Legislature(2005 - 2006)SENATE FINANCE 532
06/04/2006 02:00 PM Senate SPECIAL COMMITTEE ON NATURAL GAS DEV
| Audio | Topic |
|---|---|
| Start | |
| SB2003 || SB2004 | |
| Joseph K. Donohue, Preston Gates & Ellis | |
| Ken Konrad, Bp | |
| Brian Wenzel, Conocophillips | |
| Wendy King, Conocophillips | |
| Donald Shepler, Greenberg Traurig | |
| Bob Loeffler, Morrison and Foerster | |
| Wendy King and Pete Frost, Conocophillips | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | SB2003 | TELECONFERENCED | |
| += | SB2004 | TELECONFERENCED | |
ALASKA STATE LEGISLATURE
SENATE SPECIAL COMMITTEE ON NATURAL GAS DEVELOPMENT
June 4, 2006
2:13 p.m.
MEMBERS PRESENT
Senator Ralph Seekins, Chair
Senator Lyda Green
Senator Gary Wilken
Senator Con Bunde
Senator Fred Dyson
Senator Bert Stedman
Senator Lyman Hoffman
Senator Donny Olson
Senator Thomas Wagoner
Senator Ben Stevens
Senator Kim Elton
Senator Albert Kookesh
MEMBERS ABSENT
All members present
OTHER LEGISLATORS PRESENT
Senator Gary Stevens
Senator Hollis French
Senator Johnny Ellis
Senator Gene Therriault
COMMITTEE CALENDAR
SENATE BILL NO. 2003
"An Act establishing the Alaska Natural Gas Pipeline Corporation
to finance, own, and manage the state's interest in the Alaska
North Slope natural gas pipeline project and relating to that
corporation and to subsidiary entities of that corporation;
relating to owner entities of the Alaska North Slope natural gas
pipeline project, including provisions concerning Alaska North
Slope natural gas pipeline project indemnities; establishing the
gas pipeline project cash reserves fund in the corporation and
establishing the Alaska natural gas pipeline construction loan
fund in the Department of Revenue; making conforming amendments;
and providing for an effective date."
HEARD AND HELD
SENATE BILL NO. 2004
"An Act relating to the Alaska Stranded Gas Development Act,
including clarifications or provision of additional authority
for the development of stranded gas fiscal contract terms;
making a conforming amendment to the Revised Uniform Arbitration
Act; relating to municipal impact money received under the terms
of a stranded gas fiscal contract; and providing for an
effective date."
HEARD AND HELD
PREVIOUS COMMITTEE ACTION
BILL: SB2003
SHORT TITLE: NATURAL GAS PIPELINE CORPORATION
SPONSOR(s): RULES BY REQUEST OF THE GOVERNOR
05/31/06 (S) READ THE FIRST TIME - HELD ON SECY'S
DESK
06/01/06 (S) REFERRALS - NGD
06/01/06 (S) NGD AT 1:30 PM SENATE FINANCE 532
06/01/06 (S) Heard & Held
06/01/06 (S) MINUTE(NGD)
06/02/06 (S) NGD AT 11:15 AM SENATE FINANCE 532
06/02/06 (S) Heard & Held
06/02/06 (S) MINUTE(NGD)
06/03/06 (S) NGD AT 9:00 AM SENATE FINANCE 532
06/03/06 (S) Heard & Held
06/03/06 (S) MINUTE(NGD)
06/04/06 (S) NGD AT 2:00 PM SENATE FINANCE 532
BILL: SB2004
SHORT TITLE: STRANDED GAS DEVELOPMENT ACT AMENDMENTS
SPONSOR(s): RULES BY REQUEST OF THE GOVERNOR
05/31/06 (S) READ THE FIRST TIME - HELD ON SECY'S
DESK
06/01/06 (S) REFERRALS - NGD
06/01/06 (S) NGD AT 1:30 PM SENATE FINANCE 532
06/01/06 (S) Heard & Held
06/01/06 (S) MINUTE(NGD)
06/02/06 (S) NGD AT 11:15 AM SENATE FINANCE 532
06/02/06 (S) Heard & Held
06/02/06 (S) MINUTE(NGD)
06/03/06 (S) NGD AT 9:00 AM SENATE FINANCE 532
06/03/06 (S) Heard & Held
06/03/06 (S) MINUTE(NGD)
06/04/06 (S) NGD AT 2:00 PM SENATE FINANCE 532
WITNESS REGISTER
JOSEPH K. DONOHUE
Preston Gates & Ellis
Counsel to the Governor
Office of the Governor
PO Box 110001
Juneau, AK 99811-0001
POSITION STATEMENT: Answered questions during hearing on
SB 2003 and SB 2004.
SENATOR GENE THERRIAULT
Alaska State Legislature
Alaska State Capitol
Juneau, AK 99801-1182
POSITION STATEMENT: Commented on Amendment 4 to SB 2004.
KEN KONRAD, Senior Vice President - Gas
BP
POSITION STATEMENT: Testified during hearing on SB 2003 and
SB 2004; opposed Amendment 4 to SB 2004.
BRIAN WENZEL, Vice President
Finance and Administration
ConocoPhillips Alaska, Inc.
POSITION STATEMENT: Testified during hearing on SB 2003 and
SB 2004; opposed Amendment 4 to SB 2004.
WENDY KING, Director of External Strategies
ANS Gas Development Team
ConocoPhillips Alaska, Inc.
PO Box 100360
Anchorage, AK 99510
POSITION STATEMENT: Testified during hearing on SB 2003 and
SB 2004; opposed Amendment 9 to SB 2004.
JIM BALDWIN
Counsel to the Office of the Attorney General
Department of Law
PO Box 110300
Juneau, AK 99811-0300
POSITION STATEMENT: Answered questions on amendments to
SB 2004.
DONALD SHEPLER
Greenberg Traurig, LLP
Consultant to the Legislature
POSITION STATEMENT: Answered questions on amendments to
SB 2004.
BOB LOEFFLER
Morrison & Foerster
Counsel to the Governor
Office of the Governor
PO Box 110001
Juneau, AK 99811-0001
POSITION STATEMENT: Testified on Amendment 9 to SB 2004.
PETE FROST, Director of Regulator Affairs
ConocoPhillips
Washington, DC
POSITION STATEMENT: Testified on Amendment 9 to SB 2004.
ACTION NARRATIVE
CHAIR RALPH SEEKINS called the Senate Special Committee on
Natural Gas Development meeting to order at 2:13:31 PM. Present
at the call to order were Senators Lyda Green, Gary Wilken, Con
Bunde, Fred Dyson, Bert Stedman, Lyman Hoffman, Donny Olson,
Thomas Wagoner, Ben Stevens, Kim Elton, Albert Kookesh and Chair
Ralph Seekins. Also in attendance were Senators Gary Stevens,
Hollis French, Johnny Ellis and Gene Therriault.
SB 2003-NATURAL GAS PIPELINE CORPORATION
SB 2004-STRANDED GAS DEVELOPMENT ACT AMENDMENTS
CHAIR SEEKINS announced SB 2003 and SB 2004 to be up for
consideration. Pending was a motion to adopt Amendment 4 to
SB 2004, which had been discussed the previous day.
2:13:55 PM
CHAIR SEEKINS informed members there was an updated version of
Amendment 4, labeled 24-GS2046\A.12, Bailey, 6/3/06, which read:
A M E N D M E N T 4
OFFERED IN THE SENATE BY SENATOR BEN STEVENS
TO: SB 2004
Page 6, following line 8:
Insert a new bill section to read:
* Sec. 10. AS 43.82 is amended by adding a new
section to read:
Sec. 43.82.255. Terms of contract provisions
related to oil. (a) The provisions of this
section apply to a contract developed under
AS 43.82.020 that provides for periodic payment
in lieu of taxes on oil under AS 43.55.
(b) For the part of the contract term
beginning immediately after the date of full
project funding or the date of issuance of a
certificate of public convenience and necessity
for construction and initial operation of the
Alaska Natural Gas Pipeline, whichever date is
later, and ending 14 years after that date, the
commissioner may develop a term for the contract
that provides for payments in lieu of the taxes
on oil set out in AS 43.55. For the part of the
contract term covered by this subsection, the
payments in lieu of taxes may be established with
as much certainty as the Constitution of the
State of Alaska allows.
(c) For the part of the contract term
beginning immediately after the period described
in (b) of this section, and ending on a date not
later than 25 years after the effective date of
the contract, the amount of the payment in lieu
of tax on oil under AS 43.55 must be equal to the
amount of the tax levied by law. However, the
commissioner may develop a contract term that, in
the event of a material change in the taxes
enacted after the effective date of the contract,
establishes a procedure for restoring the parties
to substantially the same economic position they
had as of the end of the period described in (b)
of this section immediately before the change.
(d) Implementation of a contract provision
authorized in this section may be made subject to
the dispute resolution procedures of the
contract."
Renumber the following bill sections accordingly.
Page 10, line 23:
Delete "Sections 1 - 12, 15, 16, and 18"
Insert "Sections 1 - 13, 16, 17, and 19"
Page 10, line 25:
Delete "Section 17"
Insert "Section 18"
SENATOR BEN STEVENS told members the words were identical to
previous Amendment 4, except for language added to renumber the
bill sections. He thanked Senator Wilken for providing a
related handout labeled "Oil Tax Certainty." He asked for
unanimous consent for the adoption of Amendment 4.
2:15:54 PM
SENATOR ELTON began discussion that led to Amendment 1 to
Amendment 4. He reiterated his question of the previous day
relating to the dispute resolution language in subsection (d) of
the amendment. He read the phrase, "Implementation of a
contract provision authorized in this section", and asked what
its net effect would be on subsection (b).
SENATOR BEN STEVENS gave his view that the only new contract
provision would relate to lines 18-19 of the amendment,
subsection (c), "However, the commissioner may develop a
contract term ... in the event of a material change". He said
that takes place in the third component of the timeline. He
noted the provision that would be challenged in court is
mentioned on lines 13-14, subsection (b), which talks about "as
much certainty as the Constitution of the State of Alaska
allows." He highlighted this as a term in the contract that
already is subject to the dispute resolution procedure. This
just says that if a new provision under a fiscal-balancing
scenario is developed, it also shall be under the dispute
resolution scenario, he added.
SENATOR ELTON offered an example, reading from the first
sentence in (b). He said this seems to be a contract term
subject to arbitration, rather than a court decision; a
determination as to when the 14-year clock would start running
could be highly important.
SENATOR BEN STEVENS responded that the aforementioned isn't a
contract term. It would be in statute, not the contract. He
indicated this doesn't affect any term of the contract, but adds
timelines as to whether the legislature will agree not to change
AS 43.55, which would affect the contract; subsection (d)
implements a contract provision authorized by this section,
which is mentioned on lines 18-19, subsection (c).
2:20:05 PM
SENATOR BEN STEVENS suggested replacing "contract term" with
"contract provision" in (c), on line 19, because in this
instance it isn't talking about a time period.
CHAIR SEEKINS proposed adding "(c) of" to subsection
(d), line 23, so it would read: "a contract provision
authorized in (c) of this section".
SENATOR BEN STEVENS indicated the above could be done if
necessary for clarification, or as an alternative.
SENATOR DYSON agreed with the need for clarification, since
"term" has different meanings. He suggested hearing from a
legal expert.
