specified that the daily volume transported today is
seven BCF. In order to handle this increased capacity, the
original pipeline was "completely looped" by the addition of six
parallel pipelines leaving Alberta. Product is now shipped to
mid-west and north-east United States (U.S.) markets in addition
to eastern Canada and Chicago. TransCanada moves two-thirds of
western Canada's gas to market.
1:48:20 PM
Mr. Palmer noted that the original construction project included
"a 'pre-build' for the Alaska Highway Pipeline System".
Mr. Palmer advised that TransCanada recently acquired a major
U.S. pipeline interstate company, American Natural Resources
(ANR). This has allowed TransCanada's system to transport gas
north from the Gulf of Mexico to West Texas, Oklahoma, Michigan,
Illinois, and Ohio markets.
Mr. Palmer stated that this history attests to TransCanada's
"long-standing business of constructing and developing long
distance pipelines as well as systems that are more gathering in
nature" in that they move gas from gas processing and
"conditioning plants to the borders of Alberta". "An independent
pipeline model with rolled in tolls" was utilized to expand the
original 250 mile long gathering system to one that will
transport approximately 11 BCF each day via 15,000 miles of
pipe.
1:50:06 PM
Mr. Palmer reiterated that the company has been involved in the
effort to construct a gas pipeline to Alaska for approximately
30 years. The first section of the aforementioned pre-build was
constructed in 1981. Another section was built in 1982 under the
specifications of Canada's Northern Pipeline Act (NPA). Further
expansions were made through 1998. Each section met NPA's
standards that existed at the time of construction.
Mr. Palmer stated that, over the past 30 years, TransCanada has
invested approximately two billion dollars in anticipation of
the project. The company holds "valid and exclusive certificates
issued" under NPA for the Canadian section of the pipeline.
Mr. Palmer declared that these certificates were unusual in that
they have no expiration date. In contrast, the terms issued by
Canada's National Energy Board (NEB) propose a two year time
period within which the proponents of the Canadian McKenzie
project must begin construction or loose their license.
Mr. Palmer qualified that the open-ended certificate specific to
the Alaska pipeline project is recognition of the national
priority given it by both Canada and the U.S. The U.S. Federal
Regulatory Commission (FERC) and the Canadian NEB approved
project conditions "under their normal regulatory procedure".
Both countries passed specific legislation for the project and
both signed a treaty supporting the project. "Those terms and
conditions are valid and effective today and are there for the
benefit of the project in both countries."
1:52:23 PM
Mr. Palmer assured the Committee that "Alaskan gas arriving in
Alberta we think will be attractive to the very liquid Alberta
hub". The approximate 11 BCF of gas that moves each day through
the Alberta hub attests to it being "the most liquid in North
America". It is actively traded on the financial market and is
significantly "more liquid than the Henry hub".
Mr. Palmer addressed the opportunities that would be available
for Alaskan gas in the Alberta hub, including financial
transaction accommodations. The expectation is that in ten years
when the gasline was ready for service, "there would be
sufficient spare capacity leaving Alberta" on TransCanada's and
other's systems "to move the entire Alaska volume to market" in
North America.
1:54:07 PM
Mr. Palmer stated that while TransCanada would welcome having
long-term contracts for the use of its lines leaving Alberta,
Alaska would have the option, as chosen by many of TransCanada's
customers, to have short-term contracts. This option provides
"significant flexibility" for customers "to choose markets day
by day and optimize their systems and optimize their net backs
year by year".
Mr. Palmer noted that during the 1990s, TransCanada invested $14
billion into the construction of more that 7,000 miles of
pipeline in Canada and the U.S. It was able to construct between
500 to 1,000 miles of line "each year on budget and on
schedule". To put it in perspective, the length of the pipeline
from Prudhoe Bay to Alberta would be approximately 1,750 miles.
Mr. Palmer stated that any Member desiring further information
about the company's "cost and reliability record" could contact
the Senate Resources Committee as this issue was thoroughly
addressed during his testimony before that committee.
Mr. Palmer shared that TransCanada has paid for "a right-of-way
through … the entire Yukon for this project" since 1983. In
1993, TransCanada's rights were "recognized in the umbrella
final agreement between each and every First Nation in the
Yukon, the government of the Yukon, and Canada".
1:55:45 PM
Mr. Palmer qualified that this right-of-way easement is
specifically identified "in each and every First Nation final
land claim" that has been settled. It is expected to also be
included in the two remaining First Nation settlement
agreements. This matter was also thoroughly discussed in the
Senate Judiciary Committee hearings.
1:56:17 PM
Mr. Palmer also advised that "the terms and conditions" of
Canada's NPA agreement with TransCanada/Foothills as well as the
terms and conditions of the treaty with Canadian First Nations
and the benefits that would be provided to northern Canadians
were also discussed during the Senate Judiciary Committee
hearings. Examples of TransCanada's responsibilities include the
"obligation to: consult with those parties", to provide
training, entrepreneurial opportunities, and employment
opportunities. They would also be required to provide gas "to
certain communities with a financial contribution by
TransCanada/Foothills".
Mr. Palmer also noted that the agreements specify that customers
would be required to pay zonal tolls on sections of the pipe
they use. A customer taking gas off the line in Whitehorse would
only be required to pay a toll on the pipe from Prudhoe Bay to
Whitehorse. Property taxes and other things that must be paid
are also specified in the First Nation treaties.
1:57:53 PM
Mr. Palmer finished the overview of the company and turned his
attention to the AGIA legislation.
Mr. Palmer spoke of TransCanada's actions in recent years in
support of an Alaska gasline project. They had not resist U.S.
Congress' action on the Pipeline Act of 2004 legislation
"despite, in our view, it being a clear work-around of our ANGTA
[Alaska Natural Gas Transportation Act of 1976] rights and
entitlements. TransCanada and our subsidiaries are the sole
remaining partners in the original ANGTA partnership that was
going to construct the pipeline in Alaska."
Mr. Palmer noted that TransCanada decided to take a position of
compromise because they had "a significant position in the
Canadian section of the project". The decision was made "not
oppose that legislation when it was being considered by the U.S.
Congress," even though it gave other parties the right to
construct a pipeline through Alaska". It did not affect any
pipeline in Canada. TransCanada concluded it would not resist
the legislation if that's what "was needed to advance the
project".
Mr. Palmer also noted that TransCanada "actively" responded two
years prior to a request from former Alaska Governor Frank
Murkowski's Administration, "to provide it with alternatives
under the Stranded Gas Development Act (SGDA) framework".
1:59:36 PM
Mr. Palmer expressed that TransCanada had significant
negotiations with the Murkowski Administration. While the
discussions were productive, Governor Murkowski decided to
"negotiate solely with the three producers and we stood aside".
Mr. Palmer advised that TransCanada began an effort to acquire
State right of way status in June 2004. The application process
was completed and submitted in February 2005. To date, the State
has not made a determination on that application.
2:00:41 PM
Mr. Palmer reminded the Committee that TransCanada submitted
written comments to the Legislature last year about the draft
contract developed by Governor Murkowski and the three Alaska
North Slope (ANS) producers. Those comments were limited to the
Canadian section of the line only. While the remarks did not
address the merit of the legislation, they did convey "a
significant difficulty with that contract with regards to its
treatment of Canada".
Mr. Palmer reiterated that TransCanada has "maintained and
improved its rights to expedite the project in Canada" by its
actions. For example, its 12 year effort to acquire 100 percent
ownership of Foothills is beneficial because negotiations would
only involve one party as opposed to numerous ones.
2:01:38 PM
Mr. Palmer also acknowledged "that the ANS producers control the
majority of Alaska's proven gas reserves", under leases granted
by the State decades earlier. Those parties have communicated
"certain requirements before they will support a gas line
arrangement". They have shared their requirements with the
Legislature over the past several months.
Mr. Palmer pointed out, however, that "the State of Alaska has a
sovereign responsibility to Alaskans and the State is also
indicated certain objectives before the State will commit to a
gasline arrangement". "To date, our observation is the producers
and the State have not reached an acceptable agreement. There's
in effect an impasse."
2:02:32 PM
Mr. Palmer concluded that Governor Sarah Palin has introduced
the Alaska Pipeline Inducement Act (AGIA) in an effort "to
advance the project. We support efforts to end the impasse and
advance the project now." TransCanada continues to support
getting a gas line project "in service expeditiously to serve
North American markets because we believe that would be
advantageous to Alaska, to America, and certainly to Canada and
our company as well."
Mr. Palmer contended that gas consumers, the governments of both
the U.S. and Canada, and the industry would be "best served by a
large scale" trans-continental project that could transport
approximately 4.5 BCF per day.
