Legislature(2005 - 2006)SENATE FINANCE 532

07/13/2006 09:00 AM Senate SPECIAL COMMITTEE ON NATURAL GAS DEV


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09:16:52 AM Start
09:17:44 AM SB3001 || SB3002
09:22:45 AM Bill Corbus, Commissioner, Department of Revenue
09:30:00 AM Robynn Wilson, Department of Revenue
09:43:59 AM Dan Dickinson, Cpa, Consultant to the Governor
09:51:07 AM Dr. Pedro Van Meurs, Consultant to the Governor
02:17:50 PM Roger Marks, Economist, Department of Revenue
02:28:21 PM Ken Griffin, Deputy Commissioner, Dnr
02:51:28 PM Presentation on Access to the Gas Pipeline and Basin Control
02:55:37 PM Bob Loeffler, Morrison and Foerster, Consultant to the Governor
03:37:23 PM Ken Griffin, Deputy Commissioner, Dnr
04:14:05 PM Donald Shepler, Greenberg Traurig, Consultant to the Legislature
04:22:39 PM Rick Harper, Econ One Research, Inc., Consultant to the Legislature
04:42:35 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ 9:00 a.m. Introduction to Special TELECONFERENCED
Session Bills:
*+ SB3001 OIL/GAS PROD. TAX TELECONFERENCED
Heard & Held
*+ SB3002 STRANDED GAS AMENDMENTS TELECONFERENCED
Heard & Held
+ 1:30 p.m. Proposed Revisions to the TELECONFERENCED
Stranded Gas Act
                    ALASKA STATE LEGISLATURE                                                                                  
      SENATE SPECIAL COMMITTEE ON NATURAL GAS DEVELOPMENT                                                                     
                         July 13, 2006                                                                                          
                           9:16 a.m.                                                                                            
                                                                                                                                
MEMBERS PRESENT                                                                                                               
                                                                                                                                
Senator Ralph Seekins, Chair                                                                                                    
Senator Lyda Green                                                                                                              
Senator Gary Wilken                                                                                                             
Senator Fred Dyson                                                                                                              
Senator Bert Stedman                                                                                                            
Senator Lyman Hoffman                                                                                                           
Senator Donny Olson                                                                                                             
Senator Thomas Wagoner                                                                                                          
Senator Ben Stevens                                                                                                             
Senator Albert Kookesh                                                                                                          
Senator Kim Elton                                                                                                               
                                                                                                                                
MEMBERS ABSENT                                                                                                                
                                                                                                                                
Senator Con Bunde                                                                                                               
                                                                                                                                
OTHER LEGISLATORS PRESENT                                                                                                     
                                                                                                                                
Senator Gary Stevens                                                                                                            
Senator Gene Therriault                                                                                                         
Senator Charlie Huggins                                                                                                         
Representative Mike Kelly                                                                                                       
Representative Eric Croft                                                                                                       
Representative Ralph Samuels                                                                                                    
Representative Kurt Olson                                                                                                       
Representative Paul Seaton                                                                                                      
                                                                                                                                
COMMITTEE CALENDAR                                                                                                            
                                                                                                                                
SENATE BILL NO. 3001                                                                                                            
"An Act  relating to  the production  tax on oil  and gas  and to                                                               
conservation surcharges  on oil;  relating to  criminal penalties                                                               
for  violating   conditions  governing  access  to   and  use  of                                                               
confidential   information  relating   to  the   production  tax;                                                               
amending the  definition of 'gas'  as that definition  applies in                                                               
the  Alaska  Stranded  Gas  Development  Act;  making  conforming                                                               
amendments; and providing for an effective date."                                                                               
     HEARD AND HELD                                                                                                             
                                                                                                                                
SENATE BILL NO. 3002                                                                                                            
"An  Act relating  to the  Alaska Stranded  Gas Development  Act;                                                               
relating to municipal impact money  received under the terms of a                                                               
stranded gas  fiscal contract; relating to  determination of full                                                               
and  true  value  of  property  and  required  contributions  for                                                               
education  in  municipalities  affected by  stranded  gas  fiscal                                                               
contracts; and providing for an effective date."                                                                                
     HEARD AND HELD                                                                                                             
                                                                                                                                
PREVIOUS COMMITTEE ACTION                                                                                                     
                                                                                                                                
BILL: SB3001                                                                                                                  
SHORT TITLE: OIL/GAS PROD. TAX                                                                                                  
SPONSOR(s): RULES BY REQUEST OF THE GOVERNOR                                                                                    
                                                                                                                                
07/12/06       (S)       READ THE FIRST TIME - REFERRALS                                                                        
07/12/06       (S)       NGD                                                                                                    
07/13/06       (S)       NGD AT 9:00 AM SENATE FINANCE 532                                                                      
                                                                                                                                
BILL: SB3002                                                                                                                  
SHORT TITLE: STRANDED GAS AMENDMENTS                                                                                            
SPONSOR(s): RULES BY REQUEST OF THE GOVERNOR                                                                                    
                                                                                                                                
07/12/06       (S)       READ THE FIRST TIME - REFERRALS                                                                        
07/12/06       (S)       NGD                                                                                                    
07/13/06       (S)       NGD AT 9:00 AM SENATE FINANCE 532                                                                      
                                                                                                                                
WITNESS REGISTER                                                                                                              
                                                                                                                                
WILLIAM A. CORBUS, Commissioner                                                                                                 
Department of Revenue                                                                                                           
PO Box 110400                                                                                                                   
Juneau, AK  99811-0400                                                                                                          
POSITION STATEMENT:  Presented SB 3001.                                                                                       
                                                                                                                                
ROBYNN WILSON, Director                                                                                                         
Tax Division                                                                                                                    
Department of Revenue                                                                                                           
PO Box 110400                                                                                                                   
Juneau, AK  99811-0400                                                                                                          
POSITION STATEMENT:  Presented SB 3001 and answered questions.                                                                
                                                                                                                                
DAN DICKINSON, CPA                                                                                                              
Consultant to the Governor                                                                                                      
Office of the Governor                                                                                                          
PO Box 110001                                                                                                                   
Juneau, AK 998811-0001                                                                                                          
POSITION STATEMENT:   Gave a presentation  and answered questions                                                             
relating to SB 3001.                                                                                                            
                                                                                                                                
DR. PEDRO VAN MEURS                                                                                                             
Consultant to the Governor                                                                                                      
Office of the Governor                                                                                                          
PO Box 110001                                                                                                                   
Juneau, AK 00911-0001                                                                                                           
POSITION STATEMENT:  Testified on SB 3001.                                                                                    
                                                                                                                                
ROGER MARKS, Economist                                                                                                          
Department of Revenue                                                                                                           
PO Box 110400                                                                                                                   
Juneau, AK  99811-0400                                                                                                          
POSITION STATEMENT:   Discussed  differences between a  gross tax                                                             
and a net tax relating to SB 3001.                                                                                              
                                                                                                                                
KEN GRIFFIN, Deputy Commissioner                                                                                                
Department of Natural Resources                                                                                                 
400 Willoughby Avenue                                                                                                           
Juneau, AK  99801-1724                                                                                                          
POSITION  STATEMENT:   Answered  questions on  SB 3001 and  spoke                                                             
briefly during the  discussion of access to the  gas pipeline and                                                               
basin control.                                                                                                                  
                                                                                                                                
JIM CLARK, Chief Negotiator                                                                                                     
Office of the Governor                                                                                                          
PO Box 110001                                                                                                                   
Juneau, AK  99811-0001                                                                                                          
POSITION STATEMENT:   Presented information on access  to the gas                                                             
pipeline and basin control.                                                                                                     
                                                                                                                                
BOB LOEFFLER                                                                                                                    
Morrison and Foerster                                                                                                           
Consultant to the Governor                                                                                                      
Office of the Governor                                                                                                          
PO Box 110001                                                                                                                   
Juneau, AK 00911-0001                                                                                                           
POSITION STATEMENT:   Presented information on access  to the gas                                                             
pipeline and basin control.                                                                                                     
                                                                                                                                
REPRESENTATIVE RALPH SAMUELS                                                                                                    
Alaska State Legislature                                                                                                        
Alaska State Capitol                                                                                                            
Juneau, AK  99801-1182                                                                                                          
POSITION STATEMENT:   Asked questions  relating to access  to the                                                             
gas pipeline and basin control.                                                                                                 
                                                                                                                                
SENATOR GENE THERRIAULT                                                                                                         
Alaska State Legislature                                                                                                        
Alaska State Capitol                                                                                                            
Juneau, AK  99801-1182                                                                                                          
POSITION  STATEMENT:   Expressed concerns  on issues  relating to                                                             
access to the gas pipeline and basin control.                                                                                   
                                                                                                                                
DONALD SHEPLER                                                                                                                  
Greenberg Traurig, LLP                                                                                                          
Consultant to the Legislature                                                                                                   
POSITION STATEMENT:   Discussed issues relating to  access to the                                                             
gas pipeline and basin control.                                                                                                 
                                                                                                                                
RICK HARPER                                                                                                                     
Econ One Research, Inc.                                                                                                         
Consultant to the Legislature                                                                                                   
Three Allen Center, Suite 2825                                                                                                  
333 Clay Street                                                                                                                 
Houston, TX 77002                                                                                                               
POSITION STATEMENT:   Discussed issues relating to  access to the                                                             
gas pipeline and basin control.                                                                                                 
                                                                                                                                
ACTION NARRATIVE                                                                                                              
                                                                                                                                
CHAIR  RALPH  SEEKINS  called the  Senate  Special  Committee  on                                                             
Natural Gas Development meeting to  order at 9:16:52 AM.  Present                                                             
at the  call to order  were Senators Albert Kookesh,  Fred Dyson,                                                               
Bert  Stedman,  Gary  Wilken, Lyda  Green,  Thomas  Wagoner,  Ben                                                               
Stevens, Kim  Elton, Donny Olson,  Lyman Hoffman and  Chair Ralph                                                               
Seekins.   Also in  attendance were  Senators Gary  Stevens, Gene                                                               
Therriault and  Charlie Huggins, and Representatives  Mike Kelly,                                                               
Eric Croft, Ralph Samuels, Kurt Olson and Paul Seaton.                                                                          
                                                                                                                                
