Legislature(2007 - 2008)BELTZ 211
04/04/2007 02:45 PM Senate JUDICIARY
| Audio | Topic |
|---|---|
| Start | |
| SB104 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | SB 104 | TELECONFERENCED | |
| + | TELECONFERENCED |
ALASKA STATE LEGISLATURE
SENATE JUDICIARY STANDING COMMITTEE
April 4, 2007
2:48 p.m.
MEMBERS PRESENT
Senator Hollis French, Chair
Senator Charlie Huggins, Vice Chair
Senator Bill Wielechowski
Senator Gene Therriault
MEMBERS ABSENT
Senator Lesil McGuire
COMMITTEE CALENDAR
SENATE BILL NO. 104
"An Act relating to the Alaska Gas pipeline Inducement Act;
establishing the Alaska Gas pipeline Inducement Act matching
contribution fund; providing for an Alaska Gas pipeline
Inducement Act coordinator; making conforming amendments; and
providing for an effective date."
HEARD AND HELD
PREVIOUS COMMITTEE ACTION
BILL: SB 104
SHORT TITLE: NATURAL GAS PIPELINE PROJECT
SPONSOR(s): RULES BY REQUEST OF THE GOVERNOR
03/05/07 (S) READ THE FIRST TIME - REFERRALS
03/05/07 (S) RES, JUD, FIN
03/14/07 (S) RES AT 3:30 PM BUTROVICH 205
03/14/07 (S) Heard & Held
03/14/07 (S) MINUTE(RES)
03/16/07 (S) RES AT 3:30 PM BUTROVICH 205
03/16/07 (S) Heard & Held
03/16/07 (S) MINUTE(RES)
03/19/07 (S) RES AT 3:30 PM BUTROVICH 205
03/19/07 (S) Heard & Held
03/19/07 (S) MINUTE(RES)
03/21/07 (S) RES AT 3:30 PM SENATE FINANCE 532
03/21/07 (S) Heard & Held
03/21/07 (S) MINUTE(RES)
03/21/07 (S) RES AT 5:30 PM SENATE FINANCE 532
03/21/07 (S) Heard & Held
03/21/07 (S) MINUTE(RES)
03/22/07 (S) RES AT 4:15 PM FAHRENKAMP 203
03/22/07 (S) Heard & Held
03/22/07 (S) MINUTE(RES)
03/23/07 (S) RES AT 1:30 PM BUTROVICH 205
03/23/07 (S) Heard & Held
03/23/07 (S) MINUTE(RES)
03/24/07 (S) RES AT 1:00 PM SENATE FINANCE 532
03/24/07 (S) Heard & Held
03/24/07 (S) MINUTE(RES)
03/24/07 (S) RES AT 3:00 PM SENATE FINANCE 532
03/24/07 (S) Heard & Held
03/24/07 (S) MINUTE(RES)
03/26/07 (S) RES AT 3:30 PM BUTROVICH 205
03/26/07 (S) Heard & Held
03/26/07 (S) MINUTE(RES)
03/27/07 (S) RES AT 3:00 PM BUTROVICH 205
03/27/07 (S) Heard & Held
03/27/07 (S) MINUTE(RES)
03/28/07 (S) RES AT 3:30 PM BUTROVICH 205
03/28/07 (S) Heard & Held
03/28/07 (S) MINUTE(RES)
03/29/07 (S) RES AT 5:00 PM BUTROVICH 205
03/29/07 (S) Heard & Held
03/29/07 (S) MINUTE(RES)
03/30/07 (S) RES AT 1:30 PM BUTROVICH 205
03/30/07 (S) Heard & Held
03/30/07 (S) MINUTE(RES)
03/31/07 (S) RES AT 12:00 AM BUTROVICH 205
03/31/07 (S) Heard & Held
03/31/07 (S) MINUTE(RES)
04/01/07 (S) RES AT 11:00 AM BUTROVICH 205
04/01/07 (S) Moved CSSB 104(RES) Out of Committee
04/01/07 (S) MINUTE(RES)
04/02/07 (S) RES RPT CS 6AM SAME TITLE
04/02/07 (S) AM: HUGGINS, GREEN, STEVENS, STEDMAN,
WIELECHOWSKI, WAGONER
04/02/07 (S) RES AT 3:30 PM BUTROVICH 205
04/02/07 (S) Moved Out of Committee 4/1/07
04/02/07 (S) MINUTE(RES)
04/04/07 (S) JUD AT 2:45 PM BELTZ 211
WITNESS REGISTER
Patrick Galvin, Commissioner
Department of Revenue
Juneau, AK
POSITION STATEMENT: Delivered PowerPoint on AGIA, SB 104
Marty Rutherford, Deputy Commissioner
Department of Natural Resources
Juneau, AK
POSITION STATEMENT: Provided information on AGIA, SB 104
Antony Scott, Analyst
Commercial Section
Division of Oil & Gas
Department of Natural Resources
Anchorage, AK
POSITION STATEMENT: Provided information on AGIA, SB 104
Larry Ostrovsky, Chief Assistant Attorney General
Oil, Gas & Mining Section
Department of Law (DOL)
Anchorage, AK
POSITION STATEMENT: Provided an overview of the constitutional
issues related to AGIA - SB 104
ACTION NARRATIVE
CHAIR HOLLIS FRENCH called the Senate Judiciary Standing
Committee meeting to order at 2:48:56 PM. Present at the call to
order were Senator Therriault, Senator Huggins, and Chair
French. Senator Wielechowski joined the committee shortly
thereafter.
SB 104-NATURAL GAS PIPELINE PROJECT
2:49:28 PM
CHAIR FRENCH announced the consideration of SB 104. He said the
administration would deliver an overview with respect to what is
in the current committee substitute and if time permits there
would also be an overview on the tax freeze issue. In his
opinion that is the largest constitutional issue in the bill.