2:22:23 PM
^Joseph K. Donohue, Preston Gates & Ellis
JOSEPH K. DONOHUE, Preston Gates & Ellis, Counsel to the
Administration, opined that "term" is used properly within the
context of the Alaska Stranded Gas Development Act ("Stranded
Gas Act"). He gave an example. To the extent Amendment 4 deals
with a specific contract provision, he suggested "contract term"
is appropriately used. He indicated, however, that consistency
would be attained by amending (d) as proposed by Chair Seekins,
adding "(c) of" so that line 23 would read "in (c) of this
section".
2:24:37 PM
SENATOR BEN STEVENS suggested "in section (c)" for simplicity.
CHAIR SEEKINS asked whether "provision" should be changed to
"term" on line 23 for consistency.
MR. DONOHUE related his belief that within the context of
Section 10 of the bill, "contract provision authorized in
section (c)" would be as clear as "contract term authorized in
this section".
SENATOR DYSON highlighted the unclear meaning of the various
uses of "term" and "terms". For example, does "the part of the
contract term" refer to the extent of time during which the
contract is in place? Does "contract term" on line 15,
subsection (c), deal with the length of the contract in force?
Does "terms" in the title, line 4 of the amendment, refer to
both the length of time that the contract is in force and the
individual provisions within the contract?
MR. DONOHUE announced he was changing his mind. He acknowledged
the potential for ambiguity and said he needed time to think
about the appropriate language to clarify the distinction.
2:28:16 PM
SENATOR BEN STEVENS said he appreciated attempts to clarify the
intention, but brought attention to the title, "Terms of
contract provisions related to oil", as well as subsection (d).
He said the question that brought them to this point is the
creation of a new provision in the contract that is authorized
by this amendment. It is the only mention of the development of
a new provision; all other "terms of the contract" already
exist. He acknowledged "terms" could mean either provisions or
periods of time.
CHAIR SEEKINS opined that the amendment was pretty clear, except
for line 23.
2:29:55 PM
CHAIR SEEKINS requested a motion to delete the word "this" on
line 23 after "in" and then add "(c)" after "section". In
response to staff, he said he'd have no objection to "(c) of
this section". Thus it would read in part: "(d) Implementation
of a contract provision authorized in (c) of this section".
SENATOR GREEN moved to adopt the foregoing as Amendment 1 to
Amendment 4. There being no objection, it was so ordered.
2:31:17 PM
SENATOR ELTON requested a legal opinion as to whether the last
sentence of (b) affects issues relating to legal standing. For
example, does it change who has standing? Does it preclude
going to court until a lockdown on taxes begins?
MR. DONOHUE replied that as he understands Amendment 4, a term
in the contract that is authorized at the conclusion of this
process would lay out this proposal. It would say the producers
agree there is no fiscal certainty with respect to oil until
such-and-such a time, and they'd agree to fiscal certainty for
the middle period, and to a balancing for the third period.
There would be standing to challenge whether fiscal certainty is
authorized by the state constitution. In addition, the basic
theory of providing fiscal certainty associated with all the
other provisions - including tax rates for gas and so forth -
would be at issue and resolved. Even if there were an argument
that this issue needed to await the mid-phase agreement, the
constitutional question would be addressed.
CHAIR SEEKINS added that under SB 2002, which passed the Senate
that afternoon, the constitutional challenge would have to be
brought within 120 days of execution of the contract as an
original action in the Alaska Supreme Court.
2:34:04 PM
SENATOR DYSON began discussion that led to Amendment 2 to
Amendment 4. Returning to the meaning of "term" in Amendment 4,
he interpreted it to always refer to periods when the contract
is in force.
CHAIR SEEKINS compared line 19, subsection (c), with language in
the Stranded Gas Act set out in SB 2004 on page 3, line 3. He
indicated he read "contract term" on line 19 to mean "contract
provision," but otherwise thought Senator Dyson was correct.
SENATOR DYSON suggested that if the foregoing was correct,
perhaps it should be plural: "the commissioner may develop
contract terms". He said more than one component of the
contract might need alteration, and thus it wouldn't be good to
limit the commissioner to only one provision. He deferred to
Chair Seekins to propose an amendment, if appropriate.
2:36:42 PM
SENATOR GREEN suggested leaving the language as is. She noted
that "contract term" is linked to the phrase "establishes a
procedure" on line 20 of the amendment.
MR. DONOHUE said it was fairly clear, but he didn't believe
making it plural would either help or hurt. He then noted that
both (b) and (c) begin, "For the part of the contract term
beginning". He recommended perhaps citing AS 43.82.250, where
the statute says "the term of the contract"; there, however, it
means length of time. He pointed out "term" is used in both
senses in the statute, as well as in Amendment 4.
2:38:42 PM
CHAIR SEEKINS informed members that his own notes said, "For the
period of the contract term".
MR. DONOHUE agreed that would provide clarity.
2:39:18 PM
SENATOR GREEN moved to adopt the aforementioned as Amendment 2
to Amendment 4, to change "part" to "period" on lines 7 and 15,
at the beginning of subsections (b) and (c).
SENATOR DYSON proposed the same change on line 12, in subsection
(b), where it says, "For the part of the contract term".
SENATOR GREEN incorporated that change to line 12; thus revised
Amendment 2 to Amendment 4 would change "part" to "period" on
lines 7, 12 and 15. There being no objection, it was so
ordered.
2:40:37 PM
SENATOR WAGONER requested confirmation of his understanding:
after year 18 so, after capital-cost recovery, there'd be a
"reopener," except a future legislature couldn't increase the
tax without a compensating reaction as far as oil tax versus gas
tax; that would happen if there were a material change, more
than 3 percent up or down. He asked why they were even
considering having a reopener there, because he could see no
advantage to the legislature.
SENATOR BEN STEVENS pointed out that line 19 in (c) says the
commissioner "may" develop a contract term. He said he'd agree
with Senator Wagoner only if it said "shall". He referred to
the previous day's discussion about uncertainty and discretion
given to the commissioner to develop a contract term if a
material change occurred as a result of an effective change in
the tax. He said it leaves flexibility for a legislature to
force a reopener, but also gives discretion to the commissioner
and the sponsor group to say this likely will end up in dispute
resolution. He concluded that "shall" would provide a mandatory
reopener and rebalancing. However, "may" leaves it to the
discretion of the participants 18 years in the future.
SENATOR WAGONER asked what the point is of giving the
legislature a chance to reopen the tax structure for oil in
year 18, for instance, if the final result is a rebalancing by
decreasing taxes on gas - which he suggested the companies would
propose and the commissioner may concur with.
2:45:05 PM
SENATOR BEN STEVENS replied that it doesn't say anything about
the terms with regard to gas; rather, it talks about
"substantially the same economic position", which he called a
"distribution of the economic rents." He indicated that if the
legislature reacted to a change in market conditions, "may"
would give the commissioner flexibility if he or she didn't
believe there was a need for rebalancing.
SENATOR DYSON surmised Senator Wagoner's point linked to his own
concern voiced yesterday: Even if the commissioner decided to
go ahead, the net cost to the producers couldn't change very
much - within 3 percent up or down, as discussed yesterday. The
net government take under (c) would have to be substantially the
same as what was in effect in (b) after the commissioner's
decision, even if net profits were low and the companies were
going broke.
SENATOR WAGONER clarified his concern: Because of how this is
constructed, why are they even looking at an opportunity for the
legislature to revisit this?
SENATOR BUNDE suggested it costs nothing and yet provides some
flexibility for future situations that the legislature may not
be aware of.
2:48:53 PM
SENATOR BEN STEVENS, in response to Chair Seekins, specified the
intent that it be left open, not locking in a change at year 18,
but locking in the ability to make a change if so required, with
flexibility.
CHAIR SEEKINS expressed concern that the language may authorize
that term to be negotiated in the contract from day one.
SENATOR BEN STEVENS opined it was pretty clear. He read
portions of (c). Proposing that members think theoretically, he
said the contract has provisions locked in for 14 years, and a
future legislature, in year 15, could change the rate that would
become effective immediately after year 18; thus it could be
changed before the time.
2:51:01 PM
SENATOR BEN STEVENS, in further response, said the intent of (c)
is to leave it flexible; to not make it part of the contract
now; and to say that the terms to be locked in at sanction will
be firm until the end of the cost-recovery period, at which time
there would be "flexibility and opportunity." He said if the
situation posed by Senator Dyson were to come into effect, there
will be opportunity. He specified that it isn't intended that
the terms from years 18-25, give or take, be negotiated now.
CHAIR SEEKINS highlighted the need to ensure that the language
clearly says this is an option to be exercised at a future date,
rather than negotiated into the contract from day one.
SENATOR BEN STEVENS added there is certainty in (c), lines 17-
18, which says the amount of the payment in lieu of taxes (PILT)
on oil must equal the amount of tax levied by law.
2:52:43 PM
SENATOR DYSON asked whether he meant to imply that "must be
equal to the amount of tax levied by law" includes changes that
the legislature might make in the law at that time.
SENATOR BEN STEVENS replied he thinks that's inherent and
imbedded in it, because it speaks of that period of time. He
read from the first sentence of (c): "beginning immediately
after the period described in (b)". He remarked, "Beginning at
that point, whatever is law then, ... the production value tax
calculated under 43.55 must equal the PILT payment, or the PILT
payment must equal that."
He said he wasn't trying to trigger an automatic change in
taxes, but also wasn't trying to say that if future legislatures
see the need for a change, the PILT shall equal it. If there is
a material change in the distribution of economic rent as a
result, however, the commissioner may go in with the sponsors
and make the modifications. This is so far over the horizon
that the economic conditions are unknown. Referring to his
testimony the previous day, he highlighted the desire to create
a stable taxation rate during the period of firm transportation
(FT) commitments, to provide a mechanism for stability if
required, as well as to provide the legislature with an
opportunity for change. He said that's the purpose of that
section.
SENATOR DYSON asked, however, whether lines 19-21 in (c) say
that whatever those changes are, they must balance with some
other changes in order to leave the parties in the same position
as they were before.
SENATOR BEN STEVENS agreed that's what it says, but opined that
subsection (c) pivots on "may" versus "shall". He specified
that he intentionally chose "may" to leave flexibility.
2:56:06 PM
SENATOR ELTON proposed that not having (c) at all would provide
maximum flexibility, leaving it to the legislature at that time,
after 14 years, to determine tax rates or anything else.
However, (c) seems to cede some current legislative powers to
the commissioner; it suggests the legislature can increase a
tax, but if it's a material change - defined the previous day as
plus or minus 3 percent - then the commissioner has the ability
to keep the other parties whole by making economic adjustments
that would essentially change the government take. Suggesting
it gets back to Senator Wagoner's point, he spoke in favor of
maximum flexibility for the legislature, which would mean
removing (c).
SENATOR HOFFMAN agreed the aforementioned would be optimum for
the legislature, but suggested also looking at the position of
the oil companies in order to get their commitment to build the
gas pipeline. Stating his belief that the consensus of the
majority of legislators is that the contract is too long, and
referring to Senator Wagoner's previous discussion, Senator
Hoffman classified this as an opener - the legislature would
have the option, at that point, to evaluate the economic
conditions in the market and make a change accordingly.
2:59:01 PM
SENATOR WAGONER remarked that with Senator Ben Stevens'
definition of "material change" the previous day, it provides
flexibility; he mentioned 3 percent.