                   SB 3001-OIL/GAS PROD. TAX                                                                                
                SB 3002-STRANDED GAS AMENDMENTS                                                                             
                                                                                                                                
CHAIR SEEKINS  opened the hearing on  SB 3001 and SB  3002, which                                                               
included a presentation  on access to the gas  pipeline and basin                                                               
control.   He  invited Commissioner  Bill Corbus  and Ms.  Robynn                                                               
Wilson to present SB 3001.                                                                                                      
                                                                                                                                
9:17:44 AM                                                                                                                    
^Bill Corbus, Commissioner, Department of Revenue                                                                               
WILLIAM A. CORBUS, Commissioner,  Department of Revenue, informed                                                               
members  he was  appearing  on behalf  of  the administration  in                                                               
support  of  this  petroleum production  tax  (PPT)  legislation,                                                               
proposed to replace the broken  tax system currently based on the                                                               
economic limit  factor (ELF).   It  would provide  incentives for                                                               
badly needed  investment; special incentives for  small companies                                                               
to explore  Alaska; and increased revenues,  especially at higher                                                               
prices.   He specified that  the governor and  his administration                                                               
strongly support  the PPT tax as  proposed, the "20/20" -  with a                                                               
20 percent  tax rate  and a  20 percent  tax credit  - and  don't                                                               
support a gross tax.                                                                                                            
                                                                                                                                
He  highlighted the  need to  encourage investment  and resultant                                                               
oil  production.    Commissioner  Corbus  said  the  Trans-Alaska                                                               
Pipeline System  (TAPS) now operates  at less than 50  percent of                                                               
capacity.   Recent  investment, development  and production  have                                                               
been  inadequate.     Predicting  that  higher   tax  rates  will                                                               
discourage  new  investment,  he  cautioned  against  emphasizing                                                               
short-term  state  revenues  instead  of long-term  wealth.    He                                                               
opined  that the  20/20  formula is  appropriate  to arrest  this                                                               
trend, but said although the  PPT includes investment incentives,                                                               
the stronger link for investment is the tax rate.                                                                               
                                                                                                                                
He  emphasized  that  high  oil   prices  eventually  will  drop.                                                               
Combined  with lower  production,  this  will mean  substantially                                                               
lower revenues.  Commissioner Corbus  closed by saying investment                                                               
is attracted not by price, but  by how Alaska's fiscal regime and                                                               
geology compare with other opportunities around the world.                                                                      
                                                                                                                                
9:22:45 AM                                                                                                                    
^Robynn Wilson, Department of Revenue                                                                                           
ROBYNN  WILSON, Director,  Tax  Division,  Department of  Revenue                                                               
(DOR),  brought attention  to a  matrix  comparing different  tax                                                               
methods  under consideration:   the  governor's bill,  Version A;                                                               
the conference  committee substitute (CCS)  for SB 2001  from the                                                               
last  special  session;  and,  for  informational  purposes,  the                                                               
versions of SB 2001 that passed  the Senate and House.  She noted                                                               
the  governor's bill  maintains the  same regions  of the  state:                                                               
the Alaska North Slope (ANS); Cook  Inlet, where oil and gas each                                                               
still  have  a separate  rule;  and  other "south"  developments.                                                               
Ms. Wilson said  the governor continues to  believe 20 percent is                                                               
the appropriate  tax rate  for a balanced  fiscal system,  with a                                                               
credit  rate of  20 percent  that she  hadn't put  on the  matrix                                                               
because it was fairly constant throughout the versions.                                                                         
                                                                                                                                
She  explained that  the tax  on  Cook Inlet  oil and  gas has  a                                                               
ceiling and can  never be above the ELF rate.   In the governor's                                                               
bill there is  no progressivity, and credits for  annual loss are                                                               
at 20 percent  - when  a loss  coming forward  is converted  to a                                                               
credit, it  is done  at that tax  rate.  Neither  is there  a tax                                                               
floor.   Ms. Wilson  reported that  the CCS,  by contrast,  has a                                                               
credit-usage floor such that  capital expenditure (CAPEX) credits                                                               
cannot  reduce  the tax  below  3  percent  of  the gross.    She                                                               
referred  to the  line  labeled  "Gas (GRE)"  and  said it  isn't                                                               
applicable under the  governor's bill, but remains  on the matrix                                                               
because  it was  in  the version  that passed  the  Senate.   Ms.                                                               
Wilson indicated  the transitional investment  expenditures (TIE)                                                               
credit is for  the last five years'  capital expenditures brought                                                               
forward.                                                                                                                        
                                                                                                                                
She pointed  out that consistent  with the last  several versions                                                               
is a  two-for-one provision, maintained  from the CCS.   The base                                                               
allowance credit,  still $12  million, equates  to a  $60 million                                                               
deduction  under the  governor's  bill.   Originally  that was  a                                                               
deduction; throughout the matrix,  therefore, Ms. Wilson said she                                                               
has shown  an equal amount in  terms of a deduction.   It depends                                                               
strictly on the tax  rate.  The tax rate is  different in the CCS                                                               
version, although  the credit is  the same; hence  the equivalent                                                               
deduction is different.                                                                                                         
                                                                                                                                
She noted that  is also based on production,  maintaining the CCS                                                               
language;  also   maintaining  that  language  is   the  new-area                                                               
development credit, $500,000  a month, for areas  other than Cook                                                               
Inlet or  the North Slope,  with a  10-year rolling sunset.   Oil                                                               
spill language and the 10-month  transition period are consistent                                                               
with  the  CCS.    Furthermore, the  April 1  effective  date  is                                                               
consistent with  the last several  versions.   Ms. Wilson offered                                                               
to answer questions on other bill sections.                                                                                     
                                                                                                                                
9:30:00 AM                                                                                                                    
SENATOR OLSON asked:  If the  numbers are essentially the same as                                                               
previous versions, what makes  the administration optimistic that                                                               
this will pass?                                                                                                                 
                                                                                                                                
MS.  WILSON  opined that  as  more  information is  explored  and                                                               
explained, it becomes  increasingly clear that 20  percent is the                                                               
correct  tax rate.    Referring  to discussion  of  the PPT  with                                                               
respect to  the contract,  she pointed out  that in  the original                                                               
legislative  session, the  contract hadn't  been made  public; in                                                               
the first  special session, people  hadn't had much time  to look                                                               
at it.                                                                                                                          
                                                                                                                                
SENATOR OLSON reported that in  his travels throughout the state,                                                               
he  has found  this less  palatable to  the public  than when  it                                                               
first was proposed.                                                                                                             
                                                                                                                                
SENATOR  BEN STEVENS  said he  has found  the exact  opposite and                                                               
believes it is a question of political opinion.                                                                                 
                                                                                                                                
CHAIR SEEKINS  surmised most people  are interested in  trying to                                                               
get gas to  market.  However, he characterized SB  3001 as stand-                                                               
alone legislation,  not part  of a  particular gas  line project.                                                               
He  suggested keeping  questions out  of the  political arena  as                                                               
much as possible.                                                                                                               
                                                                                                                                
9:33:46 AM                                                                                                                    
SENATOR ELTON asked what the  administration's objection would be                                                               
to a  gross tax structured  to bring  in an equivalent  amount of                                                               
revenue.                                                                                                                        
                                                                                                                                
MS. WILSON deferred to Mr.  Dickinson to give a presentation, but                                                               
opined that a  net tax encourages investment, which  is needed to                                                               
boost production.                                                                                                               
                                                                                                                                
CHAIR SEEKINS  asked Mr. Dickinson  what precisely is meant  by a                                                               
net tax  or gross  tax, and why  the administration  continues to                                                               
propose a net tax.                                                                                                              
                                                                                                                                
9:35:54 AM                                                                                                                    
^Dan Dickinson, CPA, Consultant to the Governor                                                                                 
DAN  DICKINSON, CPA,  Consultant  to the  Governor,  noted he  is                                                               
former director of  DOR's Tax Division and its Oil  and Gas Audit                                                               
Division.  He  provided a four-page document  he'd prepared, "Net                                                               
vs. Gross  Oil Tax - Why  anyone should care," dated  7/10/06, as                                                               
well as a graph labeled "ANS  West Coast Price & Oil Production."                                                               
Mr. Dickinson pointed  out whereas  2 million barrels a  day once                                                               
went into TAPS, the amount has  declined over 18 years and now is                                                               
less  than 900,000  barrels a  day; this  trend affects  jobs and                                                               
revenue in  the state.   However, revenue has  risen dramatically                                                               
over the last  two years because of prices.   He explained that a                                                               
net tax makes  investment more attractive because there  is a tax                                                               
break  for investing;  for more  difficult projects,  with higher                                                               
costs, the  taxes are  lower.   A gross  tax doesn't  reflect the                                                               
costs and investments necessary.                                                                                                
                                                                                                                                
SENATOR  DYSON observed  that one  way to  incentivize investment                                                               
for  expensive  oil  under  a gross-tax  system  can  be  royalty                                                               
relief.    He  asked  Mr.  Dickinson  to  provide  an  historical                                                               
perspective in  traditional oil fields  worldwide and  in Alaska,                                                               
and to  address whether it is  a viable option for  the producers                                                               
to go through  the process of petitioning for  royalty relief for                                                               
difficult or expensive oil production.                                                                                          
                                                                                                                                
MR. DICKINSON replied that the oil  and gas production tax is the                                                               
state's  largest single  tax.   Until  2000, it  was the  largest                                                               
source of  general fund dollars;  because the ELF has  eaten away                                                               
at  it every  year, however,  royalties now  take that  position.                                                               
Most places in  the world have one dominant way  that wealth from                                                               
oil  and  gas  resources  is  shared  with  the  government  -  a                                                               
production share, a tax without a  royalty or a royalty without a                                                               
tax.    In Alaska,  however,  probably  there  should be  both  a                                                               
royalty  and a  tax  in order  to  provide effective  incentives.                                                               
Noting Ken Griffin  of the Department of  Natural Resources (DNR)                                                               
would be there  later, Mr. Dickinson said he  himself didn't know                                                               
about royalty relief for heavy  oil in particular, but knew about                                                               
royalty relief in other situations.                                                                                             
                                                                                                                                