The projected timeline is for the committee to take the time to
carefully examine the legal issues and give them a thorough
vetting while keeping in mind the goal of passing the bill
before the end of session.
2:51:35 PM
SENATOR THERRIAULT asked which companies would be presenting
before the full committee.
CHAIR FRENCH said he anticipates communicating the legal issues
to the interested parties-the producers, the pipeline companies,
and the independents-and giving them the opportunity to weigh in
on each of the legal issues including a long-term tax freeze,
triple damages, and confidentiality of the material submitted in
support of the license application. A point and counterpoint on
each issue is not anticipated, but there would be an opportunity
for the parties to express their views on the legal issues.
SENATOR THERRIAULT asked if the $500 million inducement could be
discussed even though it is not a specific legal issue.
CHAIR FRENCH said that while the committee will focus on the
legal issues, it is each member's opportunity to touch the bill
and discuss any aspect. Nothing is out of bounds, but in the
interest of efficiency he would prefer the time be weighted in
favor of the legal issues since that is the focus of this
committee.
2:54:13 PM
PATRICK GALVIN, Commissioner of the Department of Revenue (DOR),
introduced himself and Marty Rutherford, Deputy Commissioner
with the Department of Resources (DNR). Describing AGIA as a
significant opportunity for the state, he stated that the
administration appreciates the opportunity to work with the
legislature.
COMMISSIONER GALVIN said the overview will provide a general
framework for how the administration is approaching the issue
and how AGIA fits that approach. He continued to say that:
· AGIA is a commercial vehicle that creates a competitive
playing field. It allows the state to establish an
opportunity for the commercial players to make decisions
that are in their best interest, but that ultimately lead
to Alaska fulfilling its needs.
· AGIA intends to provide a pipeline sooner and on Alaska's
terms. The state is seeking very specific things from the
pipeline beyond the immediate cash flow from the line
itself. The way the terms are structured will be a driver
making sure the state's complete interest in the gas
pipeline is fulfilled.
· AGIA is a transparent process, with transparent
inducements. The issues of transparency and the ultimate
cost to the state were significant issues during the
previous gas pipeline process and AGIA makes it clear what
the incentives are, and in a manner that is as transparent
as possible.
2:57:50 PM
COMMISSIONER GALVIN said it's important to recognize that AGIA
is not a negotiation. It's an opportunity for the state to
establish the terms in statute and create a commercial
opportunity for participants to decide whether they want to
participate or not. In a project of this type it is appropriate
for government to establish the rules of the road and allow the
commercial world to make decisions as to how it wants to
participate in the process.
COMMISSIONER GALVIN explained that the state is creating a
competitive bidding opportunity and it is offering certain
inducements, which will be a significant part of the ultimate
success of the project. The inducements must provide for a level
playing field to get participants in the game and to create
competition that may not otherwise exist. He emphasized that
there is a very important linkage between what the state is
hoping to get out of AGIA and what it needs to put in to have a
reasonable expectation of getting that result.
COMMISSIONER GALVIN said that AGIA has midstream inducements
that are geared toward the pipeline construction, and upstream
inducements that are tied to the gas itself. The intention is to
get the producers to participate in the project through
transportation commitments.
3:01:11 PM
COMMISSIONER GALVIN relayed that AGIA has been structured to
provide transparency in the inducements that should be clearly
quantified so that there are no hidden surprises such that the
state could wake up one day and realize that it is going to cost
a great deal more than what it was originally told.
AGIA puts a monetary capital contribution on the table, but it
is not in the form of a $500 million check. Rather, it is an
opportunity for a company to take certain actions after which it
will be able to get the money. Part of it is a matter of
matching; the company will spend its money to have access to the
state money. Secondly, the money is on the table and the
applicants are going to compete to tell the state how much of
that money will ultimately be needed. He emphasized that the
$500 million is designed to create the opportunity for a
competition that gives everybody an opportunity to commit to
certain very important things.
3:04:19 PM
CHAIR FRENCH asked when the $500 million appropriation would be
made-assuming that it remains intact and that AGIA passes.
COMMISSIONER GALVIN said at this point there probably won't be a
$500 million appropriation when AGIA passes because it won't be
know whether or not the money will be needed. The expectation is
that the demand for the $500 million will be based upon the
measured success of the project moving forward and the amount
that the state ultimately needs to put in to get the project to
fruition. More than likely an appropriation of a couple hundred
million will be needed within the first couple of years. At
about that time there will be a juncture on the project and the
appropriation would be put before the legislature to clarify
progress and determine how much money would be needed to fulfill
obligations from that point forward. The administration
anticipates knowing more a year from now by which time the
actual applications will have been submitted, a licensee will
have been selected, and the administration will be coming to the
legislature. From that proposal a schedule can be set for when
the appropriations are needed. The expectation is that the
legislature will basically fill the obligation from there and
schedule the appropriations.
COMMISSIONER GALVIN relayed that last year the legislature put
$300 million in Alaska Housing Finance Corporation (AHFC) to be
held in the name of an Alaska gas pipeline project. It was sort
of a down payment on a previous concept of a state contribution
and the idea is to reassign that money to AGIA, he stated.
CHAIR FRENCH recalled that the last contract had some
indemnifications that were identified as constitutional problems
because they bound future legislatures. He suggested that a
better approach might be to identify and set aside the money
ahead of time. That way it's there when it's needed and isn't
dependant on an appropriation from a future legislature.