2:03:28 PM
Mr. Palmer reaffirmed TransCanada's preference for a five-party
compromise to advance the project. This would include the three
ANS producers, the State, and TransCanada. "Certain facts" must
be considered: the producers do hold the gas under existing
leases; TransCanada does hold the basis for expediting the
project through Canada; and the State of Alaska is accountable
for Alaska's long-run development and economic interests".
TransCanada is prepared to compromise as evidenced by its
willingness "to not insist on our past rights" in the State.
Mr. Palmer advocated for compromise amongst the five parties "in
conjunction or parallel with the current AGIA process".
2:04:41 PM
Mr. Palmer directed his remarks specifically to AGIA. AGIA
specifies that the State would provide "certain inducements to
pipeline developers and gas producers". It also establishes
specific application requirements under a request for
applications (RFA) process. "TransCanada accepts the necessity
of Alaska's initiative to implement a new process to meet its
objectives".
Mr. Palmer shared TransCanada's concern to AGIA would require
the licensee "to obtain a FERC certificate regardless of the
outcome of initial open season". Independent pipeline developers
might not participate in an AGIA RFA if this requirement was not
amended.
Mr. Palmer continued. AGIA proposes a cost share between the
State and the licensee: up to a 50/50 basis through initial open
season and up to an 80/20 post-open season through the FERC
certification. TransCanada supported the State's 50/50 cost
sharing prior to an open season. However, private pipeline
developers might be reluctant to commit monies to pursue a FERC
certificate if the initial open season has not attracted enough
gas commitments to make the project viable.
Mr. Palmer stated that while monies spent toward obtaining a
FERC certificate could potentially save time if customers were
ultimately found, the monies were at risk if the project did not
proceed.
2:06:07 PM
Mr. Palmer pointed out that the State's circumstances differed
from those of a pipeline proponent. "The pipeline proponent
looks to the return it will receive on the capital it invests in
the project. The State has many other avenues of revenue from
this project other than simply royalties and tax collection."
This would include the multiplier effect of employment and other
development.
Mr. Palmer specified that as a pipeline developer, his focus was
to "the money and the talent" required to invest in the project
"and the risk that I take of committing that money and talent
relative to return of that money over time, and a collection of
an appropriate risk premium for the money that I commit". In
TransCanada's experience, this would be the independent pipeline
developer's only source of money.
2:07:24 PM
Mr. Palmer stressed that "the cost of pursuing the FERC
certificate will be substantial". This activity "would not
directly lead to customer commitments". Nonetheless, he assured
the Committee that if the initial open season did "not secure
sufficient volumes or credits", TransCanada "would continue to
seek customers and credit for some reasonable period of time".
Mr. Palmer stressed, however, that they would prefer not to have
our "talent and money committed to the dual efforts of a FERC
certificate at the same times we're pursuing customers and
credit".
2:08:08 PM
To that point, Mr. Palmer strongly recommended that
consideration be given to amending language in the bill that
required the licensee to work toward FERC certification "unless
adequate shipper commitments or an alternate source of credit
are in place".
2:09:09 PM
Mr. Palmer concluded his remarks by reiterating TransCanada's
position "that the most expeditious and equitable path" through
which to advance the gas pipeline project "is a collaborative
arrangement" between the ANS producers, the State, and
TransCanada. TransCanada also urges reconsideration of the FERC
certification process. TransCanada's participation in AGIA would
depend on the final form of the bill and the terms of the
application process.
Mr. Palmer assured the Committee that TransCanada would continue
to support the endeavor to reach "a five-party arrangement". If
TransCanada was not the entity awarded the Alaska portion of the
project, it would be willing "to vend" its substantial "rights
and assets to the successful party that commercializes the
project in Alaska … under one condition and that is that they
connect with us at the Canadian border".
2:10:09 PM
Co-Chair Stedman asked Mr. Palmer to affirm the company's
ability to undertake this project.
Mr. Palmer responded that the company was capable of undertaking
the project. However, the immensity of the project should be
emphasized. While TransCanada has completed pipelines "much
longer than this on time and within budget", a project of this
magnitude would have "several forms of complexities". Capital
costs, the 1,750 mile length of the project, and the fact that
the project crosses two countries and numerous jurisdictions add
to the complexity.
Mr. Palmer expressed that TransCanada's "long history of
successfully developing complex projects and understanding and
implementing the significant compromises that are needed between
governments, customers, environmental issues, other stakeholders
including First Nations and communities as well as commercial
parties" speak to the company's ability to undertake the
project.
2:12:15 PM
Mr. Palmer next addressed TransCanada's financial capacity.
"With the U.S. federal loan guarantee for this project to cover
the debt", TransCanada's equity component specific to the
Canadian portion of the gasline "is less than one year's cash
flow". The company is "very well-positioned to construct this
project" and would welcome having a role in the effort.
2:12:40 PM
Co-Chair Stedman asked Mr. Palmer to expand on TransCanada's
position that "going to the FERC certificate through failed open
seasons" might be "an impediment" to their applying for the AGIA
license.
2:12:55 PM
Mr. Palmer considered the term "an impediment" to accurately
portray TransCanada's position on this "significant issue". The
application language in the final version of the bill would be
carefully considered with specific attention to the likelihood
of there being a successful open season.
Mr. Palmer stated that TransCanada's board of directors would
thoroughly "examine the possibility of a successful open season"
under the application language in the bill. Included in that
discussion would be a review of "what further commitments" would
be required of the corporation were insufficient volumes or
credits attracted during the open season.
Mr. Palmer asserted that the company's 30 year history was
indicative of its commitment to this project. "We intend to be
there when this project is completed."
Mr. Palmer contended that if the open season's commitments were
less than needed, the company would continue "to look for
customers or credit". The Board would be interested in the level
of talent and financial capacity that would be required of the
company during the multi-year FERC certificate application
period. This "would be a substantial commitment" of corporate
funds. The State would also "have significant investment" during
this time.
Mr. Palmer reminded the Committee that the State's perspective
would differ from that of a pipeline proponent.
Mr. Palmer acknowledged that the bill's current FERC certificate
language "was a significant hurtle" to the Corporation in
respect to its "decision whether or not to apply".
2:15:07 PM
Co-Chair Stedman asked whether TransCanada had ever sought a
FERC certificate after a failed open season or another similar
scenario.
2:15:26 PM
Mr. Palmer was unaware of any such situation.
Mr. Palmer noted that 30 years ago when the original certificate
for this project was granted, no open season had been conducted
because it was deemed a national priority of both the U.S. and
Canada.
2:16:16 PM
Senator Huggins acknowledged the consistency of TransCanada's
concern "about a failed open season going to FERC certificate".
He surmised that such a situation would be of concern to both
the applicant and the State. He also agreed that "it's much more
important to get gas in the pipeline than it is to go to a FERC
certificate based on the parameters".
2:16:38 PM
Senator Huggins, a member of the Senate Resources and Senate
Judiciary Committees, pointed out that the concern about the
Federal loan guarantee was new since TransCanada's testimony on
the bill before those committees.
Senator Huggins asked Mr. Palmer to comment on a hypothetical
situation in which AGIA had been amended to address
TransCanada's concerns about the FERC certificate and a failed
open season. In this scenario, a company had acquired its FERC
certificate but had not cemented its financing. In other words,
the open season had not been successful.
Senator Huggins understood that the problem was that the five-
year period provided in AGIA to acquire such financing did not
mesh with the federal loan guarantee. It would expire two years
after the issuance of the FERC certificate if financing had not
been acquired.
2:17:58 PM
Mr. Palmer appreciated the recognition of TransCanada's concern
about the FERC certification. Regardless of whether new language
was adopted, if TransCanada was successful in the effort to
acquire the FERC certificate, but had not correspondingly
secured project financing and the federal loan guarantee time
period was about to expire, it and other stakeholders, including
the State of Alaska, would seek a federal loan guarantee
extension. "Any prudent party would be doing so".
Mr. Palmer declared that having the federal loan guarantee
expire "would be a very significant event." Losing the federal
debt support would require the company "to go solely to the
public markets seeking debt support." Finding support to mirror
that proposed by the federal government would be "a significant
hurtle for any project of this scale".
2:19:26 PM
Mr. Palmer communicated it being unusual "that a project of this
scale would be funded up to 80 percent debt". In addition,
financing a project of this size typically "would require a
higher coupon rate from just commercial parties than one that
would be supported by the federal government".
2:20:45 PM
Senator Huggins stated that his remarks were intended to
underscore TransCanada's position that acquiring the customer
base was more important than getting the FERC certificate. For
"the federal loan guarantee, as written today," would expire in
two years regardless of "how good the FERC certificate is" if
there were no customers. This strengthens "the importance of
getting gas in the line".