9:43:59 AM                                                                                                                    
SENATOR DYSON  related his understanding that  royalty relief has                                                               
worked in Cook  Inlet, but the process is  cumbersome and doesn't                                                               
work well from  the producers' perspective.  He  asked whether it                                                               
is unduly burdensome from the state's perspective.                                                                              
                                                                                                                                
MR.  DICKINSON   acknowledged  he   hadn't  studied   this  issue                                                               
thoroughly, but  opined that when the  royalty-relief process was                                                               
set up,  it had  a fairly high  standard that must  be met:   DNR                                                               
must be able  to demonstrate royalty relief will  bring about the                                                               
desired result.  He surmised  this is difficult and burdensome to                                                               
meet, and  deferred to someone  from DNR such as  Ken Griffin for                                                               
further response.                                                                                                               
                                                                                                                                
9:46:16 AM                                                                                                                    
SENATOR  BEN  STEVENS  asked  Dr. Pedro  van  Meurs  whether  his                                                               
presentation  at   Centennial  Hall  in  May   had  included  the                                                               
following:   Alaska  has the  only regime  with both  royalty and                                                               
severance tax, and when other  regions grant royalty relief, they                                                               
don't have a severance system that backs it up.                                                                                 
                                                                                                                                
9:48:02 AM                                                                                                                    
^Dr. Pedro van Meurs, Consultant to the Governor                                                                                
DR. PEDRO VAN  MEURS, Consultant to the  Governor, affirmed that.                                                               
He   clarified  that   internationally   there  normally   aren't                                                               
severance taxes;  those are  a unique  U.S. feature.   He  said a                                                               
number of  countries have royalty  relief to make  royalties more                                                               
flexible, including  Canada with its  oil sands and  Columbia and                                                               
Venezuela with their heavy oils.   In addition, there are sliding                                                               
scales linked  to production and  so forth.   A number  have some                                                               
form  of royalty  relief  for heavy  oils,  long-distance gas  or                                                               
local wells or fields.                                                                                                          
                                                                                                                                
SENATOR BEN STEVENS  emphasized the complexity of  the tax system                                                               
in Alaska and  North America.  Saying there  hadn't been adequate                                                               
information disseminated  in this regard, he  surmised the public                                                               
believes this  system under  AS 43.55 is the  only tax  system in                                                               
place.   However, there are  five systems:   1) bonus  bidding on                                                               
the lease  itself; 2) royalty,  never changed on the  North Slope                                                               
and not  proposed for  change; 3)  severance tax,  being changed;                                                               
4) property tax; and  5) corporate income tax.   He characterized                                                               
it  as  the state  holding  five  levers  attached to  the  purse                                                               
strings of  the oil companies and  yet only pulling one;  he said                                                               
people  are  concerned  that  the one  isn't  being  pulled  hard                                                               
enough,  and they  forget about  the other  four, which  offer no                                                               
incentives.                                                                                                                     
                                                                                                                                
MR. DICKINSON thanked him for  that insight, agreeing this is new                                                               
information for citizen groups.                                                                                                 
                                                                                                                                
CHAIR SEEKINS reported that has been his experience as well.                                                                    
                                                                                                                                
9:51:07 AM                                                                                                                    
SENATOR   STEDMAN  noted   many  Alaskans   are  concerned   that                                                               
companies'  records will  be manipulated  under a  net-tax system                                                               
and thus  the taxes  collected by  the state  will be  lower than                                                               
anticipated.   He  said the  proposed tax  will rely  on Internal                                                               
Revenue Service  (IRS) regulations  with respect to  inclusion of                                                               
allowable expenses and capital expenses.   He asked whether it is                                                               
correct that if  the books were altered to  drive apparent income                                                               
down, that  would likely violate federal  Securities and Exchange                                                               
Commission (SEC) and IRS laws and regulations.                                                                                  
                                                                                                                                
MR.  DICKINSON  answered  that he  believes,  in  general,  there                                                               
already  are fairly  strict criminal  penalties for  misreporting                                                               
amounts  for  tax  purposes.    Noting  companies  keep  separate                                                               
accounts for tax  and financial records purposes,  he opined that                                                               
Sarbanes-Oxley  and  the  associated  strictures  that  apply  to                                                               
financial   accounting  don't   extend   into   the  tax   world.                                                               
Mr. Dickinson said he would provide  five reasons why the concern                                                               
about being snookered  is invalid, and would  give a presentation                                                               
to put those expenses into perspective.                                                                                         
                                                                                                                                
9:53:40 AM                                                                                                                    
MR. DICKINSON offered his first  point:  "Net versus gross" isn't                                                               
a  totally  accurate  depiction.    Rather,  the  state  is  just                                                               
substantially increasing the pool of  costs that the taxpayer can                                                               
deduct and which  the state must then audit and  check.  A gross-                                                               
receipts tax  typically is based  on what something is  sold for,                                                               
for  example,  without deductions.    Under  the current  method,                                                               
however, "gross value  at the wellhead" comes from  selling it in                                                               
Los Angeles  and deducting close  to $2 billion in  costs between                                                               
there and  the point at  which it is measured.   It's not  a pure                                                               
system with  a simple number that  can be looked up;  billions of                                                               
dollars'  worth   of  costs  are   deducted  under   the  system.                                                               
Similarly, "net" typically means all  costs are deducted, and yet                                                               
several  pages  in this  legislation  specify  costs that  aren't                                                               
deductible, in order to limit them to specific areas.                                                                           
                                                                                                                                
He addressed his  second point:  DOR already has  audited many of                                                               
these costs.  For example,  from 1979-1981 the state had separate                                                               
accounting income tax,  and all these costs had to  be audited by                                                               
DOR.  In  addition, net profit share leases  (NPSLs) were audited                                                               
by DOR.   Relating  his third point,  Mr. Dickinson  said capital                                                               
costs make up  the largest portion of the costs.   Having a gross                                                               
tax and  allowing capital credits  doesn't avoid  auditing, since                                                               
it already is required.                                                                                                         
                                                                                                                                
He  discussed  his  fourth  point:    Historically,  billions  of                                                               
dollars  in the  Constitutional Budget  Reserve Fund  (CBRF) came                                                               
about as  a consequence of  disputes being resolved.   There have                                                               
been huge disputes, Mr. Dickinson  told members, some relating to                                                               
royalties, but primarily relating to  taxes.  Those issues can be                                                               
grouped into  two areas:   valuation and  costs.   Elaborating on                                                               
valuation  issues,  he recalled  that  during  the era  of  price                                                               
controls and no transparent spot  prices announced on the markets                                                               
every day, there were huge  differences with respect to the value                                                               
of crudes; this was in 1981-1982,  but the amounts didn't go into                                                               
the CBRF  until 1996.  He  noted that experts could  differ as to                                                               
the value of a barrel of oil by as much as $25 a barrel.                                                                        
                                                                                                                                
9:58:21 AM                                                                                                                    
MR. DICKINSON  continued with  valuation issues,  saying although                                                               
there still are  disputes, they are about 10 cents  and 15 cents,                                                               
relating  to premiums  and deductions  based on  transparent spot                                                               
prices.  Thus that whole set  of billion-dollar issues is off the                                                               
table.                                                                                                                          
                                                                                                                                
He  turned  to  costs,  noting such  issues  haven't  related  to                                                               
audits, for  instance, but  have been  differences of  opinion on                                                               
transparent issues such as depreciation,  return on investment or                                                               
allocation  of   overhead.    Costs   weren't  being   hidden  or                                                               
manufactured.  Although at one  point the state alleged fraud, he                                                               
said those  allegations were withdrawn  and no fraud  was proven.                                                               
Looking at the  history, including the Amerada Hess  case and the                                                             
litigation which  created the  $7 billion  set of  settlements in                                                               
the  CBRF, Mr. Dickinson  discounted  the idea  that the  earlier                                                               
scenario would return.                                                                                                          
                                                                                                                                
He  offered  his  fifth  point:   The  state  has  an  11 percent                                                               
interest rate.   If a  later audit finds  a company has  been too                                                               
aggressive,  the  company will  pay  high  amounts of  cumulative                                                               
interest  on the  difference.   That rate  was put  in to  try to                                                               
resolve  some  large outstanding  amounts  at  the time,  and  it                                                               
specifically exists  to try to  keep self-reporting in  line with                                                               
what the  state wants to see.   Mr. Dickinson concluded  by again                                                               
disagreeing that  the state  will be  snookered and  somehow will                                                               
head into murky waters that will  cost billions of dollars in tax                                                               
revenues, for all the aforementioned reasons.                                                                                   
                                                                                                                                
10:00:45 AM                                                                                                                   
SENATOR STEDMAN  requested discussion about the  whole accounting                                                               
cycle of  a field  or particular drilling  venture, and  the fact                                                               
that amortization  and depreciation loaded  on the front  end are                                                               
subsequently lost on the back end.                                                                                              
                                                                                                                                
MS. WILSON  pointed out  there are  tensions -  which are  a good                                                               
thing  - for  bookkeeping purposes.   Any  manipulation generally                                                               
will  be to  drive up  income,  since companies  want to  present                                                               
financial  statements  in  the best  possible  light;  there  are                                                               
rules, and  independent accountants  go in  and ensure  those are                                                               
properly  stated.   The  other side  of the  tension  is for  tax                                                               
purposes:  companies  look for ways to legally  take advantage of                                                               
the tax code in order to show a lower income.                                                                                   
                                                                                                                                
She noted  Schedule M-1  of the federal  income tax  return shows                                                               
the  book/tax differences,  item  by item;  it  typically is  the                                                               
first  place auditors  go to  examine  those differences  between                                                               
book and tax.   Generally, taxable income is lower  than the book                                                               
income, but the  question is why.  It may  be about depreciation,                                                               
and Ms.  Wilson said there  are numerous  legitimate differences.                                                               
In the PPT,  however, capital investments are written  off on day                                                               
one; they aren't depreciated.   This is specifically to encourage                                                               
investment.   That book/tax difference  won't be audited  for PPT                                                               
purposes  because it  isn't  applicable and  there  was a  policy                                                               
consideration  behind it.    She deferred  to  Mr. Dickinson  for                                                               
further explanation.                                                                                                            
                                                                                                                                