SENATOR BEN STEVENS said material change is incorporated in a
generally accepted accounting principles (GAAP) or Financial
Accounting Standards Board (FASB) terminology that he believes
is plus or minus 3 percent.
CHAIR SEEKINS surmised it would be around $90 million.
SENATOR WAGONER said it depends.
CHAIR SEEKINS offered his understanding that the reason for this
is to cover the period through the first shipping commitments,
to ensure the project economics aren't altered materially during
that time.
SENATOR BEN STEVENS affirmed that. He suggested Senator
Wilken's chart defines it best. During that time, phase three
is meant to provide stabilization. As Senator Hoffman
accurately described it, Senator Ben Stevens said, there is
opportunity for the legislature to modify it, if justified by
conditions at that point. However, it isn't mandatory.
SENATOR GREEN thanked Senator Ben Stevens for bringing forward
such an amendment, which addresses two main issues heard about
from the producers and the administration. While the idea of
certainty is important, the public perspective is that 30 years
is too long. She surmised the public would find the idea behind
this amendment reasonable, since it provides a future
opportunity to look at it.
3:01:43 PM
SENATOR BEN STEVENS wrapped up his discussion of Amendment 4,
suggesting it is the legislature's answer to concerns about
fiscal certainty relating to oil and its relationship to moving
this gas project forward. He emphasized that the terms and
concept weren't provided by consultants; it is a legislative
solution.
CHAIR SEEKINS added, "With as much certainty as the Constitution
of the State of Alaska allows."
3:04:09 PM
SENATOR OLSON referred to the 14 years on line 10, in (b). If
the supreme court determines there is only a 2-year period for
certainty, he asked, does it change the flavor of Amendment 4,
since 2 years is the period of a legislature, and one
legislature's binding another may not be what they have in mind?
SENATOR BEN STEVENS replied he didn't have the answer, but it
would dilute the amendment because the supreme court would say
that certainty couldn't be provided under the constitution.
3:05:22 PM
SENATOR DYSON offered his belief that the House had amended this
to 12 years instead of 14. He also recalled hearing from
Senator Ben Stevens yesterday that the 14 years was an
approximation of what was appropriate. Senator Dyson asked how
he'd feel about amending this to 12 years.
SENATOR BEN STEVENS opposed the concept, saying the period of
project sanction to first gas is the uncertain period of time.
There could be delays because of a shortage of steel, for
instance; thus he'd "erred with that in mind."
3:07:02 PM
SENATOR DYSON asked whether language had been considered saying
this period ends when cost recovery is complete. He recalled
hearing that once the gas pipeline is largely full, costs would
be recovered in about 6 years.
SENATOR BEN STEVENS said he had considered it. A hard date was
chosen instead of capital-cost recovery, however, because
disputes would arise from trying to account for all expenditures
and determine when they began.
CHAIR SEEKINS invited Senator Therriault to comment.
3:08:19 PM
SENATOR GENE THERRIAULT, Alaska State Legislature, expressed
pleasure that the portion up to project sanction isn't locked
in. However, he offered his understanding that if construction
was thought to last 4 years, there'd been past testimony - which
probably needed to be updated - that the recovery period would
be fairly quick for capital outlay, 5 or 6 years. Thus 14 years
seems overly generous for recapturing the investment, since the
rate of return should be substantial. Referring to Senator
Elton's discussion of (c) and the House's action, he also
questioned whether any legislature would adjust the oil tax once
they were past the construction and cost recovery for oil,
despite the "may", since they'd have to give back dollar-for-
dollar on the gas side. He said it's a mixed bag.
3:10:37 PM
SENATOR BUNDE surmised that if, for some reason, North Slope oil
became like Cook Inlet production and there was a desire to
lower oil taxes, then the state would benefit from an increased
take on gas. He said it seems it should work both ways, even
though such a scenario is unlikely. He asked whether his
understanding was correct.
SENATOR BEN STEVENS replied yes.
CHAIR SEEKINS said that's how he reads it too: it restores the
parties, and the state is a party. He asked whether Mr. Donohue
wished to comment.
3:11:55 PM
MR. DONOHUE noted he wasn't authorized to address policy issues
from the administration's standpoint, since he was outside
counsel to the administration. He did point out, though, that
this is a significantly different approach from the "oil fiscal
term" in the proposed contract, and is likely problematic from
the producers' standpoint; however, the producers could speak
for themselves. Noting a legal concern, he said he'd initially
read it to have a term at the outset perhaps not locking in
rates, but creating parameters for the "reopener" conditions.
If this is merely an agreement to agree in the future, however,
there'd be a question of whether anyone would want to agree to
that from the producers' perspective.
CHAIR SEEKINS invited further testimony on Amendment 4.
3:13:26 PM
^Ken Konrad, BP
KEN KONRAD, Senior Vice President - Gas, BP, began by addressing
fiscal stability in general. He said sovereign governments
around the world enter into contracts that specify government
take for very large energy projects. They do it to attract
expertise and capital investment, which creates wealth and vital
economic activity for their countries. Similarly, U.S. states
and municipalities negotiate contractual PILTs to attract
investment for factories, for example, which can create long-
term economic benefits for citizens. Although the projects are
smaller than the proposed Alaskan gas project, the principle is
the same. Mr. Konrad noted similar contractual tax-stability
concepts were employed in Alaska over 40 years ago to attract
the investment necessary to build large gas facilities on the
Kenai Peninsula; Alaska still benefits from those.
He said in all these cases, governments working with industry
have proactively encouraged investment, providing clear and
certain rules, to the mutual benefit of both. While benefits to
Alaska from a gas project would span generations and be
enormous, risks for investors also would be quite large, given
the massive investments and the production timeframe. The
largest cost for this project, by far, is not the $25 billion in
capital costs; rather, it is the payments that will be made to
Alaska. Thus it's important to know what the rules are.
3:15:54 PM
MR. KONRAD addressed stability relating to oil and gas. He
suggested fiscal certainty as introduced in SB 2004 isn't a new
concept; it was a key purpose when the Stranded Gas Act was
enacted in 1998 and reenacted in 2003 with strong support from
the legislature. Although the original bill provided for
replacing both oil and gas production taxes with PILTs in
AS 43.82.210, it's worth ensuring that this intent is made very
clear, he told members.
He said SB 2004, as originally written, clearly extends PILTs to
both oil and gas. This is of critical importance in letting the
project advance. The economics of oil and gas are inextricably
linked on the North Slope: oil and gas are formed together
underground, co-exist in the same reservoirs, are produced
through the same wells, flow through the same flow lines and are
processed in the same facilities. This linkage is recognized by
governments and investors around the world, Mr. Konrad noted;
royalty contracts cover both oil and gas, as do international
production-sharing contracts, although the terms may not be
identical.
He advised members that this linkage is particularly acute in
Alaska in the mature basin on the North Slope. Building a gas
pipeline is effectively a commitment by the major producers to
maintain the vital North Slope infrastructure for 40 to 50
years. Unless all the oil and gas infrastructure is maintained,
the gas pipeline cannot be supplied with gas. Thus it's a 40-
to 50-year commitment to keep the machinery operating in its
entirety. Mr. Konrad highlighted protecting investors from
after-the-fact tax increases. Once the gas pipeline is up and
running, there is no choice but to produce in order to recover
the investment; that is why these large energy investments
around the world have fiscal-stability parameters for both oil
and gas.
3:19:13 PM
MR. KONRAD cited the Caspian region as a germane example; he
provided details, saying BP wants the same results for the
Alaskan gas pipeline project. Knowing the rules for both oil
and gas is of key importance, and fiscal stability on gas but
not oil is close to having no fiscal stability at all. Changes
to the oil taxes could more than offset the benefits from the
gas pipeline project, he said. That's why sovereign governments
such as in the Caspian region offer fiscal stability for both
oil and gas.
He suggested SB 2004 makes this inextricable linkage between oil
and gas very clear. Recognizing that the legislature is
carefully considering options, he discounted the idea that
decisions regarding the duration and nature of fiscal stability
should be made now. The contract details were only released two
weeks ago, he said, and public review is underway. The ultimate
decision on any contract and its duration by this legislature
should be taken at the appropriate time, after the legislature
understands the benefits and attributes of the project.
Mr. Konrad questioned the benefits to anyone of significantly
altering or foreclosing a fundamental, underpinning concept at
this juncture, in what he said feels like a bit of a rushed
fashion.
He told members SB 2004 as originally written provided the
necessary framework for the legislature to either approve or not
approve the proposed contract - in its current form or a
modified form - at some point in the future, following a public
comment period and full legislative review. For that reason and
other important attributes of fiscal stability, he voiced
opposition to this type of amendment, which would foreclose
fiscal-stability provisions. "We just don't believe it's
appropriate right now," Mr. Konrad concluded.
3:23:20 PM
SENATOR BUNDE pointed out that the total project cost won't be
known for many years. Noting Mr. Konrad had spoken of
$25 billion, he asked whether this was a conscious effort to use
a more accurate figure than the ballpark number of $18 billion
to $20 billion he'd heard earlier.
MR. KONRAD indicated BP hadn't done a reestimate since the work
done in 2001, discussed the previous day. If the project were
done today, however, it certainly would cost a lot more. Steel
prices have doubled, for instance; the Canadian dollar is
stronger; and there is inflation because of the current boom.
Although the price of steel five years from now isn't known, the
general cost environment is measurably higher than in 2001 and
so prices are expected to be higher.
3:25:20 PM
^Brian Wenzel, ConocoPhillips
BRIAN WENZEL, Vice President, Finance and Administration,
ConocoPhillips Alaska, Inc., began by saying he would echo many
of Mr. Konrad's comments. In addition, he noted the bill
provides instructions and a toolkit for the administration to
use in developing a contract with the producers to provide a gas
pipeline. However, an amendment like this removes tools,
limiting the degrees of freedom provided to the administration
to negotiate a contract - a philosophy Mr. Wenzel said he wasn't
sure he understood. He expressed concern that this amendment
reduces the administration's ability to bring in a viable
project for consideration by the legislature, and also increases
project risk to be borne by the producers, since it reduces the
amount of fiscal stability available to them.
3:28:24 PM
MR. WENZEL referred to testimony about capital-cost recovery,
saying he wasn't sure he understood the definition of that term
as discussed by the committee. He discounted the idea that this
project could have a reasonable payout in 5 years, barring very
high prices. He cautioned members to consider this when looking
at the definition.
He agreed with Senator Ben Stevens that this amendment attempts
to deal with legislator's concerns about the duration of oil
fiscal stability proposed in the contract. However, Mr. Wenzel
reported hearing previously from legislators that they were
looking to the petroleum production tax (PPT) bill to counteract
this, expecting or requiring a higher rate on the base tax rate
as the mechanism. He said he didn't support this amendment, but
expressed hope that removing the fiscal stability would also
remove the need for such a "premium" in the PPT base tax rate.
3:31:30 PM
SENATOR DYSON asked what a reasonable period would be to expect
that a project would pay for its capital construction costs.
MR. WENZEL replied that he didn't have exact numbers with him,
but his point is that just paying off the capital investment
isn't sufficient. There are operating costs and other costs.
Simply paying off capital costs is by no means recognizing the
risks for the producers, and their expected returns.
SENATOR DYSON said he understood that and wanted the producers
to be rewarded for their risks. He asked, generally speaking,
how quickly construction costs are amortized on mega-projects
like this.
MR. WENZEL replied that from an economic-return standpoint, it's
not about how long accounting principles or tax principles allow
amortizing particular costs. Rather, it's about how long it
takes to get to the expected return, which is much longer.