COMMISSIONER GALVIN thanked him for the suggestion and said
someone would look into that. He continued to say that from the
administration's perspective no appropriation is needed this
year. After the competitive proposal process and when the
legislature is looking at the proposal itself, the potential
expenditures will be more apparent. At that point an
appropriation decision can be made that would set everything up
through to the end and avoid any sort of legal challenge.
3:08:52 PM
CHAIR FRENCH highlighted the idea of reassigning the $300
million that had been set aside and calling it AGIA money from
here forward.
COMMISSIONER GALVIN stated agreement with that idea.
SENATOR THERRIAULT asked if the request for access to the $500
million had been moved into the evaluation criteria.
COMMISSIONER GALVIN said in a way. In the proposal the
applicants can establish the matching rate from zero up to 50
percent before the open season and from zero up to 80 percent
after the open season. The House and Senate versions diverge
with respect to whether the amount of the contribution is part
of the evaluation or not. He believes it was removed in the
Senate version. It could factor into the net present value
analysis and the administration is open to it either way, he
stated.
CHAIR FRENCH asked for an educated guess for the universe of
likely applicants.
COMMISSIONER GALVIN identified the three major producers, Trans
Canada, MidAmerican, and the Port Authority. He noted that
Enbridge does not intend to participate in the AGIA process at
this level. When AGIA was put together the thought was to set up
a competitive environment to meet the needs of the known
universe and perhaps attract interest from others that are
watching from afar. If the competitive process satisfies the
known universe, then more than likely the needs of those that
are watching from afar can also be met. Although there is a
possibility that everyone will be surprised by an entity or a
consortium of entities coming in and participating, at this
point there is no knowledge of that, he said.
3:12:38 PM
COMMISSIONER GALVIN addressed upstream inducements and said the
idea is to have them be as transparent and quantifiable as
possible. "We're looking at inducements associated with the
commitment of gas to the licensed project." They are in the form
of royalty provisions, which provide more certainty on the
royalty aspects, as well as tax provisions. Those will be
addressed in more detail later, but the idea is to provide some
predictability with regard to what the tax rate is going to be
for the first ten years of gas flow.
CHAIR FRENCH asked him to explain the mechanics of the royalty
inducements.
COMMISSIONER GALVIN reiterated that the purpose of the
inducements is to try to get participation in the initial open
season. He said that after looking at the discussions with the
producers on a gas pipeline we were able to identify a few
structural issues with our lease provisions that create some
uncertainty for the lessees when they think about making
transportation commitments. One has to do with the way the
royalty is valued. He explained that for Royalty in Value-when
payment is taken in the form of cash--you take the destination
price less the transportation to establish the royalty value.
CHAIR FRENCH added that for oil it is a West Coast price less
transportation or tariff.
COMMISSIONER GALVIN agreed. Basically it's the price that the
other lessees within the same field might get. "When you ship
your gas and you sell it for $7, and you subtract back the $2
transportation cost, then your net back royalty value is $5." To
ensure that the state gets the best value for its resource when
it's sold in the market, you look at all the sales for gas
within that field. Then the state gets the highest value in that
field. If someone else sold gas from that field for $7.50 then
the state would go back to that original lessee-perhaps a year
or two later-and require a royalty based upon a $5.50 net back
instead of $5. The lessees have expressed concern about that
uncertainty, he stated. The state negotiated and put that into
its leases as a tradeoff for a relatively lower royalty rate.
"But because of the desire to get a gas commitment to the
initial shipment, we're willing to give them something that
provides a bit more certainty on that value." For the applicants
that commit gas in the initial binding open season, the state
will establish, through regulation, a price that is based upon a
combination of known index values such that everybody can
anticipate the price for gas for a particular sale. That would
be the price for royalty regardless of what they or somebody
else sold it for. The applicants get the opportunity to
substitute this language into their lease to have this different
valuation methodology so that they can have a bit more
predictability on what their royalty value is.
CHAIR FRENCH asked if there is a legal definition of binding
open season.
COMMISSIONER GALVIN said he would defer to Mr. Scott.
3:18:13 PM
ANTONY SCOTT, Commercial Analyst, Division of Oil & Gas,
Department of Natural Resources (DNR), said the notion of
binding open season is a term of art and some binding seasons
are more binding than others. What typically happens in the
commercial process is that shippers make shipping commitments
that are subject to conditions precedent being subsequently
satisfied and the nature of those conditions precedent are a
matter of commercial transactions that are sometimes fairly
narrow. "So it's my understanding for example that on certain
LNG projects, conditions precedent include the ability to secure
downstream market to the gas or upstream supply, which is an
event that is actually entirely within the control of the
shipper making that commitment," he stated.
MR. SCOTT stated that a binding open season need not be wildly
binding, which is one reason that it isn't defined in the bill.
It's also why the bill contemplates going toward FERC
certification and continuing the state match even after what
might be termed a disappointing open season. Again, he said, the
nature of the success or failure will depend upon the particular
open season and it's possible on this project to imagine a very
early open season with lots of conditions precedent followed by
increasing commitments over time as the conditions are gradually
fulfilled.
CHAIR FRENCH asked if he is saying that a binding open season
occurs once the conditions in the shipper's offer have been
satisfied.
MR. SCOTT said he didn't mean to convey that. The binding open
season will be an auction. The rules of the auction, including
the conditions precedent that must be satisfied, will be laid
out during the auction. The question of whether or not the
conditions are satisfied is something that occurs at a later
point in time, he stated.
CHAIR FRENCH said so it's an offer and acceptance of those
conditions. You nominate your gas with certain conditions and if
the pipeline company accepts those terms you have a binding open
season. Is that a layman's definition?
MR. SCOTT said that's fair.
3:22:10 PM
SENATOR WIELECHOWSKI asked if the state has any legal recourse
if there is an open season and the project is economically
viable, but the leaseholder fails to bid its gas.