10:04:56 AM                                                                                                                   
SENATOR  STEDMAN reiterated  his desire  to show  the public  the                                                               
ramifications through  the full  accounting cycle when  the state                                                               
gives up revenue at the beginning under a net-tax system.                                                                       
                                                                                                                                
MR. DICKINSON  replied that  a frequent issue  is timing.   There                                                               
are  real economic  effects from  being able  to take  a loss  or                                                               
receive tax  benefits when  the money  is spent.   If  a producer                                                               
comes in new,  the IRS will say - with  certain exceptions - that                                                               
costs  cannot be  recognized until  there are  revenues, and  the                                                               
income can be lowered a little  each year over the useful life of                                                               
that asset.   To encourage investment and  the resulting economic                                                               
benefits, however,  the state is  saying all that  investment can                                                               
be taken up  front, which provides the "time value"  of the money                                                               
from  the  tax  break  at  the beginning.    In  the  out  years,                                                               
consequently, higher revenues will be  taxable.  In contrast, the                                                               
IRS and  SEC attempt to  match the effect  of the costs  with the                                                               
revenues derived from those costs.                                                                                              
                                                                                                                                
10:07:46 AM                                                                                                                   
MR. DICKINSON, in further response,  said royalties, income taxes                                                               
and property  taxes would accrue  as well.  He  emphasized making                                                               
active  investment more  attractive through  the net-tax  system,                                                               
particularly with  dollars generated  from profits  within Alaska                                                               
already,  thus  keeping  the money  in  Alaska  for  reinvestment                                                               
because of  the tax advantage.   Under a gross tax,  by contrast,                                                               
money  earned in  Alaska can  be invested  anywhere in  the world                                                               
without  affecting  the taxes.    That  is the  distinction  this                                                               
legislation tries to  address.  In response to  Senator Dyson, he                                                               
agreed  some  historical  problems  have been  solved,  but  said                                                               
companies  properly  spend  a  lot   of  effort  on  tax-planning                                                               
opportunities.                                                                                                                  
                                                                                                                                
SENATOR    DYSON   asked    whether   they    are   tax-avoidance                                                               
opportunities.                                                                                                                  
                                                                                                                                
MR.  DICKINSON pointed  out that  if there  are rules,  a company                                                               
must follow  those.  He also  indicated that if the  desire is to                                                               
provide  incentives,  a line  must  be  straddled by  the  state,                                                               
trying to not  distort the economics but  positively affect them.                                                               
The vast majority of decisions  that companies make are looked at                                                               
and appear  to make sense; the  state doesn't even look  at those                                                               
every year.   The focus is on  the small number where  there is a                                                               
challenge.                                                                                                                      
                                                                                                                                
He  provided details  of his  history working  on tax  issues and                                                               
settlements.  Mr.  Dickinson observed that the  areas for dispute                                                               
have   narrowed   considerably,   especially  with   respect   to                                                               
valuation.  If a new set of  costs is brought in, new issues will                                                               
arise and  the state will try  to narrow those down;  however, he                                                               
offered his belief  that those couldn't possibly  rival the kinds                                                               
of dollar-per-barrel issues that arose  during the late 1970s and                                                               
early 1980s, when there were  price-control issues.  He concluded                                                               
by saying the answer to Senator Dyson's question was yes.                                                                       
                                                                                                                                
10:14:40 AM                                                                                                                   
SENATOR  DYSON expressed  hope that  the  front-end credits  will                                                               
simplify the accounting  as well as provide great  incentive.  He                                                               
asked whether  the administration has quantified  and studied the                                                               
range of those  credits.  He reported hearing that  the high side                                                               
of credits for the industry might approach $13 billion.                                                                         
                                                                                                                                
MR. DICKINSON  affirmed it has  been quantified and studied.   He                                                               
pointed out  that the  analyses do consider  the credits.   While                                                               
$13 billion - if that's the right  number - sounds like a lot, he                                                               
surmised everyone  agrees it  is worthwhile if  it's part  of the                                                               
investments.                                                                                                                    
                                                                                                                                
SENATOR  DYSON  said  he'd  like   to  see  the  administration's                                                               
numbers.                                                                                                                        
                                                                                                                                
MR. DICKINSON replied  that if there is $1  billion in investment                                                               
a year,  for instance, with  a 20  percent credit and  20 percent                                                               
deduction, that  is 40  percent or  $400 million  a year  - about                                                               
$13 billion over  30 years, which  in broad strokes  sounds about                                                               
right.  At  today's prices, it would bring  in over $100 billion.                                                               
Interpreting Senator  Dyson's concern to  be that this  might not                                                               
work out in practice, Mr.  Dickinson suggested that Dr. Pedro van                                                               
Meurs speak about the frequency  with which net taxes and credits                                                               
for investment are used as tools internationally.                                                                               
                                                                                                                                
10:18:42 AM                                                                                                                   
DR.  VAN MEURS  pointed  out  that Alaska  already  has a  highly                                                               
important  feature that  collects half  the royalties,  which are                                                               
based  on  gross.   The  decision  was  made that  combining  two                                                               
systems  based  on  gross  would be  negative  to  an  investment                                                               
climate, and would  hit very hard all the  marginal fields, heavy                                                               
oils and  so forth when prices  are low.  Dr.  van Meurs reported                                                               
almost  100 nations  have royalties,  and most  nations recognize                                                               
the benefit  of collecting a  significant share of income  from a                                                               
gross feature like royalties.   About 70 nations believe anything                                                               
in addition  to a  royalty must  be profit-based.   If  costs are                                                               
high  or  prices are  low,  having  two  systems based  on  gross                                                               
doesn't work effectively.                                                                                                       
                                                                                                                                
He  emphasized  the desirability  of  a  total package  with  one                                                               
feature based  on gross and another  on net.  Dr.  van Meurs said                                                               
the system based  on gross gives protection when  prices are low,                                                               
providing at  least a  minimum amount of  income no  matter what,                                                               
and  the net  feature  provides benefits  when  prices are  high.                                                               
Nothing stops Alaska from asking  for 20 percent royalties on new                                                               
leases if  prices stay high;  thus Alaska  is well served  with a                                                               
good royalty system.                                                                                                            
                                                                                                                                
He  related his  international  experience  that, yes,  companies                                                               
might overcharge  now and  then or slip  something in.   However,                                                               
that  is the  reason for  having auditors,  and Alaska  is better                                                               
prepared in  this respect than  other places using a  net system.                                                               
Dr. van  Meurs said governments  seem to reasonably  collect what                                                               
needs to  be collected -  even governments far less  skilled than                                                               
the State of  Alaska.  Thus he denied the  possibility that major                                                               
amounts of  money could be  siphoned off.   Apart from  that, the                                                               
rules contained  in the law  are patterned  on the best  rules in                                                               
the world; it isn't an open-ended system.                                                                                       
                                                                                                                                
10:24:08 AM                                                                                                                   
DR.  VAN  MEURS opined  that  all  possible loopholes  have  been                                                               
closed,  including ones  through  which  other nations  sometimes                                                               
lose  money,  and  that  the system  can  be  administered  well.                                                               
However, he then acknowledged something  always slips through the                                                               
cracks, but  said on  balance it  will be  a good  opportunity to                                                               
create high revenues if economic  conditions are favorable.  Most                                                               
important, the  70 nations using  similar systems  have concluded                                                               
this formula  encourages reinvestment  in the  same jurisdiction;                                                               
otherwise, investors  will naturally take their  capital to where                                                               
they get the deductions.                                                                                                        
                                                                                                                                
He  said that's  why it  is so  important to  combine the  system                                                               
based on gross  - the royalty that will continue  to serve Alaska                                                               
well -  with one based  on net, which  will serve Alaska  well in                                                               
the future.   Dr. van  Meurs indicated other options  were looked                                                               
at, including sliding scales for  a gross tax and improvements to                                                               
the  ELF,  even   by  the  previous  administration.     For  the                                                               
aforementioned reasons,  however, and because it  is difficult to                                                               
design a  simple system  based on gross  that captures  all these                                                               
variables, it was decided to base this on net.                                                                                  
                                                                                                                                
SENATOR DYSON  asked how well it  has worked for regimes  to give                                                               
large investment credits on the  front end, hoping to incentivize                                                               
further  investment   and  production,  with   greatly  increased                                                               
revenues resulting in the out years.                                                                                            
                                                                                                                                
DR.  VAN MEURS  replied  that typically,  in  other regimes,  the                                                               
concept  of a  cash flow-based  system as  proposed here,  rather                                                               
than  one based  on depreciation,  has worked  well.   Of the  70                                                               
nations he'd  mentioned, the  vast majority  have such  a system.                                                               
If capital is invested, 100 percent  of the deductions - plus, in                                                               
this case,  the credits -  are taken in  the year that  costs are                                                               
incurred.   This creates  an enormous  incentive to  reinvest; in                                                               
most countries using that system,  it has resulted in significant                                                               
investment.   Pointing out that  Alaska has 5 billion  barrels of                                                               
heavy oil  and yet  remarkably low  activity compared  with other                                                               
areas  in the  world,  he  lauded features  of  the proposed  PPT                                                               
legislation and suggested focusing  on new investment, since more                                                               
oil will increase revenues.                                                                                                     
                                                                                                                                
10:31:04 AM                                                                                                                   
SENATOR ELTON  said he understands  the arguments, but  asked why                                                               
it is simpler  to create a whole new way  of doing things instead                                                               
of  duplicating what  is  being done  under  royalty with  gross,                                                               
without  the  ELF  component.   Highlighting  the  importance  of                                                               
Mr. Dickinson's graph that shows  production declining and prices                                                               
rising, he  said it seems  there could be a  two-for-one clawback                                                               
under gross  as well as under  net, which would get  to the issue                                                               
raised in the graph.                                                                                                            
                                                                                                                                
DR. VAN MEURS agreed a simple  system would be to just forget the                                                               
production tax  and add another 12.5 percent  royalty.  Venezuela                                                               
did  something  similar  in  2002;  Venezuela  is  on  tidewater,                                                               
however, has costs of  $2 or $3 a barrel and  is near the market.                                                               
In Alaska,  by contract, there are  light and heavy oils  as well                                                               
as a large  distance for transportation; such a  system would hit                                                               
the heavy  oils and smaller fields  so much that nobody  would be                                                               
interested  in them.   If  the  price dropped,  the oil  industry                                                               
would come  back to  the legislature  and ask  for a  lower rate.                                                               
Thus it wouldn't work economically in Alaska.                                                                                   
                                                                                                                                