Mr. Palmer affirmed that "attracting customers or credit is the
most critical factor to make this project proceed".
Mr. Palmer referenced his earlier remarks about TransCanada's
efforts to advance this project and the need for compromise
among the parties involved. Even were compromises made, the
project "without customers and without credit" would not
proceed. A pipeline applicant should not be required to acquire
"a FERC certificate without having customers or credit".
2:22:17 PM
Senator Huggins asked how TransCanada might view the State's
offer to provide $500 million toward the project in return for
some equity in the pipeline.
Mr. Palmer understood the intent of the State's $500 million
contribution toward the project was to, "in effect, reduce the
capital costs of the project". Nonetheless, TransCanada would
consider the proposal were the State's intent "instead to have
that money included in the cost of the project and were seeking
an equity position in the project for that contribution".
Mr. Palmer clarified however, that TransCanada would not be
attracted to the State being a shareholder in the project if the
money could not be applied toward project capital costs as
currently specified in the bill.
2:23:33 PM
Senator Elton, who was hearing TransCanada's testimony for the
first time, asked whether a copy of Mr. Palmer's remarks could
be provided.
Co-Chair Stedman stated that the requested material would be
made available.
Senator Elton asked whether TransCanada agreed with others that
the construction phase of the project might take up to three
years.
2:24:21 PM
Mr. Palmer concurred. Once all the required components,
including customers and permits, were in place, the project
could reasonably be constructed in two to three years.
TransCanada estimates that one year of logistical pre-
construction work and two years of construction work would be
required.
2:25:22 PM
Senator Elton, in order to better understand the level of
compromise that would be required, asked whether Mr. Palmer
"suspected" that the State would be required "to compromise as
much moving forward from this point as we did under Stranded Gas
Development Act (SGDA)".
Mr. Palmer understood that the agreement reached on the SGDA
worked for many of the involved entities, but not for the
Legislature. TransCanada believes that the structure of this
project "must work" for the people and government of Alaska, the
three producers, TransCanada, and any involved stakeholder. "The
degree of compromise the State needs to make has to be
something" that the citizens and the State could support. The
SGDA agreement did not garner such support.
2:26:52 PM
Senator Dyson asked for information about pipeline material
strength; specifically the pound per square inch capacity that
would be required to transport gas "in a super critical state".
He also inquired to TransCanada's experience with such gas.
2:27:50 PM
Mr. Palmer stated that TransCanada's design plan for this
project currently specifies "x80 pipe". This pipe would
accommodate up to 80,000 lbs per square inch with "2,500 pounds
of pressure on a daily basis". X80 was adopted as the company's
pipe standard in 1995 and they have approximately 1,800 miles of
it in use in North America.
2:28:47 PM
Mr. Palmer announced that TransCanada might decide to use x100
pipe on this project. It is also considering making this "next
generation of pipe" its new standard. The company has been
utilizing this Japanese or North American-manufactured pipe,
since 2003 in Alberta and eastern Canada. It is lighter than x80
and therefore less costly to accommodate.
2:30:31 PM
Senator Dyson asked for assurance that these pipes could
reliably transit Alaska's gas.
Mr. Palmer declared that x80 would be able "to manage that with
no problem". The approximate 1,075 British Thermal Units (BTU)
gas anticipated to leave Prudhoe Bay would be similar to the
volume of gas transported in TransCanada's western Alberta
pipelines today. He noted that Alberta currently has two gas
processing facilities: one near the eastern edge of Alberta for
gas heading to eastern regions and one near Calgary for gas
headed toward western markets.
Mr. Palmer concluded that while x80 pipe would suffice, "x100
pipeline would simply mean a cheaper pipeline project."
2:32:03 PM
Senator Dyson asked whether TransCanada's "approach to this
project" might change were "one of the State's off-take points"
to remove gas liquids.
2:32:23 PM
Mr. Palmer responded that the owners and shippers of the gas
would make the decision "as to where liquids would be removed".
Mr. Palmer specified that removing liquids at a terminus in
Alaska "would be unlikely to change the pipe strength". It would
however, reduce the number of "BTUs to spread the cost of the
pipeline over" as costs are typically spread over the number of
BTUs that "ultimately are going to the destination". For
example, there would be a seven percent reduction in the number
of BTUs over which to spread the cost were 75 BTUs removed from
a 1,075 BTU gasline. He noted that stripping plants in Alberta
typically remove 75 BTUs.
2:33:35 PM
Senator Thomas sought further discussion in regards to "the
licensee and the loan guarantee"; specifically [unspecified]
language that reads "the authority of the secretary to issue a
federal guarantee in instruments under this section for a
qualified infrastructure project shall expire on the date that
is two years after the date on which the final certificate of
public convenience and necessity including any Canadian
certificates of public convenience and necessity is issued for
the project".
Senator Thomas, referring to Senator Huggins's earlier
hypothetical scenario on this issue, asked Mr. Palmer what he
deemed to be the difference between an entity's holding "a
license on one hand and the certificates of convenience in
Canada and in Alaska".
2:34:30 PM
Mr. Palmer stated that TransCanada defined the term "license" as
the license Alaska would grant under AGIA. TransCanada believes
that approximately 12 months following the completion of a
successful application process, "the State of Alaska would be
granting a license under AGIA".
Mr. Palmer continued. The certificate of public convenience and
necessity (CPN) is a FERC certificate. This is referred to as
either a NEB" or "NPA" certificate in Canada. TransCanada
currently holds an NEB for this project in Canada. It also
possesses a FERC certificate under ANGTA. To that point, he
noted that, as referenced earlier by Senator Huggins,
TransCanada has requested a "technical amendment" that would
allow TransCanada, if they chose to participate in AGIA, to
acquire the certification needed to pursue the project in
Alaska.
Mr. Palmer reviewed the process the successful licensee must
conduct in order to obtain their certificate of public
convenience and necessity. The process, which is anticipated to
take approximately five years, includes conducting an open
season, submitting a FERC application, and undertaking the
associated multi-year FERC certificate process.
2:36:59 PM
Senator Huggins addressed the project timeline. AGIA currently
specifies a 36 month open season. The licensee would be required
to submit their FERC certificate application by year five. The
ensuing FERC certificate process would take approximately two
years. Thus, an entity could be granted a FERC certificate by
year seven. The federal loan guarantee, as currently specified,
would expire in year nine if financing had not been arranged.
2:37:58 PM
Co-Chair Stedman asked TransCanada's position on the
legislation's "debt to equity ratio requirement of a maximum
equity position of 30 percent".
2:38:18 PM
Mr. Palmer advised that TransCanada was comfortable with the
maximum 30 percent project equity position under the current
AGIA structure and the availability of the federal loan
guarantee.
Co-Chair Stedman asked whether TransCanada "would be
comfortable" with that maximum being lowered to a 20 percent
equity position.
Mr. Palmer stated that the corporation would "be willing to look
at something different than 30"; however, their opinion is that
"20 percent is too low for the risk of this project".
2:39:07 PM
Co-Chair Stedman asked TransCanada to comment on the issue of
"rolled in verses incremental rates". A rolled in rate structure
is specified in Section 1, Sec. 43.90.130. Application
requirements. subsection (7) on page 6 beginning on line 11 of
the bill.
Mr. Palmer responded that TransCanada supports the utilization
of a rolled in rate structure for AGIA. Rolled in rates are
standard in Canada.
Mr. Palmer disclosed that TransCanada conducted an analysis of
the pipeline system they designed for this project. That
analysis indicates that, were the initial pipeline volume 4.5
BCF a day, "the rolled in tolls, up to 7 BCF, would not" exceed
the initial 4.5 BCF a day rates. Their determination is that
"this is not a significant issue for this project" in respect to
a 50 percent expansion over the initial volume.
Senator Dyson understood the rolled in rate standard has worked
well in Canada. If an original shipper determined they were
subsidizing new shippers, they could appeal to the NEB.
Historically, the determination has been that the rolled in rate
process had "not been detrimental" to the original investors or
inhibited the process.
Mr. Palmer considered Senator Dyson's summary of the rolled in
rate process experience in Canada to be a "fair
characterization".
Mr. Palmer again spoke in support of the ability to compromise.
Compromise is often "required from parties that are shippers on
the pipeline as well as the pipeline company". In his
experience, the ability to compromise is important, especially
for "the long run interest for a project that is going to be
likely a single source pipeline for a very long time".
Mr. Palmer reviewed the success of the rolled in rate structure
for TransCanada's pipeline in Canada, which is also a single
source pipeline. Rather than precluding development, "it has
encouraged" it.