MARTY RUTHERFORD, Deputy Commissioner, Department of Natural
Resources (DNR), said that is one reason the state chose to
promulgate regulations. It is to clarify the process by which a
lessee could take advantage of this change to its lease
structure in exchange for making an FT commitment. We anticipate
triggering it through some determination that the project is
going forward under the conditions of the open season, she said.
It wouldn't be left open as to whether or not there was a
potential failed open season or a shipper decided not to take
advantage of the commitments that they made. The shipper might
have some flexibility in getting away from those commitments so
it is going to be a rather complicated process to determine how
to protect the state's interest.
SENATOR WIELECHOWSKI asked if there is language in the leases to
require a leaseholder to produce its gas when it is economically
viable.
COMMISSIONER GALVIN said one of the issues on your list is the
duty to market/the duty to develop, but generally yes. The
lessee has an obligation under the lease to market its gas when
it has an opportunity to do so. "What we're trying to establish
here is a number of opportunities and reasons for them to
participate and try to avoid a situation where we have to
exercise our rights to enforce such a duty." It is clear that
the duty exists and it is clear that the state recognizes that
the duty is there. But we don't want to end up in a situation
where we are forced through the courts to enforce it, he said.
We would rather it is a commercial decision that is in our
mutual interest, he stated.
3:25:19 PM
SENATOR WIELECHOWSKI asked why the state would want to provide
incentives for something that the leaseholders are already
required to do.
COMMISSIONER GALVIN explained that when AGIA was put together
there was discussion about what level of upstream inducements
would be appropriate. As part of those discussions the state was
balancing that issue. In the end, he said, we recognize that
reasonable minds can differ. Also, there is the need to get the
project going as quickly as possible and litigation to enforce
that lease prerogative is not the most timely way to resolve
this issue.
CHAIR FRENCH asked Senator Wielechowski to set his question
aside to continue the overview because that issue would be
discussed at length.
SENATOR THERRIAULT asked for clarification that the inducements
aren't diminishing that particular lease requirement. In fact,
he said, the committee might change elements to increase the
chance of success in the event that that language needs to be
exercised at some point in the future.
COMMISSIONER GALVIN replied nothing that's included in AGIA
diminishes the state's option to enforce those sorts of terms.
Ultimately providing these opportunities increases the state's
claims in that regard, he stated.
SENATOR THERRIAULT summarized that the commissioner talked about
reviewing the state's existing system, about determining what
inducements to offer upstream, and about the provision for
taxing at the "higher-of" selling price. He asked him to address
switching between RIK and RIV.
CHAIR FRENCH asked the commissioner to continue the discussion
of royalty inducements.
COMMISSIONER GALVIN said before continuing he wanted to clarify
something with respect to a binding open season and the lack of
a definition. "You indicated that it might be something that
people might dispute." He suggested it's important to recognize
that in the proposal the licensee will identify the binding open
season that fulfills the obligation to hold a binding open
season. That is the one that will be identified in the license
and that is the one to which the upstream inducements will
attach.
CHAIR FRENCH asked if the successful pipeline licensee will
conduct the open season.
COMMISSIONER GALVIN said yes, but it's important to understand
that pipelines generally have a series of open seasons and some
are more binding than others. "People end up focusing on the
idea that there's a single magical open season-that everything
kind of comes together. I think we need to recognize that that's
not necessarily always the case."
MR SCOTT added that on this project the initial binding open
season will be clearly identified by not only the applicant but
also by the new FERC regulations governing the terms of a
binding open season. Basically there are no regulations
governing the conduct of a binding open season in the Lower 48,
but the Alaska Natural Gas Pipeline Act (ANGPA) in 2004 said
that FERC should promulgate such regulations. For the first time
for this project FERC has issued regulations governing the terms
of a binding open season.
Touching on the commissioner's point about multiple open
seasons, he said when projects are trying to get off the ground
it is not uncommon to have a binding open season where the
initial participation is not sufficient to construct the
project. When that happens there may be another binding open
season several years later. For instance in Cheyenne Plains he
recalled it was the third binding open season before there were
sufficient commitments to construct the project.
CHAIR FRENCH noted that AGIA ties the upstream inducements to
the initial binding open season. "There may be three binding
open seasons, but only if you nominated gas at the first one do
you get the royalty inducements and the production tax
inducements."
MR. SCOTT agreed that the upstream inducements will be tied to
the first binding open season.
SENATOR THERRIAULT added that generally the open season process
conveys to FERC the need for the transportation system. But this
project passed that hurtle when Congress passed the act and
dictated the need to FERC.
3:32:23 PM
COMMISSIONER GALVIN continued to explain that the royalty has
two aspects. The first is the "higher-of" aspect that refers to
the valuation, and the second has to do with the state's ability
to switch between royalty in value and royalty in kind. Royalty
in value means they ship the gas they sell the gas and they give
the state the money. Royalty in kind means that the state takes
possession of the gas at the wellhead and takes responsibility
for shipping and ultimately selling the gas.
For gas, capacity in the pipeline is reserved and then there is
some contract to sell it in spot or through a longer term
contract. Because of the obligations associated with the
transportation and sale, the state's ability to switch between
taking the gas in value and in kind-in as short a time as 90
days-puts the lessee in a vulnerable position. They must react
quickly to either find and buy gas somewhere else at a less
favorable price, or scramble to get capacity, or displace their
own gas. Because switching could be commercially
disadvantageous, the state recognizes the value in providing the
lessees with an alternative. By committing gas at the first open
season the lessee could take some regulation generated alternate
language and switch it into their lease to basically protect
their interests through a combination of having a longer notice
provision and also the state taking some of that capacity
responsibility.