He  noted  the  ELF  worked  well for  a  number  of  years,  and                                                               
theoretically  could  be  modified   to  be  more  sophisticated,                                                               
formula-based system based on the  gross.  However, it would have                                                               
many friction  points such as  defining what  a field is  or what                                                               
heavy oil is.  It would  become so difficult to administer from a                                                               
technical standpoint  that it  would fall apart.   Dr.  van Meurs                                                               
indicated this is why the ELF system became broken.                                                                             
                                                                                                                                
He offered his sense that  a simple net system that automatically                                                               
takes  into account  these variations,  without having  to define                                                               
them or set  formulas or sliding scales, is  easier to administer                                                               
than  a   sophisticated  system  based   on  gross.     While  an                                                               
unsophisticated system like Venezuela's  is easier still, Dr. van                                                               
Meurs opined  that it would  ruin the  oil industry in  Alaska at                                                               
prices under  $40.  Thus he  stated his belief that  the proposed                                                               
PPT system  is simpler than  a formula-based system on  gross for                                                               
the production tax.                                                                                                             
                                                                                                                                
10:38:29 AM                                                                                                                   
SENATOR  STEDMAN  highlighted the  concern  that  as prices  rise                                                               
under the  current system, the  state's percentage declines.   He                                                               
said  one  drawback  to  the gross-based  system  is  it  doesn't                                                               
address it  without including so-called progressivity.   Whatever                                                               
system is  instituted needs  to ensure that  as prices  rise, the                                                               
percentage  either  rises  or  stays the  same,  to  protect  the                                                               
interests of the people of Alaska.                                                                                              
                                                                                                                                
CHAIR  SEEKINS  expressed  the  need  to  define  "net"  and  the                                                               
proposed  deductions  in  order  to address  concerns  among  his                                                               
constituents, who believe a gross-tax system is much simpler.                                                                   
                                                                                                                                
The committee took an at-ease from 10:41:42 AM to 1:29:30 PM.                                                               
                                                                                                                                
MS.  WILSON  illustrated  gross versus  net  through  an  analogy                                                               
involving a construction  business.  The net  is calculated using                                                               
direct  expenses  associated  with each  home,  including  nails,                                                               
lumber and wages; that is akin  to lease expenditures in SB 3001.                                                               
Once the homes are built,  however, the company has expenses that                                                               
cannot  be  tied  to  a   particular  home,  including  marketing                                                               
expenses or  contributions to the Little  League.  If a  house is                                                               
sold, a  tax on gross  would take the  sales price times  the tax                                                               
rate, without  deductions.  A  net tax -  including the PPT  - is                                                               
calculated  after the  allowable deductions,  which in  this case                                                               
would  include nails,  lumber and  wages,  but not  advertisement                                                               
costs or donations to the Little League.                                                                                        
                                                                                                                                
1:33:59 PM                                                                                                                    
MR. DICKINSON turned the focus to  Alaska.  He showed a series of                                                               
slides,  duplicated in  a handout,  that approximate  what a  PPT                                                               
would have done in 2005.   He told members the first slide, "Sale                                                               
at Market,"  shows an outdated  price of  about $43 a  barrel; if                                                               
the 300 million  barrels were  sold this year  for $70  a barrel,                                                               
the total of  $14.5 billion for North Slope oil  instead would be                                                               
$21 billion.   This is the  value of  the oil in  the marketplace                                                               
prior  to deducting  any costs.   Mr.  Dickinson noted  the slide                                                               
also shows Cook Inlet oil and gas, and North Slope gas.                                                                         
                                                                                                                                
He  addressed  the  second  slide,   "Gross  Value  at  Point  of                                                               
Production."   Mr. Dickinson  explained that  this shows  what is                                                               
done today,  subtracting the  cost of  transporting it  to market                                                               
from the North  Slope or Cook Inlet; the roughly  $1.7 billion is                                                               
a fairly small  percentage overall.  Under the  current method, a                                                               
percentage is  taken of what  remains; however, what it  costs to                                                               
get  the oil  to the  wellhead or  to get  it ready  to transport                                                               
isn't  an allowable  deduction.   In response  to Chair  Seekins,                                                               
Mr. Dickinson agreed this is as adjusted  by the current ELF.  He                                                               
added that even though the nominal  tax rate is about 15 percent,                                                               
once the ELF is figured in  and barrels are taken out, the amount                                                               
taken would be  about 7 percent of the orange area  on the chart,                                                               
which depicts $14.5 billion for North Slope oil.                                                                                
                                                                                                                                
1:37:39 PM                                                                                                                    
MR. DICKINSON  showed the third  slide, "Net Value  or Production                                                               
Tax  Value."   He  pointed  out  that  among the  deductions  the                                                               
producers should  be allowed to  take is $1.7 billion  in capital                                                               
costs -  investments needed  to continue  to get  oil out  of the                                                               
ground - and $1.1 billion in  operating costs on the North Slope.                                                               
While there will be an increase  in the amount audited - compared                                                               
with  the $1.7  billion for  transportation to  market, discussed                                                               
previously and  also shown on  this chart -  it is a  question of                                                               
degree, since  auditing has  been required  all along  and people                                                               
have always been required to calculate expenses.                                                                                
                                                                                                                                
He also noted  there are different companies.  Some  might have a                                                               
lot  of heavy  oil in  their  portfolio and  thus higher  capital                                                               
costs.  Under  a net system, the amount taxed  would shrink; with                                                               
a  gross system,  Mr. Dickinson  said, it  would be  identical to                                                               
someone who had production from  the Prudhoe Bay reservoir at low                                                               
cost and didn't have to make many more capital investments.                                                                     
                                                                                                                                
He  addressed  concerns  about  clever  schemes.    Mr. Dickinson                                                               
indicated  a company  would have  to somehow  show capital  costs                                                               
five  times higher  than in  reality, which  isn't what  happens.                                                               
The larger  piece, $14.5 billion  from North Slope  oil, wouldn't                                                               
be  wiped out  from some  item  in the  operating costs,  capital                                                               
costs  or  transportation-to-market  categories.   Mr.  Dickinson                                                               
reiterated that the  slide shows $40 a barrel; if  the price were                                                               
higher or  lower, it would  affect those  amounts.  Even  so, the                                                               
total dollars  spent getting  the oil  up and  out and  to market                                                               
wouldn't come anywhere near the total value.                                                                                    
                                                                                                                                
He  showed  the   fourth  slide,  also  labeled   "Net  Value  or                                                               
Production  Tax  Value,"  with   a  checkered  area  depicting  a                                                               
22.5 percent tax.   Noting the  governor has suggested  it should                                                               
be  20 percent,  Mr. Dickinson explained  that this  is what  the                                                               
state would  take in production  tax, simply a percentage  of the                                                               
$14.5  billion for  North Slope  oil.   The remaining  portion is                                                               
used by  a producer to  pay royalties, property taxes  and income                                                               
taxes  to the  state;  to  pay federal  taxes;  to  pay back  any                                                               
borrowed money  for capital costs  or investments; and to  show a                                                               
return to shareholders.  He emphasized  that a small shift in the                                                               
capital cost or operating cost piece won't wipe out the tax.                                                                    
                                                                                                                                
1:41:52 PM                                                                                                                    
MR.  DICKINSON  showed the  fifth  slide,  "Tax Before  Credits."                                                               
He told members that had the PPT  been in place, at these current                                                               
values the  checkered portion  on the  previous slide  would have                                                               
been $2.4 billion.   He then  showed the sixth slide,  "Tax After                                                               
Credits," which  depicts tax after  credits at $1.7 billion.   As                                                               
to whether the  tax will be wiped  out if someone finds  a way to                                                               
show larger credits, he said no.   This graph shows the period of                                                               
the "5,000-barrel equivalent,"  and has a bar  labeled "5,000 bbl                                                               
equivalent credit, 8  users at max of 14 million  - 112 million."                                                               
He said this is about the size  of that credit in relation to the                                                               
total taxes against which the credits are being taken.                                                                          
                                                                                                                                
He turned  to the transitional investment  expenditures, depicted                                                               
on the same  slide as "TIE credit  1.7 x .5 x  .2 - 170 million."                                                               
Mr. Dickinson explained,  in response to Chair  Seekins, that the                                                               
TIE portion of  SB 3001 looks at investments made  for five years                                                               
prior to  when the legislation  comes into effect;  producers are                                                               
allowed to  get a credit  for those,  provided they can  match it                                                               
with new  dollars being spent.   If a producer is  in a "harvest"                                                               
mode  and not  spending  new dollars,  there  is no  TIE.   If  a                                                               
producer increases expenditures by about  40 percent - so they're                                                               
about  140 percent  of  what they  were  - the  full  TIE can  be                                                               
claimed in the first seven years of the legislation.                                                                            
                                                                                                                                
He noted  the other piece  shown is the direct  qualified capital                                                               
expenditure  credits.    Mr.  Dickinson  indicated  the  previous                                                               
Senate bill had those at  25 percent, whereas the governor's bill                                                               
is at 20  percent; thus that bar  on the slide would  be a little                                                               
smaller.  Mr.  Dickinson made the point that if  someone comes up                                                               
with a  different way  of doing  credits, it  won't wipe  out the                                                               
entire tax burden; it is small in relation to the totals.                                                                       
                                                                                                                                
He presented the final slide,  showing information from the sixth                                                               
slide - including tax after credits  at $1.7 billion - as well as                                                               
a  new box  depicting  the  tax under  the  status  quo at  about                                                               
$0.9 billion.   Mr.  Dickinson pointed  out  that if  legislators                                                               
accept  what the  administration  and a  number  of experts  have                                                               
said, this tax will create  incentives for further production and                                                               
investment.   Whereas  under the  existing ELF  it would  collect                                                               
about $0.9 billion,  the system with credits and a  higher rate -                                                               
even  with quite  a bit  of movement  in the  other categories  -                                                               
would still give a better result than the status quo.                                                                           
                                                                                                                                