2:43:32 PM
Nonetheless, Mr. Palmer acknowledged the concern of initial
shippers. "They don't want to be in a position where it's all
one-sided for future customers". Every pipeline company looking
to the future wants to attract new customers while also
"want[ing] to be fair to those initial customers".
2:44:09 PM
Mr. Palmer stated that initial shippers would be unfairly
treated were a pipeline they had firm 25 year shipping
commitments with at a particular tariff to "allow interruptible
customers to get service on a daily basis at half that rate" two
years later. This action would advantage the interruptible
customers in the gas marketplace. A pipeline company should
favor long term firm commitment customers as they would help get
the pipeline built, would financially support the day to day
operations of the pipeline, and would promote expansion and
development over time.
2:45:04 PM
Senator Huggins asked whether pipeline companies were forced to
negotiate rates with shippers.
Mr. Palmer deemed it "normal on a new project that negotiated
rates", in many different forms, would be considered. This would
include such things as "a differing collection of depreciation
over time" and even "fixed tolls". He noted however, that
negotiating fixed tolls on this project, with its significant
level of risk, would be unlikely. FERC also has toll
requirements that must be adhered to.
2:46:19 PM
Senator Huggins was surprised to have recently heard an
economist project a gas pipeline tariff rate, excluding the gas
treatment plant, of $1.65. He asked TransCanada whether that or
any rate could be calculated at this stage of the project with
certainty.
2:47:01 PM
Mr. Palmer communicated that TransCanada and likely any entity
that has studied this project have estimates of what levels of
tolls and tariffs would be required. However, at this stage,
those estimates are simply "assumptions" based on such things as
projected capital costs, operating costs, volumes, taxes, and
expectations of when the project would begin service. The
calculations would be updated prior to the open season process,
and would be further refined as that process unfolded. The
licensee would desire the most accurate toll and tariff
estimates possible in order to "advance proposals to potential
customers". Therefore, the fact that an economist had calculated
a tariff rate was not unusual.
2:48:36 PM
Senator Huggins asked to the reliability of that $1.65 tariff
estimate.
2:48:48 PM
Mr. Palmer discussed actions that a project developer might be
required to do to attract customers to a "binding open season.
This would include such things as presenting "a fixed range" of
tariff estimates. Oftentimes, negotiations include language
specifying that the agreement would be binding on the customer
if "the toll was not increased more than 25 percent". If the
tariff exceeded that range, the customer could withdraw by a
certain date.
Mr. Palmer noted however, that the project would not necessarily
be considered "a failure" that if tariff costs increased beyond
that 25 percent range. Customers might still consider the
project "the best possible alternative in the marketplace and
might reaffirm their commitment". Nonetheless, if they withdraw,
the project manager would have "lost the money between the time
where we committed, and the time where they've withdrawn". That
is a risk for the project manager.
2:50:42 PM
Senator Thomas asked TransCanada to comment on "the concept that
all risk is ultimately passed to the resource" providers.
Mr. Palmer did not support that concept. Shareholders as well as
debt holders believe they take risks. The question is "who takes
what risk in which projects". For example, the monies
TransCanada has committed to this project to date "are at risk"
as are the monies they might spend on the AGIA license as they
"might not be the successful applicant".
Mr. Palmer argued that, even if they were successful, "there is
a reason" that pipeline companies are required to have up to 50
percent equity. "It's because we have risks". Otherwise,
projects would be funded with 100 percent debt or substantially
lower financing costs. Unfortunately no bank is willing to do
that. They always ask "pipeline shareholders to take the risk".
Mr. Palmer continued. Pipelines face regulatory, volume, and
operating risks. "Rigorous debates" occur between pipeline and
regulatory entities in regards to the "degree of risk they
should take and what the appropriate return should be".
2:53:20 PM
Senator Dyson voiced that "some of the producers" think they
should "control and build the pipeline because they only can
manage the pipeline and not have cost overruns that would
reflect on the tariff" against their company. To that point, he
asked what pipeline constructers could do to protect shippers
from construction cost overruns.
2:54:11 PM
Mr. Palmer opined that "potential" AGIA competitor could match
TransCanada's track record for constructing and operating large
regulated pipeline projects over long distances in a cold
climate environment.
Mr. Palmer stated that the conditions surrounding the original
North Slope gas pipeline project, 30 years ago, required the
participating pipeline company to take "a portion of the capital
cost risk". While TransCanada could commit to a maximum 30
percent equity, it could not commit to 100 percent of the
capital cost risk because "of the likely return for a regulated
pipeline" it would receive.
Mr. Palmer reminded the Committee that, unlike gas producers and
the State, a pipeline owner does not benefit from increasing gas
prices.
2:56:33 PM
Co-Chair Stedman thanked Mr. Palmer for his testimony.
AT EASE 2:56:46 PM / 3:10:50 PM
Co-Chair Hoffman called the meeting back to order.
Alaska Gasline Port Authority
Presentation
3:11:17 PM
BILL WALKER, Project Manager & General Counsel, Alaska Gasline
Port Authority (AGPA) introduced himself and AGPA's legislative
liaison advisor, Paul Fuhs. Mr. Fuhs had "a long history" with
the endeavor to advance an Alaska gasline project.
Mr. Walker addressed information in a handout titled "Alaska
Gasline Port Authority Presentation to the Senate Finance
Committee April 28, 2007" [copy on file] as follows.
3:11:59 PM
Page 2
AGIA is Good for Alaska
· Open, transparent and competitive
· Identified clear evaluation criteria
· Inducements to project applicants in exchange for
specific commitments
· Empowers selected applicant to build successful
consortium, leading to open season
Mr. Walker characterized AGIA, with its "open, transparent,
competitive process", "good" for the State. AGPA is "encouraged
by the reaction" their project has received "from potential
participants" from around the country because of AGIA.
Mr. Walker announced AGPA's intention to apply for the AGIA
license. Their efforts to date align with those of AGIA in that
they also support the creation of "a consortium … as part of the
application process".
Mr. Walker declared that AGIA "is working even before it is
passed, because of the attention" the process has brought to the
State. The interest in AGIA, in both the United States and
Canada, has made it easier for AGPA to discuss the merits of its
proposal with the industry.
Mr. Walker shared that some have asked what AGPA has been doing
recently as it has been fairly quiet. His response is that "it's
a lot quieter playing offense than defense". AGPA has "been
playing offense since the AGIA process began".
Mr. Walker noted that AGPA representatives have been traveling
quite a bit in their effort "to put a consortium together".
3:13:35 PM
Page 3
Indicative AGPA Project Structure
[Diagram depicting the variety of entities that would be
involved in the consortium envisioned by AGPA to bring
Alaska's gas to market. These entities would include the
Gas Producer/Shipper, the Regas Terminal Owner, Gas
Offtakers, the Gas Conditioning Plant (GCP) Pipeline
Engineering Procurement (EPC) Contractor, the EPC
Contractor, the Liquefied Nature Gas (LNG) Facility EPC
Contractor, the GCP Operator, the Pipeline Operator, the
LNG Facility Operator, the LNG Ship Owner, and the
Financing Institutions.]
Industry leaders will be involved in all components of
AGPA's project
Mr. Walker described the role of AGPA as one of "a facilitator"
or the entity putting together "the structure" of the project.
Mr. Walker stated that when the Trans Alaska Pipeline System
(TAPS) was originally being considered, the producers asked
then-Governor William Egan to provide State financing for the
Alyeska Marine Terminal. Governor Egan was uncomfortable with
"the closeness of that relationship" and suggested the City of
Valdez undertake that responsibility. Consequently the City of
Valdez passed a two billion dollar bond which financed that
terminal.
Mr. Walker noted that a similar "conduit package" process was
initially considered by AGPA. It would "put together a structure
that provided economic benefit to a project; that would increase
someone's revenues to the upstream by using a tax exempt
structure".
Mr. Walker expressed AGPA's awareness of the fact that a
specific "named" business must be in place for each of the
generic entities depicted on the diagram. Some agreements have
been made; others are in process.
Mr. Walker specified that in order for this to be a "viable
project" there must be world class leaders in each of the areas
depicted. "They cannot be start-up companies". This is the
reason AGPA began negotiations with the large well-known
company, Bechtel Corporation.
Mr. Walker noted that port authorities such as AGPA often become
involved in a project when no one in the private sector thought
the project would generate sufficient return. There is value in
the structure a port authority brings to a project as evidenced
by the hundreds of port authorities operating in the United
States today.
Mr. Walker contended that it is often difficult to know a port
authority was at the root of a successful project it since the
spokespersons for the project were "world-class recognized
leaders in each of their areas of expertise".