CHAIR FRENCH noted that AGIA speaks to establishing terms under
which the state will exercise its authority to switch. He asked
if the terms are set by regulation.
COMMISSIONER GALVIN said they are set in regulation and then if
the lessee makes a commitment, it could opt to have those terms
set in the lease thereby becoming a contractual right.
CHAIR FRENCH summarized it's first by regulation and then they
become contractual through the lease.
COMMISSIONER GALVIN agreed; the royalty provisions are
contractual so through this mechanism the state makes an offer
to change through the regulation and then the lessee would have
the option to accept that and amend its lease accordingly. That
would then become the lease provisions that it could rely upon
until it agreed to make a subsequent change. He noted there is
language in AGIA that allows the commissioner to potentially
readjust those regulations every couple of years. "We want to
make it clear that the changing of the regulations doesn't
change the lease. It just provides the lessee another
opportunity to accept the changed regulations as part of their
lease." Certainty is provided by the fact that once they opt in,
that language becomes their contractual right. If the
regulations change, the lessee may have the opportunity to
change again if it might be more advantageous. "We're trying
to…balance those interests of making sure that the state has a
responsible…public process to develop those rules, but that it's
ultimately the lessee's decision as to whether or not to
incorporate those into their leases."
SENATOR THERRIAULT asked if there's nothing that times that out
in the alternative language for RIK, RIV and higher-of. "That's
for the rest of the life of production of gas for that
particular field. It's locked in unless the commissioner makes a
modification and then it's optional whether the producer accepts
the new language."
COMMISSIONER GALVIN said yes, but not for all the gas from that
lease. It's only for the gas that's committed to value.
3:37:22 PM
MR. SCOTT added a technical amendment to Senator Therriault's
comment. He explained that the royalty provisions will attach to
capacity that is subscribed for the initial open season. All gas
that flows through that capacity will enjoy those benefits so it
is not particular leases that are dedicated. It's gas that the
lessee has that flows through the capacity that the lessee
obtained in the initial open season. Those rights would actually
expire with those contracts, he stated.
COMMISSIONER GALVIN commented that gets down into the minutia,
but it is a volume calculation of gas.
CHAIR FRENCH asked if the part that ensures that the state will
stick with the licensed partner is the triple damages.
COMMISSIONER GALVIN said that is part of it. Basically it is a
linkage between the fact that we've got upstream inducements
tied to the licensed project. Although they are identified as
upstream inducements, it must be recognized that because they
are tied strictly to the open season of the licensed project,
they are also very valuable to the licensee. That's a particular
value that the state is also providing the licensee, he stated.
Within AGIA there is a state obligation not to provide monetary
value to a competing project so from the prospective bidder or
licensee view this ensures certainty that the terms aren't going
to change. "So there is a tie between both the upstream and the
midstream that create what we consider to be an opportunity for
driving this project ahead from the get-go," he stated
COMMISSIONER GALVIN emphasized that this is geared toward
getting that initial open season to be a success. In the end
getting gas committed in the initial open season is what keeps
us on the best timeline for this project and provides the
maximum value to the state.
3:40:24 PM
COMMISSIONER GALVIN continued to say that the state needs to
maintain the option of proceeding past an open season if it does
not get those commitments. It is not in the state's interest to
have an all or nothing open season. If the producers choose not
to participate or if the potential commitments do not come in,
the state does not want to be where it is now. A vital part of
the AGIA model is that when the licensee accepts the inducements
"they are going to commit to not only get to an open season, but
if it is unsuccessful they are committed to continue to move
that project ahead so that the focus stays on the project, stays
on the economics of that project and people are talking about
how do we get the gas in the context of the project that is
moving toward a FERC certificate."
3:41:49 PM
COMMISSIONER GALVIN explained that the state's "must haves" are
intended to be a big part of the tradeoff in return for the
inducements. They are geared towards a vision the state has of
the future of the North Slope, "which is a vibrant competitive
market where there is oil and gas exploration that is being done
with the confidence that if they have a discovery they know that
they will be able to get that to market in a reasonable period
of time at a reasonable price." The jobs that are discussed will
come not only from construction of the gas pipeline, but also
from the vibrant competitive oil and gas fields on the North
Slope. "That's the vision that our must haves are geared to
trying to fulfill," he stated. Finally, he said, the state wants
to ensure that as the line comes in and the gas begins to move
south, that there is an opportunity to use that gas for Alaska's
needs as well.
SENATOR THERRIAULT thanked him for clarifying the issue of the
royalty modifications applying to the capacity. "That's to
prevent someone from coming in and nominating gas in the first
open season for only a five-year period. "You want them in order
to get that incentive to nominate capacity for a longer period
of time because that is critical for the economic underpinning
of that investment decision."
MR. SCOTT said the mechanism he is referring to is a beneficial
consequence of how AGIA is designed. In truth, the reason the
incentives are tied to capacity is because capacity is what is
subscribed for and reserves are not typically coupled with
capacity. "The design was a function of the practical realities
that the state faced, but you are correct that it does have the
salutary economic incentive."
SENATOR THERRIAULT added that is because the FT is basically a
contract for capacity, the way this will work is that it will
incent them for a long time.
COMMISSIONER GALVIN said it's a form of durability. The way it
is linked to the lease provides the expectation that it will be
there for the length of the project.
3:45:12 PM
CHAIR FRENCH asked him to flesh out gas for Alaskans and whether
he was referring to the deliver points.