SENATOR DYSON said he'd thought there'd be some basis on which
there was an expectation to recover the money put into building
a project. He expressed disappointment that Mr. Wenzel hadn't
answered that.
3:33:31 PM
SENATOR STEDMAN spoke in support of Amendment 4. He said some
legislators would argue that the PPT is at a discount, while
others would argue it's at a premium. Clearly, there is
discomfort around the state as the gas line project and oil
taxes are looked at. He lauded the amendment's strong points,
saying it leaves flexibility to ensure that the oil tax in place
at the end of year 4 is in the best interests of the industry
and the state, in order to have a long-term working relationship
through the next several decades.
He pointed out that legislators work to come up with a balance
in order to move tough issues forward. He said he thinks this
is a good amendment and certainly helps to protect the people of
the state, who own the resources, and it helps ensure that the
industry won't be put at a disadvantage in the future. He
surmised operating in Alaska, where there is stability and where
the tax structure isn't changed arbitrarily, is more beneficial
than in Bolivia or possibly the Caspian region.
3:35:30 PM
SENATOR BEN STEVENS clarified that "capital cost recovery" is
used to say "total revenues equals total expenditures." He told
Mr. Wenzel it's by no means intended to be when payout begins on
the project or when debt is retired. It's not mentioned in the
amendment because it has different interpretations and would
take a long effort to describe in statute, he explained, saying
that methodology had been used to come up with a timeline.
3:36:30 PM
SENATOR BUNDE remarked that he respects the industry's point of
view. However, one "given" for him is that unless the general
public has reasonable comfort with the contract's major
provisions - including this issue of certainty, which currently
causes discomfort - the contract won't pass. If this amendment
increases the public's comfort level, which is unknown at this
point, then it's a positive step forward.
3:38:10 PM
SENATOR WAGONER concurred, noting he has often heard concern
from constituents about locking in fiscal certainty for 35
years. Calling it a good compromise, he specified that he
supported the amendment.
CHAIR SEEKINS asked Mr. Wenzel whether he'd seen the chart
provided by Senator Wilken.
MR. WENZEL said yes.
CHAIR SEEKINS pointed out that the first section is plus or
minus 4 years, up to project sanction. He asked whether that is
a reasonable time.
MR. WENZEL deferred to Wendy King.
3:39:20 PM
^Wendy King, ConocoPhillips
WENDY KING, Director of External Strategies, ANS Gas Development
Team, ConocoPhillips Alaska, Inc., noted there is a publicly
available version of the project summary. She explained:
In that project summary, in our success-based case, it
is anticipated that we would take roughly 1 year for
project planning, have an additional year of permit-
application work, and then another couple years of
permit application, ... the actual submission of the
applications. So this 4-year timeframe would be
consistent with the current anticipated schedule.
And, as we've highlighted in a number of our
discussions with individuals, the provisions that are
currently within Article 5, the work commitment
section with a diligence standard, were specifically
crafted to allow us to use industry best practices on
gated decision making, to help us to be able to adjust
schedule if it's deemed appropriate at that point in
time, subject to that diligence standard. So, yes,
this is consistent with what we would know about the
schedule today, to have 4 years to project sanction.
CHAIR SEEKINS asked about a reasonable estimate of the time from
project sanction to first gas.
MS. KING replied that the publicly available schedule has an
estimate of 9 years to first gas, with an additional year of
ramp-up to get to full project volumes. She referred to
testimony from Mr. Konrad and emphasized it's an estimate, not a
guaranteed date to first gas delivery.
3:41:37 PM
CHAIR SEEKINS returned to the chart, noting it shows about 18
years to get to "capital cost recovery complete." He asked
whether Ms. King was saying that, after first gas, it would be
approximately 8 years more to get to that point, with the same
disclaimers.
MS. KING affirmed that.
CHAIR SEEKINS asked whether 8 years after first gas is a
reasonable timeframe for capital-cost recovery.
MS. KING replied:
I'll reiterate a point that Mr. Wenzel made earlier:
We do not know what payout will be, and I do not know
for sure what capital-cost recovery will be for this
project. We do not know what the actual costs of this
project are going to be. We do not know what the
natural gas prices are going to be. We do not know
how long it will take to actually deliver the project.
So we would not have an estimate for capital-cost
recovery or payout, because I can't predict what the
prices of gas would be.
CHAIR SEEKINS asked about rules of thumb or a target.
MS. KING answered:
We will look at a wide range of uncertainties, and we
will carry a wide range of what this project will
deliver going forward. And that range would be
substantially wide for a project that has a cost
estimate associated with this project of $20 billion,
... which Mr. Konrad very eloquently spoke to, that
there's large uncertainties already with that cost
estimate. We could provide a range, but that range
would be very, very large because of the uncertainties
associated with this project.
3:44:11 PM
SENATOR BEN STEVENS reiterated that capital-cost recovery isn't
mentioned in statute. He said what is meant by that period of
time is "when total revenues minus corporate income tax equals
total costs." He added, "That is the timeframe that we used in
saying total costs may be 6 years, 8 years; total revenues may
occur in 6 years or 8 years - we don't know." He emphasized
that by no means does he want Amendment 4 to be interpreted as
saying this project will reach payout in 5 years.
CHAIR SEEKINS remarked that many people he has talked with don't
mind having some kind of certainty, as long as it doesn't
negatively affect the economics of the deal. But how do they
know when that point in time is reached? Even in his own
business, he cannot make those kinds of predictions with a high
degree of certainty, he noted.
3:45:47 PM
MR. WENZEL apologized and clarified that the estimate Senator
Dyson had asked for earlier, on capital-cost recovery, isn't
something his company tracks; it isn't how they determine
returns. Thus he didn't know the answer.
SENATOR DYSON said he appreciated that. He recalled that in the
years he worked for BP, the general manager would say that if a
desired project wouldn't start making money in 3 years, they
wouldn't do it. Senator Dyson surmised he now understood what
Senator Ben Stevens was talking about: 14 years after project
sanction, the expectation would be that the producers would
begin to make money. He asked whether that's a bad assumption.
MR. WENZEL offered his understanding of Senator Ben Stevens'
intention: after 14 years, capital costs would be recovered,
but not necessarily operating costs or any return. "So it's not
the point we start first making money, in my mind," he said,
adding that it's an interim point which he doesn't believe is
relevant.
SENATOR DYSON thanked Mr. Wenzel, but expressed confusion.
3:48:04 PM
SENATOR ELTON objected to Amendment 4 as amended. He explained
that he was uncomfortable handcuffing future legislatures with
respect to the power of taxation. He agreed with producers'
testimony that it seems extremely difficult to make decisions
like this before the public comment period has ended. He also
pointed out that this is legislators' opportunity to decide what
they want the contract to look like; once they get the contract,
it will be an "up or down" vote. He specified his reason for
opposing the amendment wasn't because of an issue of when fiscal
stability begins or ends, but related to the constitution and
the legislature's power of taxation.
SENATOR BEN STEVENS removed his objection.
3:50:17 PM
A roll call vote of 11 yeas and 1 nay proved Amendment 4 as
amended passed, with Senators Stedman, Bunde, Olson, Dyson,
Wilken, Hoffman, Kookesh, Ben Stevens, Green, Wagoner and
Seekins voting yea and Senator Elton voting nay.
The committee took an at-ease from 3:50:54 PM until 4:10:39 PM.
The committee took an at-ease from 4:11:04 PM until 4:13:02 PM.
SENATOR DYSON moved to adopt Amendment 5 to SB 2004. With
original language, spelling and punctuation, as well as line
numbers relating to the previous day's Amendment 4, it read:
A M E N D M E N T 5
OFFERED BY: Senator Fred Dyson
Subparagraph (b), lines 5 and 6:
Delete [DEVELOP A TERM FOR THE CONTRACT T]
Insert "modify those terms of the contract relating
to"
Subparagraph (c), line 4: After "equal to" insert:
Delete [EQUAL TO THE AMONT OF THE TAX LEVIED BY LAW.]
Insert "equal to or greater than the amount of the tax
then levied by law."
Subparagraph (c), lines 4 through 9: Replace last
sentence with the following:
"In the event taxes levied by law have changed, and
remain in effect, in excess of three percentage points
from those taxes in effect at the end of the period
described in (b) of this section, the commissioner may
develop contract provisions for payment in lieu of tax
equivalent to the taxes in effect at the end of the
period described in (b) of this section."
SENATOR DYSON objected for discussion purposes. He explained
that he'd discussed this with Senator Ben Stevens, who he
believed was fine with the first two portions. Senator Dyson
suggested the need to either divide the amendment or do more
work on the third portion.
SENATOR BEN STEVENS pointed out that the line references in
Amendment 5 relate to yesterday's version of Amendment 4. Thus
the first portion, amending (b), relates to line 11 of today's
version of Amendment 4; the second portion, amending (c),
relates to line 18 of today's version. He agreed with dividing
the amendment.
4:15:46 PM
SENATOR DYSON moved to divide Amendment 5, with Amendment 5A
including all but the third portion. There being no objection,
it was so ordered.
4:16:04 PM
SENATOR DYSON moved to adopt Amendment 5A to SB 2004. With
original language, spelling and punctuation, as well as line
numbers relating to the previous day's Amendment 4, it read:
A M E N D M E N T 5A
OFFERED BY: Senator Fred Dyson
Subparagraph (b), lines 5 and 6:
Delete [DEVELOP A TERM FOR THE CONTRACT T]
Insert "modify those terms of the contract relating
to"
Subparagraph (c), line 4: After "equal to" insert:
Delete [EQUAL TO THE AMONT OF THE TAX LEVIED BY LAW.]
Insert "equal to or greater than the amount of the tax
then levied by law."
CHAIR SEEKINS objected for discussion purposes. He surmised the
first part of Amendment 5A would cause the beginning sentence in
(b) to end as follows: "the commissioner may modify those terms
of the contract relating to payments in lieu of the taxes on oil
set out in AS 43.55." The second part would cause the beginning
sentence of (c) to end as follows: "the amount of the payment
in lieu of tax on oil under AS 43.55 must be equal to or greater
than the amount of the tax then levied by law."
4:17:49 PM
SENATOR BEN STEVENS said after seeing how it fits in, he wasn't
sure it would achieve what Senator Bunde had mentioned in the
discussion relating to Amendment 4. This way, it would only be
one-sided. He asked whether that was Senator Dyson's intention.
SENATOR DYSON responded yes, but indicated he'd understood
Senator Ben Stevens to say that after the time in (b), the
legislature could change the tax laws. As he understood this
amendment, inserting "then" indicates it would be whatever the
law had become at that point. It allows the legislature to
adopt a tax rate up or down, but doesn't give the commissioner
discretion to have the PILT be lower than what the legislature,
in its wisdom, has decided. Senator Dyson indicated that was
his intention.
4:19:39 PM
SENATOR GREEN asked whether this is designed so the commissioner
would develop a contract term and subsequently it would come to
the legislature for approval. She then asked whether this is
designed to be only a one-way street, that only the state would
have to receive more, as she read the proposed amendment.