3:15:57 PM
PAUL FUHS, Legislative Liaison and Advisor, Alaska Gasline Port
Authority, informed the Committee that AGPA was established by
legislation in 1993. Its organization resembles most port
authorities in the country, particularly that of the
"conservative state", Wyoming. The Wyoming Gasline Authority was
successful in its endeavor to create an operating pipeline in
the state when the private sector there was unable to.
Mr. Fuhs stated that like the port authority in Wyoming,
Alaska's port authority is comprised of a small board. The
private sector companies involved in the port authority project
would actually operate it.
Mr. Fuhs also likened the port authority process to the Alaska
Permanent Fund. "A small board runs it on behalf of the people
of the State of Alaska to make sure that it meets State
interests, but then you hire the best private people in the
world that you can to actually operate it".
3:17:12 PM
Page 4
AGPA Project Description
· Gas Conditioning Plant in Prudhoe Bay
o removes impurities
o compresses and chills the gas to pipeline
specifications
· Pipeline from Prudhoe Bay to Valdez
o parallel to TAPS (max. capacity: 6 Bcfd)
o pre-build to Delta Junction for later tie-in for the
Alaska/Canada Highway Project
o tie-in at Glennallen for a spur line to Alaska South
Central natural gas grid
· LNG Facility in Valdez
o integrated LNG liquefaction and LPG extraction
facilities
o includes storage and vessel loading facilities
[Map of State depicting route of proposed in-State pipeline
from Prudhoe Bay to Valdez with spurline from Glennallen to
Palmer.]
Mr. Walker described the project parameters. A 48 inch pipeline
would run from Prudhoe Bay to Valdez. A pre-build would be
placed at Delta Junction in anticipation of a future spurline to
the Canada Highway. Another spurline would be located in
Glennallen to provide gas to South Central Alaska. The gas
liquefaction plant would be located in Valdez, which is 115
miles past Glennallen.
Mr. Walker informed the Committee that AGPA has signed a
memorandum of understanding (MOU) with the Alaska Natural
Gasline Development Authority (ANGDA) for the spurline to South
Central.
Mr. Walker explained that a phased project is being proposed by
AGPA. While the initial volume carried in the line would be
small, the project could be expanded to accommodate market
demands.
3:18:26 PM
Page 5
Project Status
1. Project Route Permitted
2. The 23 Senior Permits Acquired
· Yukon Pacific Corporation
· $100 million expended
· Right-of-way
· Project FEIS
· LNG terminal permit
3. Bechtel Cost Estimates
· Complete & Updated
4. Marine Transportation / Jones Act
· MOU with the largest LNG shipping company in the
world - Mitsui OSK Lines
5. Access to Multiple Markets
· West Coast receiving terminal under construction
· West Coast Alternatives
· Hawaii
· Pacific Rim
6. Anticipated Financing
· 80% debt (Federal loan guarantee available)
· 20% private funding
Mr. Walker reviewed AGPA's accomplishments to date. The route is
partially permitted and 65 percent of the right-of-ways are pre-
staked. APGA acquired "the exclusive rights" to Yukon Pacific
Corporation's (YPC) permits and data, the millions of dollars
spent by YPC and the work they conducted in acquiring permits,
environmental impact studies (EIS), permits associated with the
liquefied natural gas (LNG) terminal in Valdez, export licenses
and numerous other things have benefited APGA.
Mr. Walker noted that the Bechtel cost estimates are current to
2005. Efforts are underway to update that information to 2007.
This cost estimate is very detail oriented and specifies such
things as which gravel pits would be utilized and where workers'
camps will be located.
Mr. Walker next addressed transportation issues pertinent to the
gasline. AGPA has entered into an MOU with Mitsui OSK Lines, the
largest LNG shipping company in the world with 645 ships. Eight
of those were built in the United States. Meetings have been
conducted with federal entities in Washington DC to ensure that
re-flagging those ships would be permitable. Alaska's
Congressional delegation has committed to assisting this effort.
Mr. Walker stated that Alaska's experience in exporting LNG from
a Kenai facility has been a contributing factor in the interest
this project is drawing from LNG receiving terminals on the west
coast. Several of those terminals are either permitted or are in
the process of obtaining permits to handle Alaska's LNG product.
Opportunities to ship to Hawaii and Pacific Rim markets have
also been presented.
3:21:46 PM
Mr. Walker advised that, after studying numerous projects around
the world and consulting with international business firms such
as Sullivan & Cromwell LLP, a firm which had recently testified
about AGIA before this Committee, AGPA decided to continue their
original idea of financing pipeline construction on "a project
finance basis".
Mr. Walker informed the Committee that AGPA also anticipates
applying for the federal loan guarantee. Numerous meetings with
the federal Department of Energy on this issue have occurred.
3:22:40 PM
Page 6
Phased Project = Better Cost Overrun Risk Management
· 800 mile pipeline is 100% adjacent to TAPS, 100% in
Alaska
· Infrastructure in place for entire line - roads, bridges,
camp pads, etc,
· LNG project" lower overall cost overrun risk:
o Liquefaction facilities utilize proven technology and
well-tested design, resulting in a relatively low
level of uncertainty in cost estimate
o Low level of cost uncertainty for LNG marine
transportation and regasification
o Pipeline component has the highest capital cost
uncertainty - for LNG project the pipeline is only a
portion of overall cost to market
· Phase approach with LNG project proceeding first: 2/3
less cost = 2/3 less risk
Mr. Walker reviewed the benefits of having a phased, all-Alaska
pipeline project. The shorter 800 mile route would lower project
risk factors. Other pipeline proposals range between 1,750 and
3,600 miles.
Mr. Walker also declared that utilizing existing infrastructure
would save money. A route following the existing road from
Prudhoe Bay to Valdez would lower environmental issues and
reduce construction time.
3:23:35 PM
Mr. Walker attested that LNG liquefaction facilities are "proven
technologies". Due to continuing improvements in technology, the
cost of constructing these facilities continues to decrease. The
pipeline should be built soon as LNG is increasingly becoming a
viable competitor to the oil industry: ships are becoming less
expensive and liquefaction facilities are becoming more
efficient.
Mr. Walker advised that transportation should not be considered
a high risk factor as AGPA has already identified the ships it
would utilize and the costs associated with transporting LNG
from Valdez to market.
3:24:41 PM
Mr. Walker stated that the pipeline itself is presenting the
highest risk; specifically the cost of steel; the shorter the
pipeline, the better.
3:24:58 PM
Mr. Walker also emphasized that a phased project approach "would
minimize the risk".
3:25:07 PM
Page 7
LNG Project is Economic
· Robust economics with projected strong return to upstream
producers (with no tax concession by State)
· Favorable economics takes into consideration pre-build to
Delta Junction for a future AlCan Highway
· Win-Win for Alaska with LNG:
o Capture West Coast market now plus enable a later
AlCan Highway project to proceed when ready
o Earliest in-State gas availability
Mr. Walker stated that after AGPA received the construction cost
estimate from Bechtel, they engaged the services of a Washington
D.C. financial firm, Green Gate LLC, to develop "a financial
model" of the project.
Mr. Walker noted that Green Gate "was pleased" with the project
cost estimate" developed by Bechtel. Even thought the initial
financial model was developed in the years 1999 and 2000,
economic changes have improved the project financing scenario.
Mr. Walker stated that the ability to pre-build to Delta
Junction would also allow a gasline to be built at a later date
along the Alcan Highway.
3:25:50 PM
Mr. Walker stressed that an all Alaska route would not negate
the option of having a highway route. It was not "a neither/or"
situation. The State "could have the benefit of both options at
this point". The effort taken in this legislation to address the
offtake issues should be commended. Any project that fits within
the bill's parameters should be considered.
3:26:19 PM
Mr. Walker reiterated that AGPA's routing proposal was "a big
plus" for the State as it would allow gas to be available in
state sooner than other routes. A scenario in which the State
could sell on the world market via shipping or via a highway
line in the future would "be the best of both worlds".
Mr. Walker agreed with producers and industry entities that the
construction of a gas pipeline would be "a basin opening
opportunity". The basin in Alberta Canada opened in 1958 with a
small single line and expanded over time.
3:27:25 PM
Co-Chair Stedman assumed his position as Committee chair.
3:27:31 PM
Mr. Walker advised that constructing a small line rather than a
larger six BCF line would be "the way you get to a full optimum
opening of the basin". The risk profile of the smaller pipe size
line is measurably better. The smaller line could be expanded as
market offtake demands increase.