COMMISSIONER GALVIN explained that gas for Alaskans has three
components. The first is the off-take points and it's important
that the lessee recognizes that it has an obligation to provide
off-take points. The second part is what AGIA calls distance
sensitive tariffs. Using a toll road analogy he said that
someone who gets off at the first exit shouldn't be expected to
pay the same amount as someone who drives the entire length of
the road. The applicant would need to accept the idea that the
tariff for an off-take point within Alaska will reflect that
distance and not the entire line. The third component is the
expansion provisions. There needs to be an expansion expectation
on the line such that Alaskans can take advantage of that gas in
a manner that fulfills their needs.
COMMISSIONER GALVEN said taken together those three components
make up the package that will provide the opportunity for
economic gas to Alaskans.
CHAIR FRENCH said his constituents are most interested in the Y
or spur line.
COMMISSIONER GALVIN said ANGDA (Alaska Natural Gas Development
Authority) did an instate gas demand study and it provides a
look at what Alaska's future could be in terms of energy use
within the state and how a gas pipeline could fill a number of
different uses. There could be an off-take at the Yukon River
for propane that would lead to a facility that barges it on the
river to communities that would be able to substitute the
currently barged-in heating fuel for the lower cost fuel. There
could be lines into Southcentral, the Fairbanks area, and to
tidewater. The latter could be for export out of Alaska and for
coastal communities. There are a number of different
opportunities for Alaska once a gas pipeline is being pursued.
The administration believes that AGIA has the needed tools to
ensure maximum opportunity for Alaska to pursue those options,
he stated.
3:48:46 PM
COMMISSIONER GALVIN said some of the state "must haves" are
accomplished structurally. One is through low tariffs. The
primary driver for that is the debt to equity ratio that the
tariffs are based on. It's the cost of the project and how it
will be financed, but it isn't how it is actually financed so
much as the proposal to FERC to get your money out. That will be
based upon a weighted average of the cost of debt, which is
basically at that cost. It's going to be lower than what you
expect to get as the return on equity. "Depending on how much
you slide your weights between the low cost debt return and the
higher cost equity return is going to be the amount of money
that you expect to get…out of this project." In looking at any
model for any pipeline you'll find that the line between debt
and equity is going to be a primary driver of the tariff. A
70/30 debt/equity ratio was selected because it seems to be a
reasonably commercial term that many pipelines meet. The
administration believes that 70 provides an assurance to the
state that it will have a commercially reasonable tariff
structure, but the applicant will be allowed to compete to
provide a potentially higher level.
COMMISSIONER GALVIN said that the netback value to the state and
the tariff that's used will be a very significant portion of the
evaluation criteria. "If they propose a 75 percent debt level or
an 80 percent debt level it is going to have a very large impact
on their tariff and a very large impact on the net value of that
to the state." Establishing 70 as a minimum is a reasonable term
and it would allow them to compete at a level higher than that,
he stated.
3:51:32 PM
COMMISSIONER GALVIN said expansion requirements, which were
mentioned previously, are a critical component of the vision for
a vibrant North Slope gas field. "We fulfill this through a
number of requirements in the AGIA application process to be
soliciting demand, be fulfilling that through an expansion if
the demand comes in at an appropriate level, and to provide
rolled-in rates." He explained that describes how the cost of
the expansion is going to be shared among the shippers. Under a
rolled-in rate scenario the cost is spread across all the
shippers after the expansion, including the ones that were
shipping prior to the expansion. The alternative is referred to
as incremental and under that system only the expansion shippers
carry the cost of the expansion.
COMMISSIONER GALVIN said we strongly believe that it's in
Alaska's interest to provide for maximum economic potential for
explorers at reasonable terms. Rolled-in rates do that. They
have been used in Canada and various other areas and have led to
a great deal more expansion and exploration. "Ultimately it
serves Alaska's interest to see that fit into our gasline and so
when we put this inducement in there we're expecting to get in
return a gasline that meets our interests." Rolled-in rates are
a critical part of that interest, but the administration does
recognize that there is some concern. Initial shippers that are
not expansion shippers may, in their view, be economically
impacted under rolled-in rate treatment.
CHAIR FRENCH added that their view is they are suddenly paying
for a new shipper to bring gas to market.
3:54:25 PM
COMMISSIONER GALVIN said yes; they had the expectation that they
would pay a certain amount when they came in. Once the expansion
takes place they can opt out of their contract, but they
wouldn't be able to ship. If they want to continue to ship, then
under rolled-in rate treatment they would have to pay the price
that everybody else is paying, which is potentially higher.
COMMISSIONER GALVIN said there are a couple of different things
to point out with respect to rolled-in rates. First there is the
cap. That obligates the pipeline company to use rolled-in rates
until it gets to 15 percent above the initial shipping rate.
CHAIR FRENCH asked if that is the initial tariff or the initial
volume.
COMMISSIONER GALVIN said it's the initial tariff. Pipeline
expansions usually takes place through compression initially.
With rolled-in rates that reduces the cost for everyone and you
end up with a J curve. "Through the first one or two expansions
the tariffs go down for everybody. Then as you go into… looping
where you add actual pipe. You end up with the cost starting to
move up." AGIA provides the obligation to use rolled-in rates.
"You follow that J curve down and you'd continue to follow it as
you move up, but once you reach a point where you…have returned
back up and gone past your initial tariff level - up to 15
percent above that-then the obligation to use rolled-in rates no
longer applies."
3:56:40 PM
COMMISSIONER GALVIN emphasized that this can't be a mandate. The
tariff treatment is either 70/30 or under the rolled-in rate
treatment it's a decision that will be made by FERC for an
interstate line, or by the Regulatory Commission of Alaska (RCA)
for an instate line. They will ultimately decide what the tariff
should be and whether the rolled-in rate should be used at a
particular level. But the state is requiring that anybody that
takes the inducement has to commit that they are going to apply
for a rolled-in rate treatment up to the 15 percent cap.