SENATOR DYSON reiterated his understanding of what Senator Ben
Stevens had said, that after the (b) portion of the contract
period is over, in the period of capital-cost recovery and so
forth, then the legislature is free to adjust oil taxes up or
down. This wording change would only say that the commissioner
could not modify the PILT below what the legislature had, by its
actions, put in place. In further response, he said the
commissioner could only go up or down in putting in place a
payment in lieu of taxes. So whatever was in statute, or that
the legislature decided, would be the basis on which the
commissioner could exercise discretion in applying a PILT.
4:21:34 PM
SENATOR BUNDE expressed concern about letting the commissioner
raise taxes, but not lower them.
SENATOR DYSON answered that the constitutional role of imposing
taxes is within the legislature's purview. When getting into
this business of authorizing a payment in lieu of taxes,
however, it authorizes the commissioner, in this contract, to
have a PILT, but not to ignore what the legislature has done in
statute.
SENATOR BUNDE replied, "Unless you raise them; then you can
ignore it."
SENATOR DYSON responded, "Well, sure. And we would trust that
he would be doing that for good public purposes and so on."
SENATOR BUNDE said he'd trust the commissioner would lower them
for good public purposes as well.
SENATOR DYSON replied, "And then I don't believe that we want to
give away that constitutional mandate that establishing taxes is
our purview."
SENATOR BUNDE responded, "Raising it is giving away our right.
I don't see how that's any different than lowering."
SENATOR DYSON said he didn't see it as giving it away. If the
administration wants a surcharge, it would still be subject to
contract negotiations. Furthermore, with Amendment 4 the
commissioner can put in changes to other parts of the agreement
to bring it back to "the net that's not a substantial
modification to what was in place before."
4:23:44 PM
SENATOR BEN STEVENS, in response to Chair Seekins, interpreted
the second part of Amendment 5A to say the commissioner can
modify the PILT, not the taxes, and could only change the PILT
to be a greater amount. He asked whether that is correct.
SENATOR DYSON affirmed that as his understanding.
SENATOR GREEN asked how that differs from surrendering the right
of the legislature. She also asked whether this is how it's
done currently.
SENATOR BEN STEVENS, in response to Senator Green and Chair
Seekins, alluded to (c) of Amendment 4. He clarified that this
amendment is confined to the PILT as determined on oil, not gas.
He surmised Senator Dyson's intention was to maintain that, so
the PILT on oil couldn't be adjusted downward from the amount
due under the calculation under the oil tax.
4:26:29 PM
SENATOR HOFFMAN said it must be equal under the existing
language.
CHAIR SEEKINS asked how something can be taken in lieu of
something that isn't due.
SENATOR BEN STEVENS suggested that may be an issue for dispute
resolution.
CHAIR SEEKINS observed that, in effect, there would be a PILT
greater than the taxes due; it would equate to a tax increase.
SENATOR DYSON responded, "We are willing to give this one up."
4:27:34 PM
SENATOR BEN STEVENS moved to amend Amendment 5A by deleting the
second portion, relating to (c). There being no objection, it
was so ordered.
4:27:58 PM
CHAIR SEEKINS asked whether there was any objection to adopting
Amendment 5A as amended. There being no objection, it was so
ordered.
4:28:15 PM
SENATOR DYSON moved to adopt Amendment 5B to SB 2004. With
original language and punctuation, as well as line numbers
relating to the previous day's Amendment 4, it read:
A M E N D M E N T 5B
OFFERED BY: Senator Fred Dyson
Subparagraph (c), lines 4 through 9: Replace last
sentence with the following:
"In the event taxes levied by law have changed, and
remain in effect, in excess of three percentage points
from those taxes in effect at the end of the period
described in (b) of this section, the commissioner may
develop contract provisions for payment in lieu of tax
equivalent to the taxes in effect at the end of the
period described in (b) of this section."
SENATOR DYSON objected for discussion purposes. Noting this
adds a definition to "material change", he said Senator Ben
Stevens told him during the recess that "we didn't quite get it
done because we were talking about the tax rate, not the
effective tax rate." He indicated the effective state
government take needs to be defined as being in excess of
3 percent, but asked Senator Ben Stevens whether that was right.
SENATOR BEN STEVENS said he believed the issues revolve around
the definition of materiality and what is a material change.
There are two issues: the material change in revenues and the
material change in the government take or distribution of
economic rent.
SENATOR DYSON concurred.
SENATOR BEN STEVENS highlighted the need for deliberation. He
said the intent of the original amendment was to say a material
change as defined by GAAP or FASB, which he interpreted to be a
plus-or-minus-3-percent change on revenues. After giving it
more thought, however, that wouldn't trigger a distribution
change in the economic rents. He suggested Senator Dyson had
pointed out a deficiency because of the lack of definition,
saying "we need to have a material change in distribution of
economic rents, which would be plus or minus 3 percent."
Senator Ben Stevens said the question in his mind, though, is
whether to apply that to revenue or to the percentage of
government take. He suggested that a 1 percent change in
government take would be a material change in funds or revenue.
He urged caution.
4:31:34 PM
SENATOR DYSON asked whether Mr. Donohue or someone else had a
good way to resolve this. Otherwise, he said, he'd withdraw the
amendment and work on it.
MR. DONOHUE said one possible approach is to add to (c) a
definition that gets at these concepts of economic rent,
beginning with "For purposes of this subsection, a material
change in the taxes means ..."; however, those are sophisticated
notions and would take some time to develop. Hence he suggested
a simpler approach: go to the effective tax rate at the time
under AS 43.55, which might be a shorthand for some of the
"economic notions that you're driving at in this measure."
4:32:58 PM
SENATOR STEDMAN asked what effect a change in the federal tax
rate would have, since it would affect economic rent. Would
that put the state in a position of having to lower its share to
achieve balance?
SENATOR BEN STEVENS answered that in developing the amendment,
there wasn't consideration that a change in a tax structure over
which the state has no authority would initiate a change by the
commissioner; he wasn't sure whether the contract had that
provision. Returning to Mr. Donohue's definition of material
change, he agreed with the concept, but cautioned to use care in
crafting it. He reiterated his belief that a 1 percent change
in tax rate would have a material impact on project economics.
MR. DONOHUE concurred, indicating these issues should be
discussed with state economists, for instance.
4:34:54 PM
SENATOR DYSON committed to work on the aforementioned with
Mr. Donohue and Senator Ben Stevens if the bill wasn't moving
from committee that day.
CHAIR SEEKINS set aside Amendment 5B to SB 2004.
4:35:24 PM
SENATOR DYSON moved to adopt Amendment 6 to SB 2004, labeled 24-
GS2046\A.8, Bailey, 6/4/06, which read:
A M E N D M E N T 6
OFFERED IN THE SENATE BY SENATOR DYSON
TO: SB 2004
Page 3, line 28, following "waiver":
Insert "on a case-by-case basis"
Page 3, line 28, following "general":
Insert "and the consent of the legislature"
CHAIR SEEKINS objected for discussion purposes.
SENATOR DYSON said this is to provide clarity on page 3,
line 28, of the bill with regard to waivers. It also adds the
consent of the legislature in the process, in addition to the
attorney general.
4:37:11 PM
SENATOR GREEN asked Mr. Baldwin how it affects the arbitration
and alternate dispute resolution setup if the legislature is
thrown into it. Also, if waivers are done on a case-by-case
basis, will the standard vary according to the person or
incident?
4:37:53 PM
JIM BALDWIN, Counsel to the Office of the Attorney General,
Department of Law, surmised this to be in reaction to "our
testimony the other day" that said the waiver would be effected
on a one-time basis only, when the attorney general signs the
agreement. He also surmised that with "case-by-case basis" this
intends that each time there is an intent to waive sovereign
immunity for a specific action, it would need to be a separate
waiver.
CHAIR SEEKINS recalled that the discussion had included whether
this allowed the attorney general to negotiate into the contract
a blanket ability to use arbitration as an alternate dispute
resolution process. He asked whether that was what Mr. Baldwin
was saying here, that this amendment would change it to be on a
case-by-case basis and to require legislative approval to do so.
MR. BALDWIN affirmed that and elaborated:
What we're intending to do here, really, is to obtain
the legislature's consent on a one-time basis to be
able to agree ... to waive the sovereign immunity.
And so what this would do, as I read it, would be to
say that we cannot do it on a one-time basis, and that
if we're going to do it, we have to go back to the
legislature each time to obtain the legislature's
consent, ... which really kind of leaves us where we
are today, which is, we can't waive sovereign immunity
unless we have specific authority from the legislature
to do it. So this is really leaving us where we are
today, basically, I think. And I'm not sure that's
what the maker of the amendment is intending, but
that's how I'm reading it.
4:40:04 PM
SENATOR GREEN asked whether inserting the legislature into the
process creates a separation-of-powers issue.
MR. BALDWIN answered, "When we need to or want to waive our
immunity as a state, we have to get authority from the
legislature to do that."
SENATOR GREEN requested confirmation that this happens
currently.
MR. BALDWIN replied:
We currently must do that, particularly in dealing in
federal court, if we're going to subject ourselves to
the jurisdiction of the federal court. And the way
we're acting here is, we believe we need to do a
similar thing in order to subject ourselves to
jurisdiction of ... another state's court. So ...
we're asking for this statutory authority so that we
can agree to that.
And so that's why I'm saying I think it leaves us kind
of where we are today, without this authority. ... We
wouldn't be gaining much ... if Senator Dyson's
amendment were to be accepted. I'm not sure that's
what he intends, but ... I'm starting to assume maybe
that is what he intends.
4:41:30 PM
SENATOR DYSON indicated the drafters in Legislative Legal
Services had alerted him to a potential separation-of-powers
issue on this.
CHAIR SEEKINS related his understanding that the intent of the
waiver of sovereign immunity is basically to put the state on an
equal footing with the other partners, the producers. If the
state is going to act as a partner in an organization, it needs
to act as if it were a corporation, rather than a sovereign
state. Otherwise, the state could sue the producers without
their permission, but the producers couldn't sue the state
without its permission. He asked whether that is correct.
MR. BALDWIN said the partners are not on an equal footing with
the state, which as a sovereign entity can avoid suit in distant
jurisdictions. In order to equalize their remedies - from their
viewpoint - the producers are asking that the state's ability to
agree to a waiver of sovereign immunity be incorporated into the
Stranded Gas Act.
CHAIR SEEKINS asked whether there is a blanket waiver under
contract for sovereign immunity.
MR. BALDWIN answered that AS 09.50 says that under certain
circumstances, for actions in tort or contract, the state
consents to be sued as a general matter.
CHAIR SEEKINS suggested that is basically what is being said
here, that in terms of enforcement of this contract, the state
is allowing the other parties to sue the state as if it were a
corporation, rather than a state.
MR. BALDWIN replied it adds the element of "in distant
jurisdictions." The consent referred to in Title 9 is in the
state courts.
CHAIR SEEKINS surmised this lowers the state's position, so to
speak, to be on an equal basis with the other parties, as is
done already in contract or tort.
MR. BALDWIN responded, "Yes, in our jurisdiction." He said the
legislature has made that policy decision, and it's up to the
legislature to make the further policy decision as to "what we
would do in district courts."
SENATOR DYSON withdrew Amendment 6 to SB 2004.
4:45:15 PM
SENATOR DYSON moved to adopt Amendment 7 to SB 2004, labeled 24-
GS2046\A.9, Bailey, 6/3/06, which read:
A M E N D M E N T 7
OFFERED IN THE SENATE BY SENATOR DYSON
TO: SB 2004
Page 3, line 31:
Delete "state"
Insert "project"
CHAIR SEEKINS objected for discussion purposes.