1:45:00 PM                                                                                                                    
MR. DICKINSON  encouraged legislators  to not let  concerns about                                                               
how  to administer  this overwhelm  the economic  considerations.                                                               
If  the  state is  helping  to  make investment  more  attractive                                                               
through the tax system, he  surmised more investment will happen,                                                               
which is really all a net tax is doing.                                                                                         
                                                                                                                                
CHAIR SEEKINS  returned to the  third and fourth  slides, showing                                                               
$1.1 billion  in operating costs and  $1.7 in capital costs.   He                                                               
requested  confirmation  that  these   costs  would  be  directly                                                               
attributed  to North  Slope  operations, with  no  way a  company                                                               
could use deductions  from another state or  nation against taxes                                                               
owed under this system.                                                                                                         
                                                                                                                                
MR. DICKINSON  affirmed that, but  pointed out  that if BP  had a                                                               
technical  problem  with  heavy  oil  on  the  North  Slope,  for                                                               
example,  and  the  best  lab  to resolve  it  was  its  own  lab                                                               
overseas,  it  would  be charged  internally  against  the  North                                                               
Slope.  In further response,  he indicated losses carried forward                                                               
from elsewhere wouldn't affect the North Slope operation.                                                                       
                                                                                                                                
CHAIR  SEEKINS   noted  his   constituents  are   concerned  that                                                               
deductions applied  against taxes in Alaska  will be company-wide                                                               
expenses, such  as a bonus  paid to the chief  executive officer.                                                               
He surmised  those would be  deductible in terms of  state income                                                               
tax, but not the severance tax or whatever this will be called.                                                                 
                                                                                                                                
1:48:04 PM                                                                                                                    
MR. DICKINSON  concurred.   He mentioned  the structuring  of the                                                               
bill and  pointed out that in  the Prudhoe Bay Unit,  BP does the                                                               
check writing  and hiring.   However,  BP only  has a  26 percent                                                               
interest, and  so only  26 cents of  every dollar  actually comes                                                               
from  its  pockets.   ExxonMobil  and  ConocoPhillips  each  have                                                               
something over one-third; some of  their employees do nothing but                                                               
look over BP's shoulder and say,  "We're not going to spend this,                                                               
we're  not going  to spend  that."   Mr. Dickinson suggested  any                                                               
bonus  to  Lord  Browne  of   BP  would  catch  their  attention.                                                               
Furthermore,  the state  could say  that one  test which  must be                                                               
passed is that  the other partners must have been  willing to pay                                                               
for it; then the state would apply its own tests.                                                                               
                                                                                                                                
CHAIR SEEKINS  asked whether deductions  for operating  costs and                                                               
capital  costs, particularly  the latter,  are limited  to actual                                                               
dollars spent,  rather than reclassification  of the asset.   For                                                               
example, if  an oil-producing  well is converted  to a  gas well,                                                               
can it be  recapitalized at that point for what  it would cost to                                                               
install  a gas-producing  well?   Or  does it  not  qualify as  a                                                               
capital cost in  terms of deductions because it  already has been                                                               
spent and recaptured other ways?                                                                                                
                                                                                                                                
MR. DICKINSON said  it is a good  question.  One test  in the PPT                                                               
for a capital  cost is whether it could have  been capitalized on                                                               
the federal tax return.  He  noted additional dollars at the time                                                               
of conversion might  apply, but indicated the  IRS guards against                                                               
arguments when  companies show a  series of invoices in  order to                                                               
prove a transaction carries weight that it perhaps shouldn't.                                                                   
                                                                                                                                
CHAIR  SEEKINS reported  hearing that  Federal Energy  Regulatory                                                               
Commission  (FERC)  rules  might  allow for  rolling  an  already                                                               
deducted asset  into that  process.   He said there  is a  lot of                                                               
suspicion that  the State of  Alaska might be gamed  with respect                                                               
to the PPT as well.                                                                                                             
                                                                                                                                
MR. DICKINSON  acknowledged this  issue can  arise.   However, he                                                               
indicated the administration isn't looking  at the rules of FERC,                                                               
which  generally aims  toward treating  consumers fairly,  but is                                                               
looking  at those  of the  IRS, which  generally doesn't  allow a                                                               
deduction for depreciation more than once.                                                                                      
                                                                                                                                
CHAIR  SEEKINS summarized  that these  two deductible  expenses -                                                               
capital  costs and  operation costs  - are  actual dollars  spent                                                               
that  are  directly  attributable  to Alaska  North  Slope  (ANS)                                                               
operations.                                                                                                                     
                                                                                                                                
MR.  DICKINSON  affirmed that  as  the  intention, noting  it  is                                                               
contained in several places, in several ways, in the PPT.                                                                       
                                                                                                                                
1:53:16 PM                                                                                                                    
SENATOR HOFFMAN inquired  about other North Slope  fields such as                                                               
the  NPSLs in  the Beaufort  Sea; he  mentioned Amerada  Hess and                                                               
drilling that led to discovery of the Northstar field.                                                                          
                                                                                                                                
MR. DICKINSON  said he  would have  to get  specific information.                                                               
There  may  be an  issue  about  an  "affiliate charge"  when  an                                                               
affiliate  comes  in.   Federal  tax  rules  are looked  at  with                                                               
respect  to who  is spending  that money;  those rules  might not                                                               
have been as clarified in the  NPSL regulations.  In general, the                                                               
costs will  be allowed, and  the only question that  arises, from                                                               
the sound of  it, is whether an Amerada Hess  affiliate was doing                                                               
the  drilling and  then  the  costs were  passed  through to  the                                                               
Amerada Hess affiliate in whose  name the development account was                                                               
being kept.                                                                                                                     
                                                                                                                                
SENATOR  HOFFMAN asked  whether  that would  be acceptable  under                                                               
current regulations.                                                                                                            
                                                                                                                                
MR.  DICKINSON answered  it isn't  done currently  for production                                                               
tax.   In the income tax  rules that will come  in, typically the                                                               
entire entity is looked at,  and cross-selling between them "just                                                               
cancels  itself out"  if  it's part  of the  unitary  group.   He                                                               
offered  to  respond further  if  Senator  Hoffman provided  more                                                               
specific information.                                                                                                           
                                                                                                                                
1:55:29 PM                                                                                                                    
CHAIR SEEKINS  surmised a  gross tax  would drop  some deductions                                                               
and would be applied at an earlier point and different rate.                                                                    
                                                                                                                                
MR.  DICKINSON commended  that  observation,  saying gross  taxes                                                               
around  the world  typically are  at  a smaller  rate, since  the                                                               
numbers they apply to are larger.                                                                                               
                                                                                                                                
CHAIR SEEKINS asked  whether expenses that would end  up in these                                                               
two categories - operating costs  and capital costs - are already                                                               
published or otherwise available to the  state.  He noted both BP                                                               
and ConocoPhillips  had published  in their  financial statements                                                               
their "operating profits" in Alaska.                                                                                            
                                                                                                                                
MR. DICKINSON  replied yes  and no.   Operating costs,  which are                                                               
immediately  deductible, are  deducted  annually,  and the  state                                                               
gets access to  federal returns.  In addition, in  looking at the                                                               
PPT the  state has  pulled together  statements from  the Prudhoe                                                               
Bay Unit, for example, where the  operator bills the owner.  Each                                                               
is constituted as a separate  partnership, and the state looks at                                                               
those partnership  returns and the  documents behind them.   That                                                               
will also include cash calls for capital expenditures.                                                                          
                                                                                                                                
He pointed  out that  capital expenditures won't  be seen  in the                                                               
IRS returns until the asset is  placed in service.  There will be                                                               
reconciliations, but  basically under the  IRS rules if  it takes                                                               
three years  to develop an  asset and there isn't  any productive                                                               
income from it, none of it can  be deducted until it is placed in                                                               
service; it has to be set aside  and doesn't show up as either an                                                               
expense or a deduction.  Mr.  Dickinson said what a producer will                                                               
present to the  IRS as a capital expense or  an operating expense                                                               
won't be verifiable by the state until some years down the road.                                                                
                                                                                                                                
He   noted  another   way   is   through  financial   statements.                                                               
ConocoPhillips historically  has broken out Alaska  as a separate                                                               
area, and  someone can go  through the "M-1 exercise"  to compare                                                               
financial  statements with  taxes.   On something  like operating                                                               
costs,  Mr.  Dickinson said  it  isn't  controversial.   However,                                                               
drilling  expenses are  treated differently  under financial  and                                                               
tax accounting.   Thus there is access to information,  and if it                                                               
could be provided  through the PPT, it would be  available all in                                                               
one piece.                                                                                                                      
                                                                                                                                
1:59:38 PM                                                                                                                    
CHAIR  SEEKINS   asked  if  there   are  federal   penalties  for                                                               
misrepresentation on a company's financial statements.                                                                          
                                                                                                                                
MR. DICKINSON  replied yes.  The  rules that would apply  are SEC                                                               
rules  and  civil  fraud  that  would  arise  from  misstating  a                                                               
financial accounting  document.   Under SEC  rules, which  to his                                                               
belief follow  financial accounting  rules, a business  must show                                                               
whether each  segment has  a material effect,  as it  is defined;                                                               
misstating  that  is  misstating  part of  the  financials.    He                                                               
indicated  ExxonMobil  uses the  segment  rules,  and the  Alaska                                                               
piece wouldn't  have a  material effect  on its  performance; the                                                               
same isn't true  for ConocoPhillips.  "That's  why some companies                                                               
do and some companies don't," he added.                                                                                         
                                                                                                                                
CHAIR SEEKINS asked whether there  is access to the capital costs                                                               
if there is only a single entity.                                                                                               
                                                                                                                                
MR.  DICKINSON  answered no,  although  those  expenses could  be                                                               
found  in the    federal income  tax return  if  one looked  deep                                                               
enough.  He added that companies  like to share risk, so few sole                                                               
operations are found on the North  Slope.  Right now, BP operates                                                               
two  fields -  Milne  Point and  Northstar -  that  are the  only                                                               
fields there without significant minority partners.                                                                             
                                                                                                                                
CHAIR  SEEKINS   asked  whether  the  companies'   accounting  of                                                               
expenses would be available for the state for auditing purposes.                                                                
                                                                                                                                