COMMISSIONER GALVIN said that FERC has a rebuttable presumption
of rolled-in rates and hopefully that will stay in place.
Ultimately that will help support what is being proposed by our
applicant, but it isn't appropriate to rely on that. "We want to
have a contractual obligation on the part of those who are
getting our inducement to fulfill it."
3:58:01 PM
SENATOR WIELECHOWSKI asked what the remedy is if there are
rolled-in rates, but the explorer or producer doesn't comply
with the contract and actually requests incremental rates before
FERC.
COMMISSIONER GALVIN said under AGIA the license would still be
in place and they would be found in violation. The commissioners
would give notice of that violation and the opportunity to cure.
If they didn't cure, the state would be able to seek damages
associated with that violation.
COMMISSIONER GALVIN said the corollary to the rolled-in rate
discussion as it relates to the pipeline company is the
obligation that the state is placing on those who take advantage
of the upstream inducements. "If they commit their gas to the
line, in order to get those royalty and tax provisions that were
discussed, they would have to commit to not oppose the rolled-in
rate treatment proposed by the licensed project, up to that 15
percent maximum.
COMMISSIONER GALVIN noted that the language in the current
committee substitute says that the obligation not to oppose the
rolled-in rates only applies if the FERC rebuttable presumption
goes away. "We'd like to talk to you about that," he said.
3:59:49 PM
CHAIR FRENCH acknowledged that is an item of concern and said it
would be addressed at length at a later time.
SENATOR THERRIAULT asked if the presumption is only on voluntary
expansions.
COMMISSIONER GALVIN said yes; the FERC presumption is only for a
voluntary expansion. That means the pipeline company is
requesting from FERC an expansion at a particular rate. The
alternative is a FERC imposed expansion that would occur when
someone wants the pipeline company to expand and it is unwilling
to do so. He said he views expansion requirements as going hand-
in-hand with the rolled-in rates. "We shouldn't reach the
rebuttable presumption because our expansion provisions are
probably going to result in it being extremely unlikely that
there would be an involuntary expansion imposed by FERC. We
believe they would have a contractual obligation to us to expand
before we would reach that point," he stated.
4:00:55 PM
COMMISSIONER GALVIN explained that transparency associated with
the level of inducements is to make sure that everyone knows
what the state is offering and what it will cost. In addition
the state is trying to ensure that the process to advance the
project and select the licensee is equally transparent. He
emphasized that AGIA sets up a very public competitive process.
"It is not a negotiation; it is not an individual discussion
with any particular entity." Everyone is given a change to
compete. The public provides comment to the commissioners, the
commissioners make a decision and provide an explanation to the
legislature, and the legislature decides whether or not it was
the right decision. Although everything associated with the
project that the state backs will be available for public
review, he said that "we do make some recognition of commercial
reasons and competitive reasons why certain aspects of the
proposals may have to be held confidential during the
competitive portion of the process."
4:03:06 PM
SENATOR THERRIAULT asked if all information, including the
confidential information, will be available to the legislature
immediately when the bids are opened. "We should start our
independent process as soon as you open up the envelopes on all
of them," he stated.
COMMISSIONER GALVIN stated agreement. "We crafted an amendment
on the House side just yesterday to ensure that the bill
reflects the opportunity for legislators to access even the
confidential information." With respect to the timing, he said
there will be some give and take between the departments and the
applicants during the initial process to make sure that all the
information clear. "So we see the start of the opportunity for
the legislature to see even the confidential information being
at the notice that there is public comment." He estimated it
might take a week or two to ensure that the applications are in
order and that there is a fully competitive process. "Once we
have the completed applications, they become public and the
legislature will be able to see everything," he stated.
SENATOR THERRIAULT asked what the estimated timeline is between
opening up the envelopes and the executive reaching a final
decision.
COMMISSIONER GALVIN said the applications are due October 1 and
they become public October 14 so it's a fairly quick turn
around. "Everything becomes public, absent the confidential
information, and at that moment in time the legislature
would…have the opportunity to sign the confidentiality
agreements and see the confidential information."
SENATOR THERRIAULT asked how quickly he expects to get to the
final selection of a proposal.
COMMISSIONER GALVIN said there is a 60 day public comment period
from October 14 to December 14. Then we anticipate up to six
weeks for the commissioners to make a decision and give the
notice to the legislature with the finding and other things. Of
course if there's just one application or if the applications
are so disparate that one clearly stands above the others, then
the decision-making timeframe from the close of the public
comment period could be shorter, he stated.
4:07:34 PM
SENATOR THERRIAULT recapped that "at the very least there will
be 90 days that the legislature could be running numbers,
questioning or maybe even making comment in the public comment,
but it's not like…we don't do anything until you make your
decision."
COMMISSIONER GALVIN said correct. "Regardless of what the
timeframe is, the legislature will have probably 30 more days
than the commissioners would to make the evaluation." The review
time will be basically the same, but the legislature will have
the extra time on the end.
CHAIR FRENCH stated that Senator Therriault raises a good point
because nothing in AGIA says that all the information that the
commissioners have is forwarded to the legislature for
consideration. "We wait until you issue the preliminary notice
that you want to issue a license."
COMMISSIONER GALVIN restated that language was crafted and put
into the House version to clarify that point. The Senate could
consider and add similar language providing the legislature with
access to all the information from the beginning of the public
review process.
CHAIR FRENCH said it seems like a simple clarification.
COMMISSIONER GALVIN agreed.
4:09:14 PM
SENATOR HUGGINS said there isn't parity because the
commissioners are working full time and the legislature isn't in
session fulltime. The earlier the legislature starts its
evaluation process the better, but there is reason for restraint
until it's clear that an application is complete.
CHAIR FRENCH agreed "you don't want to waste time."