SENATOR DYSON offered his belief that this clarifies what was
understood from the previous day's discussion.
MR. DONOHUE opined it would be incorrect to substitute the
concept of "project" for the concept of "state" in this
amendment and in Section 4 of the bill. He explained:
We are talking about allowing the producers, in a
dispute, to pursue the state in other jurisdictions,
but it's limited to jurisdictions ... where the state
is doing business or otherwise has assets or what have
you. So that state court has to have jurisdiction
over the State of Alaska. If that fact exists, then
the state is ... waiving sovereign immunity pursuant
to this provision. So I believe, if I understand the
concern, maybe the amendment would be "that has
jurisdiction over the State of Alaska."
SENATOR DYSON said those were words he'd penciled in during
yesterday's discussion. He asked Mr. Donohue to explain, under
the federal constitution, how any other state has jurisdiction
over the State of Alaska.
4:48:45 PM
MR. DONOHUE replied the issue may arise when states engage in a
proprietary activity in other states. For example, the Alaska
Marine Highway System uses facilities and wharves in Washington
State that are owned or leased by the State of Alaska. There
could be accidents and so forth, and those issues probably would
be resolved initially in Washington State. Thus the sovereign
immunity of the State of Alaska does not automatically translate
into sovereign immunity in another jurisdiction when the state
is acting in a proprietary capacity.
4:49:42 PM
CHAIR SEEKINS asked whether it made sense to say "over the State
of Alaska related to this project".
SENATOR DYSON proposed "or a portion of this project that is
happening" or something that is related to this project.
CHAIR SEEKINS asked about "on matters related to this project".
MR. DONOHUE replied the jurisdiction that this section tries to
clarify arises when there is an enforcement action against the
State of Alaska that hasn't been satisfied by either the
recoupment provisions in Article 22 of the fiscal contract or by
an appropriation from the state legislature. So it wouldn't
necessarily be project assets or jurisdiction related to this
project itself.
CHAIR SEEKINS asked about "or to the contract" or "matters
related to ... the fiscal contract". He surmised Senator Dyson
was saying it's only when there is jurisdiction over the state
in matters related to this particular project or contract.
MR. DONOHUE replied by giving the example that if the State of
Alaska were engaged in an enforcement action to collect a
significant amount of revenues from the producers, and for
whatever reason the producers' assets in the state were
insufficient to satisfy the judgment entered after arbitration,
the State of Alaska would be pursuing the producers in other
states such as Texas or Colorado; those assets may or may not
have anything to do with the project. Thus the producers here
are seeking reciprocal rights, essentially.
SENATOR DYSON said this is what he was trying to get at, because
he'd thought of what the State of Alaska might be pursuing in
other states. For example, a module might be built in
Louisiana, or the organization from which the state sought a
remedy might have a bank account in Massachusetts. He said it
would be a place where some of the assets related to this
project reside when the state seeks a remedy.
4:52:03 PM
MR. DONOHUE pointed out that someone engaging in an enforcement
activity would be looking for highly liquid assets, and probably
not going after assets that are under construction and related
to this project.
CHAIR SEEKINS asked whether an enforcement action would be filed
for collection of a judgment wherever the money was; for
example, the state may have money in a Boston bank. He asked
whether that is a common practice among states.
MR. DONOHUE replied it is a common practice among private
parties pursuing each other when there is an unpaid judgment.
It is relatively uncommon, however, for a state to waive
sovereign immunity to allow itself to be sued in other
jurisdictions. But this is a very uncommon and historic fiscal
contract under consideration, he noted, and so the state and the
producers have incorporated this provision to create more equal
footing.
SENATOR DYSON announced he was now convinced that the language
in the bill was probably okay.
4:54:11 PM
SENATOR DYSON moved to amend Amendment 7, leaving "state" and
inserting "of Alaska" following that. Thus it would clarify
which state it is talking about, especially for lay readers.
There being no objection, it was so ordered.
4:54:57 PM
SENATOR GREEN referred to the top of page 4, line 2, of the
bill. He asked Mr. Donohue whether that refers to any state in
which the litigation occurs or refers to the State of Alaska.
MR. DONOHUE answered it is only after the initial arbitration
award is entered in superior court; there is an enforcement
action sought in Alaska Superior Court.
CHAIR SEEKINS said he hadn't read it that way. He asked whether
it is an arbitration award and they would have tried to collect
in the Alaska Superior Court.
MR. DONOHUE affirmed that.
CHAIR SEEKINS first proposed saying "of Alaska", but then said
it was all right with him either way.
4:55:58 PM
CHAIR SEEKINS removed his objection and asked whether there was
any further objection to adopting Amendment 7 to SB 2004 as
amended. There being no objection, it was so ordered.
SENATOR ELTON requested that Mr. Donohue confirm his
understanding: If there is an arbitration award and the state
doesn't pay, a private partner first must go to Alaska Superior
Court; if the court doesn't agree and enforce the arbitration
award, the partner can then go to another state. He asked what
happens if the Alaska Superior Court enters an enforcement
order, but the legislature refuses to appropriate the funds.
Could the partner still go to another state to seek relief?
4:57:01 PM
MR. DONOHUE answered there are two categories of arbitration
awards within the fiscal contract. One is for a class of
indemnification-type obligations, which are limited to
enforcement in Alaska, seeking appropriations from the state
legislature; he mentioned the recoupment and offset provisions
in Article 22 of the fiscal contract. Other types of
arbitration awards, relating to other issues and obligations of
the state within the contract, would then go through this
process and would go to the state legislature for an
appropriation; without an appropriation, they would be
authorized to seek enforcement in other states.
He noted Article 26 also provides that if, for some reason, the
superior court didn't act to confirm an arbitration award of
this other category of obligations that don't relate to the
indemnification provisions under the contract, then they would
be free to pursue state assets and enforce the judgment in other
states. Mr. Donohue said this is unlikely, however, because
once an arbitration award has been decided, it's usually an
administerial act for the court to enter and confirm that award
and enter judgment.
4:59:06 PM
SENATOR WAGONER asked how this applies to the limited liability
companies (LLCs) that will be created. Would it be the same
application even if the LLC was registered in Delaware, or would
the Delaware court take precedence over the Alaska court?
MR. DONOHUE offered his understanding that these provisions
relate only to the fiscal contract terms; they don't necessarily
dictate what will happen under the LLC agreement. The LLC being
negotiated has mandatory arbitration requirements; those
obligations and disputes would be resolved under Delaware law.
SENATOR OLSON asked: If there is a pipeline to Chicago and
there are sales agreements or gas reserves in some other states,
are those counted as assets that allow the State of Alaska to be
sued there?
MR. DONOHUE replied, generally speaking, that is correct if the
state is doing business. He noted the state would be doing
business through LLCs; generally, the asset to be pursued would
be the state's ownership interest in the LLC, but "on the sales
side" there could be assets available as well.
SENATOR OLSON asked: Anywhere we're selling gas, that
jurisdiction prevails?
MR. DONOHUE answered that the rules of that jurisdiction can
vary by state. One reason the contract calls for a waiver of
sovereign immunity is to make it more certain that the state
cannot assert sovereign immunity, in these other jurisdictions,
as a defense against a judgment in an enforcement action.
5:02:18 PM
CHAIR SEEKINS again asked whether there was any objection to
adopting Amendment 7 to SB 2004 as amended. There being no
objection, it was so ordered.
5:02:41 PM
SENATOR DYSON moved to adopt Amendment 8 to SB 2004, labeled 24-
GS2046\A.10, Bailey, 6/3/06, which read:
A M E N D M E N T 8
OFFERED IN THE SENATE BY SENATOR DYSON
TO: SB 2004
Page 9, line 14, following "section.":
Insert "Before making a final determination of
the grants to be awarded, the commissioner shall
submit recommendations for annual grant allocations to
the Legislative Budget and Audit Committee for
approval. The Legislative Budget and Audit Committee
shall approve or modify the commissioner's
recommendations within 10 days after receipt from the
commissioner. If the Legislative Budget and Audit
Committee does not respond to the commissioner within
10 days, the commissioner may proceed with grant
payments as recommended."
SENATOR DYSON objected for discussion purposes. Recalling that
yesterday Senator Wilken had expressed concern about the ability
of the Department of Commerce, Community and Economic
Development (DCCED) to award grants without oversight, Senator
Dyson said it seemed that could be improved upon. Notice to the
legislature wouldn't be given until the first 10 days of the
regular session, which occurs after the fact. Thus this
amendment requires the department to solicit the approval of the
Legislative Budget and Audit Committee for these grants,
inserting the legislature into the approval process. He noted
Legislative Legal Services had suggested this may raise a
separation-of-powers issue.
CHAIR SEEKINS asked Mr. Baldwin to respond. He also noted the
Department of Revenue (DOR) wished to comment on Amendment 10,
but Steve Porter wasn't available.
MR. BALDWIN agreed this raises separation-of-powers issues in
that it would have a legislative committee executing the law by
being able to declare who were the approved grantees under this
program. It would not be the legislature itself, the 60
members; rather, the committee would be attempting to act in a
lawmaking capacity, if it could be characterized as such. While
saying he could understand why the legislature would like to
have that oversight role for the grant-making process,
Mr. Baldwin opined that it is a rather severe legal problem.
5:05:56 PM
SENATOR WILKEN welcomed what Senator Dyson was trying to do with
the added scrutiny, but recognized the separation-of-powers
problem. He asked Mr. Baldwin: If this grant process goes off
track and the legislature gets the report in the first 10 days,
couldn't the legislature affect the grant process through the
budgeting process each year?
MR. BALDWIN answered that as it's set up, the money is
appropriated into the fund - as almost all grant programs are -
in advance of the fiscal year. The legislature has exceedingly
broad powers, the "power of the purse," to deal with agencies
that aren't administering funds in the appropriate way; the
powers of oversight and audit are potent legislative powers that
the agencies are mindful of and responsive to.
He surmised, however, that the suggestion was the ability to go
in and amend those grants after they are made. Mr. Baldwin said
it depends on how those grants are being administered by the
agencies. Altering the grant through the capital-budget process
might be possible if the money isn't fully expended; otherwise,
options are somewhat limited. Generally, though, this
department doesn't just disburse the whole amount, but will
disburse a percentage and then pay on invoices, on a rolling
basis. Thus the money wouldn't be all out the door, and the
legislature could exercise its power of appropriation in the way
Senator Wilken had suggested. Mr. Baldwin characterized it as a
blunt instrument, but one that's available.
5:08:30 PM
SENATOR DYSON withdrew Amendment 8 to SB 2004.
5:09:00 PM
SENATOR HOFFMAN moved to adopt Amendment 9 to SB 2004, labeled
24-GS2046\A.7, Bailey, 6/4/06, which read:
A M E N D M E N T 9
OFFERED IN THE SENATE
TO: SB 2004
Page 3, line 26:
Delete "a new subsection"
Insert "new subsections"
Page 4, following line 2:
Insert a new subsection to read:
"(c) The commissioner shall include in any
contract developed under this chapter gas
pipeline "rolled in" expansion pricing to provide
for expansion of the pipeline that encourages
further gas exploration."
CHAIR SEEKINS objected for discussion purposes.
SENATOR HOFFMAN requested that a related two-page handout be
distributed. He then indicated Amendment 9 would add the
following requirement under Section 3 of the bill, which amends
the "Contract development" section of the Stranded Gas Act: the
commissioner shall include a "rolled-in" expansion to provide
for expansion of the pipeline, which encourages further gas
exploration. He offered his understanding that this language
doesn't presently exist in the Stranded Gas Act.