MR. DICKINSON affirmed that, noting  they'd be available directly                                                               
from the  IRS through cooperative  agreements that the  state has                                                               
entered into,  and through  the regular course  of business.   He                                                               
highlighted a  tension that the PPT  takes good advantage of:   a                                                               
company wants  to deduct  expenses immediately,  classifying them                                                               
as operating  expenses, whereas the IRS  forces capitalization of                                                               
expenses that  will produce benefits  over a period of  time, and                                                               
allows incremental deductions accordingly.                                                                                      
                                                                                                                                
2:04:24 PM                                                                                                                    
CHAIR SEEKINS asked  Ms. Wilson whether DOR is  able to determine                                                               
the amount of taxes owed under this system.                                                                                     
                                                                                                                                
MS.  WILSON  replied  yes.     She  noted  DOR  has  people  with                                                               
experience  in   auditing  NPSLs  and  has   income-tax  auditors                                                               
familiar  with IRS  provisions and  tax books.   She  related her                                                               
expectation  that the  information  discussed  by Chair  Seekins,                                                               
including  subledgers,  would   be  provided  through  course-of-                                                               
business audit requests.                                                                                                        
                                                                                                                                
CHAIR SEEKINS indicated the commissioner,  in Fairbanks, had said                                                               
a few more employees would be needed, at higher pay.                                                                            
                                                                                                                                
2:05:33 PM                                                                                                                    
MR.   DICKINSON,  in   response  to   Senator  Elton,   said  the                                                               
$1.7 billion  in   capital  costs   shown  on  the   third  slide                                                               
represents  dollars spent  in 2005  on  the leases  on the  North                                                               
Slope and  in Cook Inlet to  get further development.   They  are                                                               
deductible "as  they are being  made" and don't  include pipeline                                                               
costs or  the kinds of  expenditures seen  for a gas  line, other                                                               
than the ones for the lease.                                                                                                    
                                                                                                                                
He used  the year  2009 as  an example,  as suggested  by Senator                                                               
Elton.   Mr. Dickinson  explained that  if there  is a  gas line,                                                               
there  would be  developments  at Point  Thomson.   Although  the                                                               
billions spent there  would appear on the graph,  neither the gas                                                               
line itself nor the gas-transmission  plant would be shown.  When                                                               
those are  operating, they would  flow into the  operating costs;                                                               
they'd have  been paid for  out-of-pocket, going along.   He said                                                               
not much  would need to  be done at  Prudhoe Bay with  respect to                                                               
capital costs.   As to whether operating costs, shown  in gold on                                                               
the graph,  would increase  in 2009, he  suggested 2011  would be                                                               
more realistic.                                                                                                                 
                                                                                                                                
CHAIR SEEKINS indicated that hopefully production will increase.                                                                
                                                                                                                                
MR.  DICKINSON  pointed out  that  the  graph shows  334  million                                                               
barrels, but this year fewer  than 300 million would be produced.                                                               
Barring  further capital  investment, it  is predicted  to shrink                                                               
even further.                                                                                                                   
                                                                                                                                
2:10:43 PM                                                                                                                    
^Roger Marks, Economist, Department of Revenue                                                                                  
ROGER MARKS, Economist, Department of Revenue, referenced a one-                                                                
page  document showing  light oil  and  heavy oil  under a  gross                                                               
system versus  a net  system.  He  explained the  scenario shown,                                                               
with  the  West  Coast  ANS   price  at  $30.00,  until  recently                                                               
considered high;  shipping from Valdez  to Los Angeles  at $2.00;                                                               
and the  tax tariff at $3.00.   The  gross value would  be $30.00                                                               
minus  the shipping  and tariff,  $25.00 at  the lease  boundary.                                                               
Both light oil  and heavy oil are put into  the pipeline and sold                                                               
as a mixture at the same price, Mr. Marks explained.                                                                            
                                                                                                                                
He pointed  out that upstream  costs differ, however.   Mr. Marks                                                               
estimated light oil would cost  about $7.50 to produce, including                                                               
both  capital and  operating costs;  heavy oil  would cost  about                                                               
$15.00, since  it is much more  difficult to produce.   The North                                                               
Slope  has different  classes of  heavy  oil, he  noted, and  the                                                               
number could  be higher or lower.   Light oil under  this example                                                               
would have a net value of $17.50; heavy oil, $10.00.                                                                            
                                                                                                                                
He continued with  the example.  If a straight  15 percent tax on                                                               
gross  were  enacted   and  the  ELF  eliminated,   it  would  be                                                               
15 percent of  $25.00, or  $3.75; this would  be 37.5  percent of                                                               
the  net value  for heavy  oil, Mr.  Marks noted,  whereas people                                                               
have been talking about a tax on  net of 20 to 25 percent.  Under                                                               
a  gross system  that doesn't  differentiate upstream  realities,                                                               
heavy  oil, which  needs the  most  help, would  get the  biggest                                                               
"kick in the stomach" under a simple gross tax like this.                                                                       
                                                                                                                                
CHAIR SEEKINS asked  what the royalty would be at  the West Coast                                                               
ANS price, on average.  He gave the example of $30.00.                                                                          
                                                                                                                                
MR.  MARKS replied  that if  this were  West Sak  in the  Kuparuk                                                               
Unit,  which he  believes has  about a  12.5 percent  royalty, it                                                               
would be 12.5 percent of the  gross amount of $25.00, for a total                                                               
of $3.13.                                                                                                                       
                                                                                                                                
CHAIR SEEKINS surmised on heavy oil it would be under $7.00.                                                                    
                                                                                                                                
MR.  MARKS  noted  the  royalty  would  be  deductible  from  the                                                               
severance tax, so it would be a little less.                                                                                    
                                                                                                                                
CHAIR SEEKINS suggested these numbers  might be a disincentive to                                                               
develop that field.                                                                                                             
                                                                                                                                
MR. MARKS  cautioned that merely  taxing on the gross  to provide                                                               
simplicity ignores  a very complicated  problem:  not all  oil is                                                               
created the same.                                                                                                               
                                                                                                                                
2:17:50 PM                                                                                                                    
MR.  MARKS  turned  to exploration  economics,  noting  the  main                                                               
drivers are geology and exploration  costs.  He said the question                                                               
is how the  fiscal system can help to spur  exploration.  Because                                                               
TAPS is 60 percent empty, finding new  oil is important.  The tax                                                               
rate  on  oil  doesn't  have  that  big  a  role  in  exploration                                                               
economics  because no  tax  is paid  if it  comes  up dry,  which                                                               
happens  most of  the time.   There  is a  100 percent  chance of                                                               
incurring exploration  costs, but  if there is  only a  5 percent                                                               
chance of success, the tax rate  from finding oil only comes into                                                               
play only 5 percent of the time.                                                                                                
                                                                                                                                
He said  while the state  cannot affect geology directly,  it can                                                               
share the  dry-hole risk and  thus affect costs by  sharing them.                                                               
Mr. Marks  recalled a  point made  by the  governor in  a speech:                                                               
Under the  status quo,  a wildcatter pays  for everything  if the                                                               
well comes up  dry.  Under a PPT system  where upstream costs are                                                               
deductible, in  contrast, the  state picks up  40 percent  of the                                                               
dry-hole  costs  and  incurs  40 percent  of  the  dry-hole  risk                                                               
through deductions,  converting losses  to credits  and marketing                                                               
those credits.  In a gross system, this is bypassed completely.                                                                 
                                                                                                                                
He reported that  an average exploration well on  the North Slope                                                               
costs  $10 million  to $20  million.   If the  state picks  up 40                                                               
percent of $20  million, it costs $8 million.   Sharing that risk                                                               
can  make a  big difference  in  whether the  well gets  drilled,                                                               
Mr. Marks  said,  since  it materially  affects  the  exploration                                                               
economics.   All  it takes  is to  find one  field like  Alpine -                                                               
where  a  $20 million  exploration  well  found  half  a  billion                                                               
barrels, worth $30  billion - for that kind of  policy to pay off                                                               
enormously  for the  state.   Mr. Marks  emphasized that  a gross                                                               
system would bypass that risk sharing completely.                                                                               
                                                                                                                                
CHAIR SEEKINS  returned to the chart  provided by Mr. Marks.   He                                                               
surmised the differential isn't as great at higher prices.                                                                      
                                                                                                                                
MR. MARKS agreed.                                                                                                               
                                                                                                                                
2:22:51 PM                                                                                                                    
^Ken Griffin, Deputy Commissioner, DNR                                                                                          
KEN   GRIFFIN,  Deputy   Commissioner,   Department  of   Natural                                                               
Resources, offered  feedback on issues  raised this morning.   He                                                               
informed members there are a number  of NPSLs on the North Slope,                                                               
administered by  DNR.  These  are a  "net profit royalty"  to the                                                               
state,  and they  require an  audit  process similar  to what  is                                                               
envisioned  on the  PPT  side.   Seven  of  these  leases are  in                                                               
"payout," meaning  the operator makes  a net profit from  them as                                                               
defined  in regulation;  those seven  return  about $7 million  a                                                               
month  to the  state.   They  are audited  by  DNR's royalty  and                                                               
auditing section.                                                                                                               
                                                                                                                                
He reported  about 95 percent  of the value audited,  in general,                                                               
is  closed   without  dispute.    Historically,   the  state  and                                                               
producers have  successfully resolved  the remaining issues.   To                                                               
his knowledge, Mr.  Griffin said, none have been  elevated to the                                                               
level  of the  commissioner  or have  gone to  court.   There  is                                                               
concern about  setting up PPT rules  that will last a  long time.                                                               
These NPSL  rules were set up  in 1979 and 1982,  are archaic and                                                               
don't   fit  well   with  how   the   companies  operate   today.                                                               
Nevertheless, DNR and the companies  manage to resolve issues and                                                               
come to a common understanding of  how to interpret and apply the                                                               
rules to meet the needs of the producers and the state.                                                                         
                                                                                                                                
SENATOR  DYSON asked  whether statutory  authority  is needed  to                                                               
update those rules.                                                                                                             
                                                                                                                                
MR. GRIFFIN  affirmed that as  his personal view.   He reiterated                                                               
it has been  workable and thus isn't urgent.   He noted the rules                                                               
are  written  into  the  leases  and thus  it  is  a  contractual                                                               
relationship rather than a statutory or regulatory one.                                                                         
                                                                                                                                