3:27:49 PM
Page 8
Advantages of LNG from Alaska
· The Alaska LNG project will benefit from an efficient,
low-cost liquefaction operation:
o ambient conditions (low average temperatures) in
Valdez result in significant unit cost savings in
comparison with liquefaction facilities located in
tropical climate
o efficiency gains estimated in the range of 30 - 40 %
· Most other LNG projects have significantly higher marine
transportation costs to market due to longer shipping
distances
· Many other LNG projects involve higher upstream costs due
to complex, expensive field development
o Alaska benefits from substantial existing North Slope
infrastructure and developed fields (Prudhoe Bay)
Mr. Walker reviewed the material and noted that Alaska's 30 to
40 degree temperature ranges increase "the efficiency of LNG out
of Alaska" by approximately 30 to 40 percent more than global
marketplaces such as Qatar with a mean temperature of 80 or 90
degrees.
3:28:46 PM
Mr. Walker also noted that a tidewater terminus in Valdez is
only five or six days from market rather than 22 to 27 days
associated with other pipeline projects. The overall merits of a
project should be considered as opposed to focusing on one key
aspect such as whether a project developer already had a
pipeline.
Mr. Walker also stressed the benefits provided from having an
existing upstream infrastructure on the North Slope. Other LNG
pipeline projects have had to build "expensive upstream
infrastructures" prior to building a pipeline. Surplus gas is
currently being re-injected on the North Slope.
3:29:20 PM
Page 9
Advantage of LNG for Alaska - Phased Project
· Better mitigation of cost overrun risk
· Open North Slope to commercialization of gas; encourage
further exploration
· Commercialize discovered gas resources, while allowing
exploration for expansion to proceed
o initial offtake for LNG project - within existing
AOGCC Rule 9 limitation
· Better positioned to accommodate early in-State offtake:
o Economics of project components downstream of Alaska
do not suffer diseconomies of scale due to reduced
export volume - offtake at Glennallen affects only 100
miles of pipeline to Valdez
· Pre-build for expansion affects only the pipeline in
Alaska
o Expansion either through addition of new LNG trains or
by interconnection at Delta Junction with an AlCan
Highway project
o Availability of gas liquids in Alaska for value added
processing
Mr. Walker reviewed the benefits of a phased project.
Exploration would also be encouraged by the construction of a
pipeline.
3:29:59 PM
Mr. Walker addressed the AGIA requirement that there be five
off-take points in Alaska. An 800 mile all-Alaska line would "be
in a much better position to accommodate large off-takes along
the way". For example, an offtake point near Fairbanks would
affect approximately 350 miles of pipe rather than thousands of
miles of pipe associated with other pipeline proposals.
Downstream volume adjustments for off-takes would be less
impacting on a shorter pipe.
3:31:09 PM
Mr. Walker advised that AGPA was also willing to accommodate a
pre-build to Delta in consideration of a future line down the
Alcan Highway. The initial 48 inch line would accommodate
approximately two BCF. It could be expanded to accommodate six
BCF by use of compression. Looping would not be required.
3:31:55 PM
Mr. Fuhs interjected to note that a gas liquids market in Alaska
should be further investigated as it is "a huge industry in
Canada. Consideration should also be given to the significant
level of propane contained in Alaska's gas. A recent propane
feasibility study indicated it would be "quite feasible to
deliver propane to rural Alaska as a replacement for diesel fuel
and to be able to save money". This is another reason in support
"of bringing this gas to tidewater".
3:32:36 PM
Senator Elton asked for further information about the process
through which a two BCF pipeline could be expanded to a six BCF
capacity.
Mr. Walker reiterated that a 48 inch two BCF capacity pipeline
could be expanded to accommodate six BCF through the use of
compression. Looping would not be required.
3:33:01 PM
Senator Elton asked whether the compression technology being
considered by AGPA differed from that being considered by
highway pipeline proponents as he understood that compression
alone would not suffice to proportionately increase capacity on
that line.
3:33:16 PM
Mr. Walker communicated that AGPA's engineers have determined
that the shorter pipeline being proposed by AGPA could be
expanded to accommodate 5.9 BCF solely by the use of
compression. Looping would not be required.
Mr. Fuhs pointed out that the highway route pipelines would be
initially constructed to accommodate a 4.5 BCF capacity. Those
lines could be expanded to six BCFs without compression. Looping
would be required to achieve a 7.5 BCF capacity.
3:34:06 PM
Page 10
AGIA Suggested Project Evaluation Criteria
· If applicant's offtake amounts exceed AOGCC Rule 9
limitations (2.7 bcf/d less field use), must have already
filed an application with AOGCC for increased offtake
limits
· Additional gas reserves needed? Budget and timeline for
exploration program
· Analysis of liquids availability in Alaska for value
added processing
· Current project cost estimate required with application
AGIC benefits towards advancing gas pipeline
· Rolled in rates - good for Alaska's future
· Allows for independently owned infrastructure
· Follows successful model used in other countries who also
use rolled in rates and independently owned pipelines.
· $500 million skin in the game - sends very positive
message about Alaska's desire to commercialize Alaska's
gas
· Supports lowest tariff
3:35:10 PM
Mr. Walker suggested that further attention be given to AGIA's
offtake and timing provisions. In addition, a review of when
additional gas, beyond the current 35 trillion cubic feet (TCF)
of proved gas reserves on the North Slope, might become
available should be conducted. AGPA would need approximately 15
TCF for the first phase of their project. An analysis of the
availability of liquids is a "critical point".
Mr. Walker shared that one country "has held up development of
gas … because they want to have a certain amount of liquids
dedicated to remain" in that part of their country. Alaska
should follow this example. Having a dedicated supply of liquids
to support Alaska industry is important.
Mr. Walker also stressed the importance of having project cost
estimates accompany each proposal.
3:37:29 PM
Mr. Walker next spoke in support of rolled in rates. Canada,
which has rolled in rates, has "a very robust infrastructure of
gas pipelines". This approach would benefit the State and assist
in furthering the opening of the basin.
Mr. Walker supported independently owned infrastructure. In
response to the argument that AGPA's lack of pipeline ownership
experience was a negative, he countered that AGPA has benefited
from the experience of the Trans Alaska Pipeline System (TAPS);
specifically in regards to such things as cost overruns,
construction experiences, and interactions with the Federal
Energy Regulatory Commissions (FERC) and the Regulatory
Commission of Alaska.
Mr. Walker concluded that the TAPS "model should not be
replicated on the gas" pipeline. The gasline should be
independently owned and have the goal of moving as much gas as
possible.
Mr. Walker stressed that the experiences of other projects would
assist in containing cost overruns. The builder should absorb
the majority of cost overruns with only a portion of the cost
overruns being included in the tariffs. This and other issues
should be addressed during contractual discussions.
3:38:55 PM
Mr. Walker informed the Committee that numerous financial
advisors have commended the concept of the State's $500 million
"skin in the game" investment. "It sends a good message that
Alaska's ready for this to happen".
Mr. Walker contended that the AGIA process will support a low
tariff and attract more companies.
3:40:17 PM
Mr. Walker concluded his formal presentation.
3:40:24 PM
Senator Dyson asked AGPA to comment on the open season process.
3:40:48 PM
Mr. Walker reminded the Committee that the open season capacity
of AGPA's project would be smaller than other projects as its
initial line would transport two BCF rather than the 4.5 or 6
BCF of the highway route projects. The entities meeting with
AGPA are not interested in larger volumes as that would require
a substantial level of exploration.
3:41:32 PM
Mr. Walker communicated that producers have said they would sell
gas to a project that minimized risk and provide them a good
return. That is the goal of AGPA.
3:41:46 PM
Mr. Walker stated that an open season goal of 1.7 BCF would be
within the capacity of AGPA's project. The fact that producers
are currently paying to re-inject that gas would attract them to
the open season. Producers are in the business of
commercializing gas and AGPA is "in the business of bringing
together a consortium that does just that".
AT EASE 3:42:28 PM / 3:43:04 PM
Mr. Fuhs addressed the commonly stated position "that only the
producers can take the risk and that it'll be just firm
transportation commitments on their part to make the project
work". Numerous LNG projects have been successfully developed
with "market commitments" to buy the gas. "Other people could
agree to buy the gas from the producers and make the commitments
for this project."
Mr. Fuhs contended that this project would work even without the
participation of "all three producers". As it appears right now,
"even one reluctant party" could "leverage the entire rest of
the system. Not only the State in terms of its taxes and returns
and benefits to the State, but all the other participants as we
saw with the holdout on the LLC and that's the reason why a
contract could never be brought before you under the past
administration. One party was able to hold out for ultimate
leverage."
Mr. Fuhs suggested that this same scenario might occur with the
open season process. Nonetheless, "there might be companies that
are willing to commit to this where it does not require all
three companies to make the project work".
Senator Dyson asked whether AGPA was contemplating purchasing
gas from the producers at the wellhead or at a gas conditioning
plant. He was also curious as to who would be responsible for
building the gas conditioning plant.