He referred to the page of his handout labeled "Quotes from the
FERC (The Federal Energy Regulatory Commission) Briefing Paper
Nov. 9 2004." Calling it the most telling from that sheet,
Senator Hoffman read from the last paragraph, which stated:
Under incremental pricing there will almost certainly
be no competition after the less expensive capacity
goes into service. Expansion, priced incrementally,
will virtually preclude new exploration programs by
companies other than the preexisting holders of
pipeline capacity.
He noted the other page explains the difference between
incremental pricing and rolled-in pricing.
5:11:16 PM
SENATOR BUNDE said this is focused on "independents" finding
more gas. He asked whether it would also apply to consumers, or
whether a provision already does that. For example, would the
people of Fairbanks be subject to rolled-in pricing if the
people of Valdez wanted a spur line, and thus the Fairbanks
residents would help pay for it?
SENATOR HOFFMAN said he didn't believe that would be the case,
but deferred to an expert to answer.
SENATOR WILKEN suggested the answer was provided yesterday, when
it was said that all gas sales have to be commercial gas sales,
which would indicate they're sold at market value.
CHAIR SEEKINS noted the discussion often arises with regard to
the North Pole refinery.
SENATOR GREEN recalled discussion at Centennial Hall that spur
lines and offshoot lines would be a totally different network,
under the Regulatory Commission of Alaska (RCA), whereas the
others are under FERC.
CHAIR SEEKINS asked whether anyone could comment on whether
rolled-in pricing would have a positive or negative effect.
5:13:17 PM
SENATOR BUNDE said he'd like to state for the record that this
would apply only to producers, not to consumers.
CHAIR SEEKINS said that was his understanding, but asked whether
it was correct.
SENATOR STEDMAN related his understanding that this amendment
precludes FERC from allowing an incremental-pricing scenario,
and that "all expansions would then go into the rolled-in, so
... we'd be controlling FERC's action." He also asked whether
FERC normally tries to do rolled-in pricing to keep competition
in the marketplace.
SENATOR HOFFMAN said he didn't know.
SENATOR BEN STEVENS opined that the tariffs and authority to
demand the rolled-in or incremental pricing lie not with the
state's commissioner, but with FERC; it is an interstate
commerce project, and the state doesn't have jurisdiction.
While respecting the Senator Hoffman's attempt, he suggested the
need to find out the answer.
SENATOR WAGONER pointed out that Mr. Shepler, a FERC attorney
with 30 years' experience, was in town. Noting he himself had
an amendment, Senator Wagoner expressed hope that Mr. Shepler
would be available for that as well.
The committee took an at-ease from 5:16:08 PM to 5:26:31 PM.
^Donald Shepler, Greenberg Traurig
DONALD SHEPLER, Greenberg Traurig, LLP, Consultant to the
Legislature, introduced himself.
SENATOR STEDMAN explained that the question goes to rolled-in
pricing versus incremental pricing and the relative roles of
FERC and the state. Specifically, can FERC's decision be
preempted legislatively by requiring that FERC use rolled-in
pricing instead of incremental pricing? And when FERC looks at
situations similar to what Alaska is facing, does it normally
include either rolled-in pricing or incremental pricing as a
preferred alternative?
MR. SHEPLER answered that, first, the state probably couldn't
dictate to FERC how to require pipeline expansion to be priced.
However, FERC has said, in its order following the 2004 federal
legislation, that it would establish a rebuttable presumption in
favor of any expansion of the Alaskan pipeline being priced on a
rolled-in basis, which is a departure from the policy FERC has
applied in pipeline cases in the Lower 48. Up until the mid-
1990s, to his recollection, FERC's policy was that it would
approve rolled-in pricing for an expansion if it caused a rate
increase of less than 5 percent to existing shippers.
He surmised members were familiar with the concept of rolled-in
pricing. Mr. Shepler said in the mid-1990s or so, FERC
reassessed its policy if circumstances included one pipeline
company competing against another to serve a particular market
or to expand a pipeline to attach to new market areas. To
promote a level playing field, current FERC policy for Lower 48
pipelines is that any pipeline expansion which will result in a
rate increase to an existing shipper has to be priced on an
incremental basis.
He noted, however, that in Order 2005 FERC made a 180-degree
change: in the context of the unique circumstances, FERC ruled
that the presumption going forward for an Alaskan pipeline -
regardless of whether there was an increase to existing
shippers' rates - would still be in favor of rolling in the cost
of an expansion, on the theory that, at some point, the
expansions would get incrementally so expensive that they
wouldn't be economic and thus wouldn't take place. Mr. Shepler
said the increase that an existing shipper would bear in the
context of rolled-in pricing would be some unknown rate impact,
but certainly the increase to the existing shipper would be much
less than if the new shipper had to pay an incremental rate,
which may be two times what the existing shipper was paying. In
response to Senator Ben Stevens, Mr. Shepler noted he'd just
been given a copy of Amendment 9.
5:33:02 PM
SENATOR BEN STEVENS referred to line 7 of Amendment 9, the
beginning of proposed subsection (c). He asked whether the DOR
commissioner has the power to mandate rolled-in pricing in this
project.
MR. SHEPLER answered he thinks so, if it's put into the
contract.
SENATOR BEN STEVENS countered with his understanding, under
rolled-in pricing, that the rates are determined by FERC.
MR. SHEPLER agreed, but said they're determined based on filings
and applications made by the pipeline company, which has to
propose a rate either under rolled-in or incremental treatment;
FERC then disposes of it. He said as he read what he'd just
been handed, the contract for the gas pipeline would require the
pipeline company to file for rolled-in treatment; as to whether
FERC would approve it, however, he agreed it wasn't certain.
SENATOR BEN STEVENS said that wasn't how he read it. He
suggested the need to perhaps modify the amendment so it states
what Mr. Shepler said, that the intention is to say "the
contract shall include rolled-in pricing in applications for
rate-setting methodology at FERC."
CHAIR SEEKINS interpreted the foregoing to be that the contract
requires the parties to agree to apply for rolled-in pricing on
expansion.
SENATOR BEN STEVENS concurred. He offered his understanding
that FERC has the authority to tell the participants in a
ratemaking case what they believe should happen when they
adjudicate the tariffs, whether or not there is an application
for rolled-in pricing or for incremental pricing.
MR. SHEPLER agreed. At the same time, however - as he believed
Mr. Loeffler had explained previously - in the gas pipeline
context the applicant goes to FERC and makes an application for
a certificate, including the tariff and all supporting
materials; FERC makes a decision and issues an order, and
requires some sort of rate treatment; and then the applicant can
accept or reject that certificate. Thus while FERC would make a
ruling regardless of what the applicant proposed, the pipeline
company could accept or reject it.
SENATOR BEN STEVENS asked: If the legislature mandates rolled-
in pricing must be in the contract, and if FERC then determines
otherwise, is the contract in violation and thus there would be
no contract? He said he doesn't want to set up a trapdoor that
jettisons the contract based on a decision by FERC.
MR. SHEPLER replied he didn't have an answer. Returning to what
Chair Seekins had said, Mr. Shepler opined that if the amendment
were to have the effect of obligating the pipeline company to
file for and support rolled-in pricing, that would probably be
as far as the State of Alaska could go; the ball would then be
in the commission's court to adjudicate that filing and either
accept the rolled-in pricing or not.
5:38:19 PM
SENATOR BUNDE asked whether FERC would tend to accept or reject
certain portions of a contract or the whole contract.
MR. SHEPLER replied the contract itself wouldn't go to FERC, to
his understanding; rather, it would be an application for a
certificate, containing the company's proposal. Frequently, or
almost universally in pipeline certificate cases, FERC grants
approval contingent on attached conditions. At that point, the
company can decide whether to accept those conditions.
CHAIR SEEKINS surmised the contract would have a severability
clause so the whole contract wouldn't be voided.
5:40:08 PM
SENATOR STEDMAN recalled that FERC had looked at the cost of
this proposed pipeline and challenged that the smaller firms
could come in and use a portion at some future date; incremental
pricing would put them at a disadvantage because of the
magnitude of this project, whereas rolled-in pricing would be
preferable from their perspective.
MR. SHEPLER said he believed that was right; it was the
rationale, at least, presented to FERC as to why rolled-in
pricing was a necessary condition for this pipeline to be
expanded at some point. Although there may be one or two
expansions where rolled-in pricing wouldn't matter to the new
shippers, at some point they'd face paying for the expensive
looping expansions, which would be cost-prohibitive because
they'd be paying far more than the existing shippers. Either
everyone, including the existing shippers, would have to pay a
dime more or else the incremental shipper may have to pay a
dollar more; that's the problem FERC, with its presumption, is
trying to avoid.
SENATOR STEDMAN posed a situation in which smaller players want
to expand the pipeline and FERC wants rolled-in pricing as a
policy, but the four pipeline owners want incremental pricing.
He asked whether those four could be forced by FERC to do
rolled-in pricing.
MR. SHEPLER answered they always have the power to reject the
certificate. If they filed for and tried to pursue incremental
pricing, and if FERC approved the application except for saying
they must do rolled-in pricing, then the pipeline company - the
producers and the state - would have to decide whether to accept
that certificate; if they chose not to, then that expansion
couldn't be built.
5:43:24 PM
SENATOR HOFFMAN spoke for Amendment 9. He pointed out the
dilemma because included are provisions for credits for oil
companies to explore. There is a desire to extend use of the
gas pipeline for 30-50 years, but if the explorers can't get
into the line, then the life of the contract won't be stretched
out. He again read from his handout on FERC, which stated:
Under incremental pricing there will almost certainly
be no competition after the less expensive capacity
goes into service. Expansion, priced incrementally,
will virtually preclude new exploration programs by
companies other than the preexisting holders of
pipeline capacity.
He remarked that this is the crux of the problem, and asked why
that door should be left open. Instead, he said, it seems the
rolled-in basis should be required in order to fulfill the
original intention: to stretch this out and have new explorers.
To accomplish that, he suggested, this amendment must pass.
Otherwise, it defeats the purpose of offering all the credits in
the first place.
5:45:07 PM
SENATOR BUNDE suggested the amendment could be passed as an
expression of interest or will. He said, however, that he'd
understood Mr. Shepler to say the decision would be made by
FERC. Thus he questioned whether it would accomplish much.
MR. SHEPLER first offered the following clarification for
Senator Hoffman:
The pipeline applicant has to file a proposal. They
have to propose ... and pursue and defend a rate
structure as part of their certificate application.
So if the contract obligates the pipeline company to
file on a particular basis, in this case, rolled-in,
then the pipeline company would have to file on that
basis. ... In the absence of such a requirement, the
pipeline company would presumably be free to file on
whatever basis it thought made sense at the time,
which might or might not be rolled-in. But the
pipeline company has the obligation in the first
instance to make a proposal.
He then opined, in response to Senator Bunde, that putting into
the contract what the pipeline company has to file at FERC is
significant, because the pipeline company has the burden
initially to propose something.
SENATOR BUNDE replied that even if the company didn't request a
rolled-in basis, however, FERC could ask for it, if it believed
it was in everyone's best interest - regardless of whether the
pipeline company had applied for it.
MR. SHEPLER agreed, but noted the pipeline company would decide
then whether to accept the certificate with that condition.