COMMISSIONER GALVIN said evaluating the proposals for
completeness will take place before the clock starts running on
the public review process. That isn't specified in the bill, it
simply allows the commissioners the time it takes to get
complete information. Once notice is given of the complete
applications then the 60 day clock starts running.
He clarified that the original bill allowed 30 days for
legislative review and the current committee substitute [CSSB
104(RES)] has a 60-day period for legislative approval.
4:10:57 PM
COMMISSIONER GALVIN summarized AGIA's purpose is to create a
competitive opportunity for commercial entities to participate
in a process that has a level playing field. The inducements are
geared towards getting as much participation as possible and
getting the participants to meet the state's "must haves" with
regard to expansions and tariff, and the expectation of
committing to get to an open season and a FERC application
within a certain timeframe. The intention is to get a pipeline
as soon as possible, to provide for a pipeline that meets the
state's long term interests, and to have it all in as
transparent a process as possible. In the end this is all geared
toward improving the state's position with regard to getting a
pipeline under our terms, he said. "It's a matter of providing
the state with better leverage as it relates to our options for
getting a pipeline."
COMMISSIONER GALVIN acknowledged that right now there isn't
movement from any participants but, he said, we have experienced
what it may cost if we ask the producers what it'll take to move
this project ahead. The previous contract provided a clear
example of the price, but it didn't get a commitment to do more
than just continue to study. "We believe that the state needs
more than that and we believe that through AGIA we will
establish a process that will provide the leverage necessary to
get this project moving and to ultimately result in a project
that meets the state's interest," he concluded.
CHAIR FRENCH thanked Commissioner Galvin for the overview and
asked Mr. Ostrovsky to preview the constitutional issues that he
would talk about next week.
4:14:11 PM
LARRY OSTROVSKY, Chief Assistant Attorney General, Civil
Division, Oil, Gas & Mining Section, Department of Law, said he
would briefly discuss the context of the issue of fiscal
certainty with respect to AGIA and how the Department of Law
analyzed it.
He referenced Article 3 on page 19, which says essentially that
an entity that commits gas in the first binding open season is
entitled to an exemption from the state's gas production tax
that holds it harmless from increases in that tax. The exemption
is good for 10 years from the commencement of commercial
operations and it applies only to tax levied on North Slope gas
that is committed to the pipeline during the first binding open
season. Also, the exemption constitutes a "contract" between the
entity and the state.
CHAIR FRENCH asked what legal issue that raises.
MR. OSTROVSKY said although it does raise a legal issue, AGIA
has been carefully crafted and the belief is that the approach
is consistent with the state constitution and with past
practices of the state as well as other legislation. To reach
that conclusion the first place we looked was Article 9, Section
1 of the state constitution.
Article 9 - Finance and Taxation
§ 1. Taxing Power
The power of taxation shall never be surrendered.
This power shall not be suspended or contracted
away, except as provided in this article.
MR. OSTROVSKY said he provided the under lining in the last
clause because that is where the entire debate rests. If it
wasn't there I wouldn't be here, he said. If the sentence ended
after the word "away" everyone would agree that there could not
be a contract. It's interesting that when the Constitutional
Convention originally considered this section for inclusion in
the constitution, that last clause was not included. The
National Municipal League provided the first model of this
article and it ended with the statement that "This power shall
not be suspended or contracted away." The final clause was added
during the convention.
What does the clause mean? He explained that a basic tenet of
statutory construction is that "every word sentence or provision
in the statute was intended to have some useful purpose, have
some force and effect." Not only can that clause not be ignored,
he said, it must be given some meaning. "Unfortunately Article 9
doesn't go on to describe specific circumstances where that
clause takes effect. But I think that pretty much…every lawyer
who's looked at this provision believes that it probably takes
effect, if at all, in Section 4 under exemptions." That's the
only place that's relevant to it, he stated.
4:18:04 PM
Article 9 - §4. Exemptions
The real and personal property of the State or
its political subdivisions shall be exempt from
taxation ... [P]roperty used exclusively for non-
profit religious, charitable, cemetery, or
educational purposes, ... shall be exempt from
taxation. Other exemptions of like or different
kind may be granted by general law. All valid
existing exemptions shall be retained until
otherwise provided by law.
MR. OSTROVSKY said he underlined the sentence "Other exemptions
of like or different kind may be granted by general law." to
emphasize that general law is law that has general applicability
as opposed to a special law that applies to a particular person
or class of people. We believe that AGIA is a general law, he
said, because it is open to any participant that can come in and
apply for the inducements. We believe that to give effect to the
clause "except as provided in this article" in Section 1, you
must read Sections 1 and 4 together and the power of taxation
may be contracted away or suspended through other exemptions of
like or different kind in general law.
MR. OSTROVSKY said this is also supported by another tenet in
statutory construction. That is that statutes should be
construed so that effect is given to all the provisions and no
part is inoperative, superfluous, void, or insignificant. Under
Section 1, if you had no circumstance where the power of
taxation could be suspended or contracted away, the portion
following the comma - "except as provided in this article." -
would have no meaning. "So we find meaning in the other
exemptions by general law," he stated.
4:20:06 PM
CHAIR FRENCH summarized that we are operating in the exception
to the rule. The issue is, "Can we drive a gas pipeline through
that exception?"
MR. OSTROVSKY commented that that is a provocative note on which
to leave the committee.
CHAIR FRENCH recognized the excellent work that his staff, Cindy
Smith and Andy Moderow, had done in putting together the very
complete compendium of all the legal opinions rendered with
respect to the constitutionality of a long-term tax freeze. He
noted that copies are available to the public.
Chair French announced that the committee would take up SB 104
after the long weekend. He adjourned the meeting at 4:21:23 PM.
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