3:44:56 PM
Mr. Walker expressed that AGPA could "do it either way".
Whichever method was acceptable to the producers would be fine.
Mr. Walker communicated that AGPA's economic model "assumes"
that the producers would construct and own the gas conditioning
plant as it would provide them tax benefits. AGPA would "pay a
toll for that work".
3:45:26 PM
Senator Thomas understood that AGPA considered a smaller project
more economical in terms of being able to generate gas
commitments. This in turn might allow the project to proceed at
a faster pace than a larger one.
Mr. Walker expressed that AGPA did not view its project as a
smaller project but rather a phased expandable project that
would accommodate market demands. This approach would minimize
risk and have a sooner start-up date. The field efforts to date
could allow the project to begin operation in six years. The
work that has been conducted over the past 20 plus years would
"shave off three or four years".
3:47:12 PM
Senator Thomas asked for further details about the pipe sizes
that might be used along the route.
3:47:19 PM
Mr. Walker advised that a 48 inch pipe would be utilized from
the North Slope to Delta Junction. Discussion is continuing in
regards to the size of the pipe from that point south. Using a
smaller size pipe out of Delta Junction might restrict the
line's ability to be expanded to six BCF. A decision in this
regard would be made prior to project financing. Other
considerations include the prospect of having a line extend
through Canada.
3:47:59 PM
Senator Huggins hypothesized a situation in which the State
looked at AGPA's application and concluded that a two BCF
pipeline would not generate adequate levels of revenue for the
State. The question was whether AGPA could accommodate a pipe
with a minimum 3.5 BCF capacity if the State requested that.
Mr. Walker replied that AGPA could accommodate that request
because of the project's ability to expand to 5.9 BCF. Market
conditions and infrastructure are factors in AGPA's project
design. A two BCF project was proposed because "it was the
smallest base case that would make good money for the State, and
gave a sufficient return to the producers on the wellhead". It
also significantly reduced risk and provided a significant time
advantage on project start-up.
Mr. Walker advised that some have questioned whether a smaller
project might negate the opportunity for a larger project. His
response was that most basins have opened with smaller pipe and
then expanded as influenced by market conditions. This project
should be viewed as the first phase of a big project.
3:50:49 PM
Mr. Fuhs acknowledged the thought that a bigger pipe would
provide more revenue to State. However, gas availability and
commitments must substantiate that pipe and make it "a practical
project" which would not "collapse oil production in Prudhoe
Bay". That is "a legitimate question" that must be addressed by
the Alaska Oil and Gas Conservation Commission during the
application process.
3:51:55 PM
Mr. Fuhs declared that the risks associated with starting with a
smaller project should be weighed against such things as "the
likelihood of the project going forward". State departments are
charged under AGIA with those evaluations.
3:52:26 PM
Co-Chair Stedman thanked Mr. Fuhs and Mr. Walker for their
presentation.
The bill was HELD in Committee.
AT EASE 3:52:32 PM / 4:42:52 PM
SENATE BILL NO. 125
"An Act relating to the accounting and payment of
contributions under the defined benefit plan of the Public
Employees' Retirement System of Alaska, to calculations of
contributions under that defined benefit plan, and to
participation in, and termination of and amendments to
participation in, that defined benefit plan; making
conforming amendments; and providing for an effective
date."
This was the fourth hearing for this bill in the Senate Finance
Committee.
Co-Chair Hoffman moved to adopt committee substitute Version 25-
GS1074\K as the working document.
There being no objection, the Version "K" committee substitute
was ADOPTED.
4:43:47 PM
Co-Chair Stedman announced that several spreadsheets and a new
Department of Administration fiscal note dated April 20th, 2007
pertinent to Version "K" [copies on file] would be addressed
during today's discussion. A side-by-side comparison of Version
"K" to the original version of the bill was being developed.
MILES BAKER, Staff to Co-Chair Stedman, communicated that his
remarks would highlight areas of change in this committee
substitute relative to the original version of the bill. As
noted, a side-by-side comparison was currently unavailable but
would be provided once completed.
Mr. Baker identified the first change as being the elimination
of a section in the bill pertaining "to the duties and
responsibilities" of the Alaska Retirement Management Board
(ARMB). The reference to ARMB in the bill's title was also
removed. The provisions pertinent to ARMB had not been included
in the original version of the bill, but were incorporated by a
previous committee substitute adopted by the Committee.
Mr. Baker informed the Committee that "some slight drafting
differences" resulted in there being minor language changes in
Section 1. The substance of the Section had not been changed. In
addition, definitions incorporated into Section 1 in the
previous committee substitute, Version 25-GS1074\E, had been
moved to "the broad definition section" of the Teachers
Retirement System (TRS) Statute.
4:45:49 PM
Senator Olson asked for confirmation that the Senate's proposed
TRS employer contribution rate of 12.56 percent had not been
affected by these changes.
Mr. Baker affirmed the rate was unchanged.
4:45:58 PM
To that point, Mr. Baker directed attention to Section 1
subsection (d) page 2 line 9. In essence, this section specified
that "regardless" of that 12.56 rate, "if the normal cost goes
above that in the future", then that higher rate would become
the normal cost.
4:46:24 PM
Mr. Baker indicated that, other than minor "wording differences"
resulting from "editorial" changes, no substantial changes were
made in Sec. 2. The working differences also resulted in a
change in the title of the section: instead of reading
"Determination and payment of state contributions", the title
now read "Additional state contributions".
4:46:50 PM
Mr. Baker stated that the TRS definition removed from Section 1
has been incorporated into Sec. 3, page 3 lines 3 through 5.
4:47:16 PM
Mr. Baker specified there being were "no real changes to
Sections 4, 5, 6, or 7.
4:47:34 PM
Mr. Baker expressed that the first substantial change made by
Version "K" is in Sec. 8. The effort being furthered in this
bill is to transition entities to a cost-share system. In the
case of the Public Employee Retirement System (PERS), all PERS
employers would contribute 22 percent of "their active payroll"
base.
Mr. Baker reminded the Committee of the concern raised in
previous hearings on this bill that employers might endeavor to
reduce their payroll base by selling off, "for example, their
local utility or to decide to outsource something that
previously was done by the municipality". While such action
would lower that municipality's contribution, other
municipalities "would be required to share in the loss of that
revenue".
Mr. Baker specified that language in Sec. 8 subsection (a) page
5 lines 4 through 11 was reworked to address this concern. Each
year, an employer would be required to pay 22 percent of the
greater of either their current total payroll base or "the
salary base as it was for the fiscal year ending June 30, 2007".
This would prevent an employer from contributing less were their
payroll to decrease as well as ensure their contribution
adequately reflected any increase in their payroll base in the
future.
4:49:41 PM
Senator Dyson asked whether the municipality would still be held
to this obligation if the buyer of one of its political
subdivisions "agreed to assume the benefits liability for the
employees".
4:50:35 PM
Mr. Baker clarified that that issue could be addressed during
the negotiations with the buyer. However, the reason for
requiring the municipality to pay 22 percent of the "higher
payroll base is because built into that 22 percent is the money
that this employer currently is putting forward into this new
pooled pot to pay off the unfunded liability".
Senator Dyson characterized this obligation as "legacy costs"
Mr. Baker affirmed.
Senator Dyson accepted the explanation.
4:51:21 PM
Mr. Baker noted that language in Sec. 9 was slightly reworked.
This section clarified the State's additional obligation to the
retirement systems. In addition to paying 22 percent on its
payroll base, the State, as specified in Sec. 9 line 5 page 6,
"shall contribute to the plan each July 1" or as soon after that
date as possible, "the amount of money required between the 22
percent and the Board adopted rate to fund the payment for the
whole system for the unfunded liability for that year". The date
for the payment was allowed some flexibility in consideration of
the State's cash flow situation in July, as numerous payment
obligations are specified for July first.
4:52:55 PM
Mr. Baker communicated that no changes were made in Sec. 10.
4:53:29 PM
Mr. Baker deferred to the Department of Administration to
discuss Sec. 11.
4:53:53 PM
ANNETTE KRIETZER, Commissioner, Department of Administration,
informed the Committee that Sec. 11 would allow the Department
"to claim monies that's owed to it under the system". The
language in this section was rewritten in consideration of
concerns of the Alaska Municipal League (AML). The revised
language is located on page 7, lines 5 through 8 and reads as
follows.
After the agency submits this amount to the administrator,
the employer may appeal the administrator's claim to the
Office of administrative hearings (AS 44.64). If an appeal
is timely filed, the administrator shall hold the submitted
funds in an escrow account pending a final decision on the
appeal.
Commissioner Kreitzer stated that this compromised language
would assist in addressing some of AML's concerns.