5:48:11 PM
SENATOR ELTON spoke in support of Amendment 9. He recalled that
Mr. Shepler's memo said rolled-in pricing is crucial for two
reasons: it provides for expansion, and it is the best way for
the state to commercialize its resource. He further recalled
Mr. Shepler had noted that after FERC decided to have the
presumption be rolled-in pricing for expansion, some of the
private partners in the proposed contract argued against that
presumption, and continue to argue against it.
He said he is comfortable inserting this in the contract because
rolled-in pricing, which aids in expansion and commercializing
the resource, should be something the state gets in return for
the tax and royalty concessions in the contract in other places.
It makes sense that the state would want this option to have the
request for expansion include rolled-in pricing; perhaps, he
suggested, the only way to get it is through the contract, since
the state will be a minority partner in the mainline entity.
SENATOR DYSON said he appreciated those remarks. He noted that
the independents, which he surmised will be the future of
exploration in Alaska, feel strongly about rolled-in pricing.
^Bob Loeffler, Morrison and Foerster
BOB LOEFFLER, Morrison & Foerster, Counsel to the Governor,
began by voicing general agreement with what Mr. Shepler had
said. First, he emphasized, the applicants can request rolled-
in pricing, but a future FERC will do whatever it decides is in
the public interest; without a federal statute, FERC cannot be
forced to deliver rolled-in pricing, even if it is perhaps
possible to force an application for it. Second, there is no
guarantee the capacity will be given to the independents,
whether rolled-in or incremental pricing is used. Capacity is
put out for an open season. If a major producer bids for the
capacity, it could receive it. So while rolled-in pricing can
be requested, the results cannot be promised.
He said, third, the pipeline can be expanded easily from 4.3 to
about 5.9 billion cubic feet (Bcf) a day; this is cheap
expansion of almost 50 percent. Rolled-in pricing actually
doesn't help there; it is a disadvantage to the independents
because the cheap capacity is rolled in with the original
capacity. Only when there is more than a roughly 50 percent
increase in the project that looping happens, which is more
expensive. Mr. Loeffler told members he has talked to engineers
about it. It starts out more expensive, but depending on "how
far out you go" may end up less expensive. Noting the picture
is more complicated than people think, Mr. Loeffler said FERC
has done all it could, and has established rolled-in pricing as
a rebuttable presumption for the future.
He opined Amendment 9 would create a major hurdle for getting
the contract through, from what he'd seen of the negotiations on
expansion. Furthermore, it wouldn't provide the absolute
assurance hoped for.
5:56:07 PM
^Wendy King and Pete Frost, ConocoPhillips
MS. KING of ConocoPhillips noted Pete Frost was on
teleconference. Saying she has an engineering degree but isn't
a pipeline engineer, Ms. King began by emphasizing that a one-
size-fits-all treatment can't be prescribed for expansions. The
large expansion being discussed is about 1 Bcf a day, but there
are other types of expansions including line looping. She
pointed out that this is the largest pipeline she has been
exposed to, and thus line looping seems a significant feat in
its own right, considering how much gas would be needed to
justify it; however, she couldn't predict how much gas would be
discovered.
She highlighted that first it is critical to get a fiscal
contract and a pipeline project. Then multiple mechanisms exist
for any explorer in Alaska wanting to deliver new volumes.
These include: 1) voluntary expansion, because any shipper can
approach the pipeline and request an expansion, and pipelines
are motivated to expand if a party is willing to pay to ship; 2)
the unprecedented federal provisions passed by FERC in the
mandated-expansion provisions; and 3) in the contract, a term
Ms. King suggested the legislature will want to assess,
Article 8.7, to her belief, the state-initiated-expansion
provision that provides another mechanism for the state to
represent an explorer with respect to expansion.
She emphasized that ConocoPhillips, the largest explorer in
Alaska, has a unique perspective. The company continually tries
to explore and find additional gas each year to put into this
pipeline. Ms. King said ConocoPhillips is comfortable that FERC
will play a role in adjudicating the rates and mechanisms for
expansion on this pipeline. That is FERC's role, and her
company believes FERC is the appropriate adjudicator, given that
this is an interstate-commerce pipeline. Stating opposition to
this amendment for a number of those reasons, Ms. King
reiterated that there are provisions and mechanisms for
explorers to pursue and gain access to this pipeline.
PETE FROST, Director of Regulator Affairs, ConocoPhillips, added
that voluntary expansions of pipelines are the result of
negotiations. The pipeline and potential shippers come together
long before an open season is conducted. They have discussions
about the shippers' needs and the ability of the pipeline to
provide that service, and the parties come together and
voluntarily propose an expansion to FERC. A predetermination of
any aspect of that negotiation, particularly the rate design,
can create unintended consequences. For instance, some
expansions are uneconomic; the negotiating parties could have an
expansion imposed upon them that isn't in the best interest of
either the pipeline or the shippers.
He cautioned, therefore, about imposing conditions on what is
normally a voluntary process. Mr. Frost also noted there is an
unprecedented opportunity here that isn't available to any other
party under FERC jurisdiction in the Lower 48: if voluntary
expansion and negotiation by the parties isn't successful, then
the parties have the ability, under federal law, to approach
FERC and require the pipeline to expand.
6:02:36 PM
SENATOR OLSON said he'd been working under the premise of
encouraging more exploration. He asked why they would preclude
one of the avenues with respect to rolled-in expansion, which is
the essence of the amendment.
MS. KING offered her reading of the amendment, that rolled-in
treatment would be required for any expansion of the pipeline.
"That is something that we do not have control over," she said,
noting FERC would control the rates for the pipeline.
SENATOR OLSON replied that the alternative he sees is
incremental pricing, which would make it cost-prohibitive. He
asked whether that is true.
MS. KING returned to her point that each expansion is different.
She explained that she has seen "multiple runs of expansions"
where incremental pricing would create different combinations of
either increased rates or lower rates for incremental shippers.
There are multiple factors - not just the rate, but also what
happens to the fuel associated with an incremental expansion.
In addition, she has seen rolled-in rates increase the total
rate for all shippers, but also where they might decrease the
rate for all. It depends on what the actual expansion is.
She gave her understanding: The pipeline would propose
treatment for a specific expansion proposed by an "expansion
shipper," and then FERC would look at that in relation to the
particular rules it has already outlined in Order 2005, with a
rebuttable presumption of rolled-in rates. Thus she suggested
protections already exist within Order 2005 to let FERC decide
the appropriate rate for each particular expansion as it comes
forward over the next 50 years.
6:06:30 PM
MR. SHEPLER agreed that FERC decides, but emphasized that the
pipeline company first must make a proposal to FERC; then FERC
would decide; and, subsequently, the pipeline company would
decide whether to accept that decision. He also agreed that
expansions come in different sizes. At some point, though,
incremental pricing will put new shippers at a huge
disadvantage. Rolled-in pricing has the effect of creating a
level playing field, he added.
SENATOR OLSON asked whether Mr. Shepler's view of Amendment 9
was positive or negative.
MR. SHEPLER said positive.
The committee took an at-ease from 6:08:32 PM to 6:16:04 PM.
CHAIR SEEKINS noted members had all received a chart.
SENATOR BEN STEVENS recalled that this chart arrived during the
week of May 10 in a packet from Mr. Loeffler. He opined it
illustrates what Mr. Loeffler had labeled "cheap capacity
expansion" and that the rolled-in tariff is more expensive.
Mentioning "the difference between 4.5 and 5.9," he said he
believed he'd heard the original line in the contract is at 4.3,
not 4.5. He asked Ms. King whether that's correct.
CHAIR SEEKINS noted Mr. Loeffler used 4.3 in his testimony
today.
MS. KING explained there are slightly different numbers because
sometimes people talk about what goes into the gas treatment
plant (GTP) versus what comes out of it; there are assumptions
too. "In our actual Stranded Gas Act application, we just used
approximately 4 Bcf," she added. "But that's usually the
distinction between 4.5 and 4.3."
SENATOR BEN STEVENS thanked Ms. King for the clarification. He
made the point that the difference between 5.9 and 4.3 is
37 percent. He indicated he'd distributed the information from
Mr. Loeffler as a reminder of what federal law mandates, and to
outline what was mentioned in the state-initiated expansion, as
well as to highlight what is in Article 8.7.
6:19:03 PM
SENATOR WILKEN recalled the aforementioned chart from the
Centennial Hall presentations. He expressed concern that a
4.5 Bcf system could be put into place today, followed by a
37 percent increase in capacity, "cheap incremental." However,
at 5.9 Bcf there would be a major leap for anyone trying to gain
access to the pipeline.
He pointed out today a big impediment on the North Slope is the
inability to get into the Trans-Alaska Pipeline System (TAPS);
of the three oil producers, one is actively exploring,
discovering and producing, but one is doing nothing but
harvesting. With respect to a gas line, Senator Wilken voiced
concern that the cheap expansion would be done by the three
producers, and that 10-15 years after first gas there would be a
similar situation: three producers of gas, but no incentive for
companies such as Anadarko to explore for gas because it would
be too expensive. Therefore, Senator Wilken spoke in favor of
at least sending to FERC an expression of support for rolled-in
rates along with applications for expansion.
SENATOR HOFFMAN withdrew Amendment 9, given the testimony that
it would pose a major hurdle in building the gas pipeline. He
indicated he'd requested that Legislative Legal Services draft
two similar amendments, one saying "shall" and the other being
permissive.
6:22:19 PM
SENATOR HOFFMAN moved to adopt Amendment 12 to SB 2004, labeled
24-GS2046\A.14, Bailey, 6/4/06, which read:
A M E N D M E N T 12
OFFERED IN THE SENATE
TO: SB 2004
Page 1, line 12, following "state":
Insert ", including gas pipeline pricing that
encourages further gas exploration"
He explained that Amendment 12 has permissive language on "roll-
ins" and goes in the purposes section of the bill.
SENATOR WILKEN referred to his notes from 5/21/06 indicating
Mr. Shepler had said there was one item pending in a FERC
decision, on expansion due to a new discovery. He asked whether
that relates to this.
MR. SHEPLER said he didn't recall it. There is a pending
producer appeal of a requirement FERC set forth in its order
with respect to evaluating the initial pipeline sizing. If they
found it hadn't been sized optimally to facilitate expansion,
they reserved the right to order a design change.
CHAIR SEEKINS asked if Amendment 12 is talking about tariff
pricing.
SENATOR HOFFMAN reiterated that he'd asked the drafters for two
amendments: one that required rolled-in pricing, and one that
had it as a preference.
6:24:35 PM
CHAIR SEEKINS asked whether there was any objection to adopting
Amendment 12 to SB 2004. There being no objection, it was so
ordered.
The committee took an at-ease from 6:25:19 PM to 6:29:33 PM.
CHAIR SEEKINS informed members another amendment was being
broken into individual segments for tomorrow, and there would be
further amendments as well. He announced he would recess the
meeting until 7 a.m. and the regularly scheduled meeting would
occur at 9 a.m.
SENATOR WILKEN pointed out Mr. Harper and Mr. Shepler were in
town for a few days. He asked, since 12 of the 20 Senators are
members, whether this committee could be used as a forum for
discussion.
CHAIR SEEKINS requested that members speak with him about this.
He held SB 2003 and SB 2004 over.
CHAIR SEEKINS recessed the Senate Special Committee on Natural
Gas Development meeting at 6:31:16 PM.
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