4:55:23 PM
Senator Elton inquired to the cost of conducting an
administrative hearing; specifically to a small community.
Commissioner Kreitzer responded that this information would be
provided.
4:56:08 PM
Mr. Baker addressed Sections 12, 13, 14, and 15. They dealt with
two sections of statute regarding an employer's termination from
the plan or amending their participation agreement. Both the
original bill and the previous committee substitute "envisioned
that" once the system transitioned to a cost share plan,
employers would have a 90 day period in which "to make changes
to their participation agreement": they could opt in or out
classes of employees. No such changes would be allowed after
that. The only recourse after that would be for an employer to
exit the system completely.
Mr. Baker advised that Version "K" would eliminate that 90 day
window. An employer's ability to amend their participation
agreement would continue to be allowed as in current Statute.
However, language in Sec. 15, page 8 was required to address
costs associated with an employer's decision to opt in or opt
out a group of employees or sell off a portion of the business
which would in effect reduce the employer's payroll base. For
instance, a community could decide not to cover their municipal
waste people or their fire chief or city administrator.
4:58:47 PM
Mr. Baker stated that while an employer could continue to amend
their participation agreement, language in Sec. 15 specified
that an employer who terminates a class of employees or
completely terminates from the system would be required to pay
termination costs. He reviewed how the termination costs would
be calculated. For instance, an employer terminating a class of
employees would be required to pay that groups' past service
costs.
5:00:20 PM
Senator Thomas expressed concern that, as has happened in the
past, the State might not have an accurate unfunded liability
figure. Were that the case, an entity terminating groups of
people or completely terminating from the plan, might be told
their obligation was satisfied, but then might un-expectantly
get a "huge bill" later" when the system's unfunded liability
was reevaluated.
5:01:43 PM
Commissioner Kreitzer pointed out that "no plan is foolproof".
The Department, Committee members and staff, and other entities
and individuals working on this bill have worked diligently "to
identify areas where we think that there could be some loophole
and could allow for a situation where you might not have the
unfunded liability taken care of". The bill before you "is our
best effort to deal with that and to not come into a situation
in the future where we would have someone getting a big bill
because the Division of Retirement and Benefits made a mistake".
She could not envision where at this point, a mistake might be
made.
Senator Thomas also acknowledged being unable to identify any
specific weakness. Nonetheless, despite professional action in
the past, the State is facing a substantial unfunded liability.
5:02:47 PM
Mr. Baker pointed out that "liabilities by individual employers"
are tracked under the current retirement system. Each year, the
actuary conducts an extensive process to determine "the new
liability of the system is and allocating it as appropriate to
all the individual employers".
Mr. Baker directed his remarks to Senator Thomas's concern. An
employer might have been fine at one time, but, as each new
valuation was determined, their unfunded liability grew. This
was the experience of most employers.
Mr. Baker expressed that the same valuation process would
continue under this bill. However, under the cost share system
being proposed, the unfunded liability would be "shared amongst
everybody".
5:03:44 PM
Mr. Baker stated that, under the current system, each entity was
combating "a different number".
Mr. Baker agreed with Commissioner Kreitzer that "this is a best
attempt to address the fact that everyone will be sharing the
load and" appropriately allocating it going forward.
5:04:15 PM
Mr. Baker informed the Committee there was no change in Sec. 16.
Mr. Baker noted that it was decided to move definitions from
individual areas of the bill to a more appropriate place in the
Statute section. Thus, definitions were added to Sec. 17.
5:04:31 PM
Mr. Baker deemed Sec. 19 to be a significant component of the
committee substitute. The spreadsheets earlier referenced by Co-
Chair Stedman were pertinent to this section.
Mr. Baker stated that Sec. 19 subsection (a) of Version "K"
contained a listing of employers who had contributed excess
funds to their retirement plans during the prior three years and
their contribution rates, as adjusted, for the first year of
program implementation. This information had been re-verified by
the Department.
Mr. Baker directed attention to a spreadsheet titled "FY 08 Rate
Adjustments Required to Recoup Excess Muni PERS Contributions
from Prior 3 Years (Revised 4/28/07) Prior to application of
Hold Harmless Provision" [copy on file], which pertained to this
section.
5:05:40 PM
Mr. Baker addressed Column "9" of the spreadsheet. Changes on
this spreadsheet, as compared to the previous version, are
highlighted. For instance the City of Barrow and the City of
Klawock have been added to the list.
5:06:26 PM
Mr. Baker next addressed the spreadsheet titled "Impact of a 22%
Employer PERS Rate on Municipalities, with CSSB 125 Hold
Harmless Provision" [copy on file]. In addition to the desire to
assist the "Heroes" communities, those entities which had
contributed excess funds toward their retirement plans, an
effort was made "to be equitable. As we set a rate of 22
percent, many municipalities are going to see quite a windfall
or credit to what they previously thought they were going to
have to pay if their rates were substantially higher than 22".
Mr. Baker also pointed out that there were also a few
communities that had rates significantly lower than 22 percent.
They would be experiencing a substantial increase in their
payments.
Mr. Baker signified that the "Impact" spreadsheet reflected
communities' estimated FY 08 payroll; their FY 07 employer
contribution rate; and the FY 08 Board recommended rate they
would have been required to pay absent this legislation. For
example, the City of Fairbanks would have paid $13,271,641 under
the FY 08 Board Requested Rate. Under this legislation, they
would pay $1,578,676 for a savings of $11,692,965 or an 88
percent "credit gain".
Mr. Baker stated that the City of Fairbanks would not be subject
to the hold-harmless provision in the bill because, under this
bill, they would be experiencing a tremendous decrease in the
contribution level as compared to the status quo system.
5:08:33 PM
Mr. Baker stated that the City of Fairbanks situation was
opposite to that of the City of Seldovia in that the proposed
cost share system would require them to contribute more than
they would under the status quo system. Therefore, hold harmless
provisions were incorporated into the bill in an attempt to
provide equality.
Mr. Baker explained that the hold harmless provision would apply
to those entities whose FY 07 rate or FY 08 Board Recommended
Rate was less than 22 percent. They would be subject to the
lower of those two years' contribution rates.
Mr. Baker informed the Committee that the total fiscal impact of
the hold harmless provision was then calculated. The State, in
addition to its 22 percent contribution, would be required to
contribute an additional $1.3 million as specified at the bottom
of Column (7).
5:10:21 PM
Senator Elton asked whether there were school districts with
employees in the PERS system which might require similar hold
harmless considerations.
5:11:00 PM
Mr. Baker stated that this issue is under review. Until
recently, only municipalities and cities had been considered. In
addition to considering whether any school districts with PERS
employees should be included, attention is being expanded to the
category referred to as "PERS Others". This would include
entities such as a housing authority or Bartlett Regional
Hospital in Juneau.
Mr. Baker calculated that an additional one million dollars
could be added to the hold harmless total were school districts
considered. "PERS Others" might add an additional three million
dollars.
Mr. Baker concluded that applying the hold harmless clause to
these entities would be doable; it would be a policy call
matter.
Senator Elton appreciated the foresight given to this issue.
5:12:23 PM
Mr. Baker referred the Committee to the spreadsheet titled "CSSB
125 Sec (19) Rate Adjustments" [copy on file]. This spreadsheet
reflects communities "recoup" rates as affected by the hold
harmless provisions. For instance, the Aleutian East Borough's
recoup rate for FY 08 would have been 10.01 percent. Once the
hold harmless rate is factored in, their rate for FY 08 would be
3.24 percent.
5:14:16 PM
Mr. Baker stated that communities who qualified for both the
recoup and hold harmless provisions would contribute at the
adjusted rate for FY 08. The hold harmless provision adjustment
would continue to apply to qualifying communities for an
additional four years.
Mr. Baker specified that all communities would be subject to the
22 percent contribution rate beginning in FY 13.
5:15:20 PM
Mr. Baker noted that the communities depicted at the top of the
spreadsheet were those that qualified for the recoup and/or the
hold harmless rate provisions specified in Sec. 19(a) for FY 08.
Mr. Baker stated that 19(b) contains the hold harmless
provisions specific to the additional four years. Communities
subject to that provision are depicted at the bottom of the
spreadsheet.
5:15:45 PM
Commissioner Kreitzer "commended" Co-Chair Stedman's staff for
their efforts in developing the Version "K" committee
substitute.
Co-Chair Stedman asked Members to review Version "K" thoroughly
and advise his office of any concerns or suggestions.
The bill was HELD in Committee.
5:16:59 PM
Co-Chair Stedman conducted housekeeping of the Committee's
upcoming hearing schedule.
ADJOURNMENT
Co-Chair Bert Stedman adjourned the meeting at 5:17:06 PM.
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