2:28:21 PM                                                                                                                    
MR. GRIFFIN  addressed the relationship  of royalty  reduction to                                                               
tax credits.  He explained  that the purpose of royalty-reduction                                                               
regulations, as well  as tax-credit provisions in the  PPT, is to                                                               
change  a  project's bottom-line  economics  in  order to  change                                                               
companies' investment  behavior.  The goal  is long-term benefits                                                               
to the state  by increasing exploration and  production, and thus                                                               
long-term revenues.  The tax  credits are designed to shift broad                                                               
investment patterns in  Alaska.  There is a  6 percent decline in                                                               
oil,  and yet  companies invest  more  than a  billion dollars  a                                                               
year; to arrest this decline  and monetize gas reserves, a broad-                                                               
based,  substantial  increase in  investment  in  oil is  needed,                                                               
perhaps two  to three  times the current  amount, in  addition to                                                               
gas-related investments including the proposed pipeline.                                                                        
                                                                                                                                
He  contrasted that  with royalty  relief,  a specific,  project-                                                               
oriented    opportunity   intended    to   provide    incremental                                                               
encouragement  to  a specific  project.    Mr. Griffin  said  the                                                               
result of  that royalty relief  should be that a  project becomes                                                               
feasible,  where without  the relief  it  would not.   If  relief                                                               
won't change the result, it isn't the right answer.                                                                             
                                                                                                                                
SENATOR  WAGONER  asked:    If  the  PPT  is  passed,  what  will                                                               
guarantee that  the major producers  on the North Slope  will use                                                               
it to  do more exploration?   He said ExxonMobil isn't  doing any                                                               
exploration, for instance.                                                                                                      
                                                                                                                                
MR. GRIFFIN replied there are no  guarantees, but in his 25 years                                                               
of industry  experience he has  seen significant growth  in areas                                                               
that have adopted tax regimes such  as this.  First, if a company                                                               
isn't  doing   exploration  and   investing,  it  will   have  no                                                               
deductions  and  will   pay  the  full  tax  rate,   which  is  a                                                               
substantial  increase over  what is  being paid  today.   Second,                                                               
there  isn't  sole  dependence   on  these  three  companies  for                                                               
exploration; other  companies are  here or want  to be  here, and                                                               
some are the most aggressive  explorers in North America.  Third,                                                               
the type  of tax  regime being  talked about  under PPT  has been                                                               
used in  Norway, England and  Alberta to stimulate  investment in                                                               
some higher-risk,  higher-cost projects.   He suggested  the need                                                               
to hear  from someone  with expertise on  those, perhaps  Dr. van                                                               
Meurs or Mr. Johnston.                                                                                                          
                                                                                                                                
SENATOR WAGONER questioned whether Alberta has a production tax.                                                                
                                                                                                                                
MR. GRIFFIN clarified that Alberta has a credit system.                                                                         
                                                                                                                                
SENATOR WAGONER specified it's a  25 percent royalty system, with                                                               
only a  1 percent royalty  charged until the company  recoups its                                                               
costs.                                                                                                                          
                                                                                                                                
MR. GRIFFIN suggested that is something Alaska could do as well.                                                                
                                                                                                                                
SENATOR WAGONER  said Alaska already  has the ability to  do that                                                               
with its royalty for heavy oil.   He indicated it has worked well                                                               
for Alberta's tar sands.                                                                                                        
                                                                                                                                
CHAIR SEEKINS concluded discussion of SB 3001.                                                                                  
                                                                                                                                
The committee took an at-ease from 2:35:09 PM to 2:50:53 PM.                                                                
                                                                                                                                
^Presentation on access to the gas pipeline and basin control                                                                 
                                                                                                                                
CHAIR SEEKINS informed  members there would be  a presentation on                                                               
access  to  the gas  pipeline  and  basin control,  as  requested                                                               
during the roundtable discussions.                                                                                              
                                                                                                                                
2:51:28 PM                                                                                                                    
^Jim Clark, Office of the Governor                                                                                              
JIM  CLARK, Chief  Negotiator, Office  of the  Governor, informed                                                               
listeners that Mr. Loeffler has been  the state's attorney on oil                                                               
and  gas,  particularly  FERC  matters,  since  1974.    He  said                                                               
Mr. Loeffler  and Mr.  Griffin of  DNR  are the  right people  to                                                               
address  these  elements.    Thus there  would  be  an  extensive                                                               
presentation  to assure  members of  what the  rules of  the road                                                               
are, in order to help in assessing the problem.                                                                                 
                                                                                                                                
^Bob Loeffler, Morrison and Foerster, Consultant to the Governor                                                                
BOB LOEFFLER, Morrison and Foerster,  Consultant to the Governor,                                                               
noted when  this topic came  up the previous week,  Chair Seekins                                                               
and  Senator Ben  Stevens had  requested that  materials be  made                                                               
available  for  the  record.    Accordingly,  he  was  providing:                                                               
1) FERC  Orders 2005  and 2005-A,  regulations governing  an open                                                               
season for  an Alaska gas  pipeline; 2) excerpts from  the Energy                                                               
Policy Act of  2005, which increases penalties  under the Natural                                                               
Gas  Act  and other  relevant  Acts  from $5,000  to  potentially                                                               
$1 million  a day;  3) a chapter  describing  lengthy Order  636,                                                               
from  a   treatise  entitled   "Energy  Law   and  Transactions";                                                               
4) excerpts relating  to the federal Minerals  Management Service                                                               
(MMS)  royalty-in-kind (RIK)  program  and  some results  showing                                                               
improved  performance;  and  5) Monday's   report  from  FERC  to                                                               
Congress on  progress on the  Alaska natural gas  pipeline, which                                                               
has good  projections but warns  of threats to this  project from                                                               
the increasing role of liquefied natural gas (LNG).                                                                             
                                                                                                                                
2:55:37 PM                                                                                                                    
MR. LOEFFLER told  members he would talk about  the framework for                                                               
regulation of  pipelines and their marketing  affiliates; penalty                                                               
schemes; special additional requirements  that apply to an Alaska                                                               
gas  pipeline; and  two related  concepts that  have gained  some                                                               
currency, so-called  basin control and basin  mastery.  Following                                                               
that,  Mr. Griffin  would provide  observations  gained from  his                                                               
experience in the industry.                                                                                                     
                                                                                                                                
He  gave an  overview from  his  handout, "Access  to Alaska  Gas                                                               
Pipeline and 'Basin Control.'"   Mr. Loeffler noted an Alaska gas                                                               
pipeline  will  be  a tightly  regulated,  open-access  pipeline,                                                               
meaning   capacity  is available  to all  comers through  an open                                                               
season  auction  process.   The  pipeline  sells  "transportation                                                               
tickets"  and by  law, since  Order 636,  gas must  be sold  as a                                                               
separate product; FERC no longer  regulates the price of gas, and                                                               
has separated gas and the transportation on the pipeline.                                                                       
                                                                                                                                
He explained that there are  restrictions on passing advantageous                                                               
information between the pipeline  and the marketing affiliate, if                                                               
a pipeline has one.   Last year, Congress enacted heavy penalties                                                               
- up to $1 million a day -  in reaction to problems with Enron in                                                               
California.    Mr. Loeffler  said  FERC  will review  competitive                                                               
issues  when  the open  season  notice  comes through;  when  the                                                               
pipeline application comes through after  that; and later on.  In                                                               
addition, FERC  has unique  powers to  mandate expansion  of this                                                               
pipeline to protect shippers,  potential shippers or independents                                                               
not affiliated with  the pipeline.  Mr.  Loeffler emphasized that                                                               
over  its  life  this  pipeline  will  be  the  most  scrutinized                                                               
pipeline in the U.S. and probably Canada.                                                                                       
                                                                                                                                
He provided  some history,  including that  then-President Carter                                                               
wanted to  ban producers from  equity ownership in an  Alaska gas                                                               
transportation  system, and  that Congress,  by contrast,  passed                                                               
legislation  in  2004  making the  application  process  open  to                                                               
anyone, including a producer.                                                                                                   
                                                                                                                                
2:59:44 PM                                                                                                                    
MR. LOEFFLER highlighted core features  of Order 636 from 1992, a                                                               
fundamental restructuring of the U.S.  gas pipeline business.  He                                                               
said  pipeline  companies  provide  transportation  services  and                                                               
don't  own  or  sell  gas, although  they  could  have  marketing                                                               
affiliates.   Separate companies,  some affiliated and  some not,                                                               
sell gas.   Owning a pipeline doesn't give an  automatic right to                                                               
capacity,  or  a  bidding advantage;  the  affiliated  production                                                               
interest must  bid in  the open  season to  get capacity  to ship                                                               
gas.   Similarly, owning the  gas in  the basin connected  to the                                                               
pipeline doesn't give an automatic  right to capacity.  Many FERC                                                               
requirements for  this pipeline  are designed  so bidders  are on                                                               
equal footing for  the open season.  Mr. Loeffler  said Order 636                                                               
went  to the  court of  appeals and  was sustained  in all  major                                                               
aspects;  it  has been  the  basis  of  the modern  gas  pipeline                                                               
industry in the Lower 48 since 1992.                                                                                            
                                                                                                                                
3:03:02 PM                                                                                                                    
MR. LOEFFLER, in response to  Senator Ben Stevens, explained that                                                               
widely used in the industry  is a "net present value" methodology                                                               
that looks  at the  present value  of a  bid, including  how long                                                               
someone is willing  to bid, and for how much  capacity.  The FERC                                                               
open season  regulations require disclosure of  that methodology,                                                               
by  the pipeline,  to  all  bidders.   The  pipeline chooses  the                                                               
methodology, but  in the  case of  this particular  pipeline must                                                               
put out  notice in  advance of  the open  season, with  a similar                                                               
notice to FERC, that contains  21 kinds of information including,                                                               
to his belief, the valuation methodology.                                                                                       
                                                                                                                                
SENATOR BEN STEVENS requested clarification  about the meaning of                                                               
"bid" in this instance.                                                                                                         
                                                                                                                                
MR. LOEFFLER suggested thinking of  a train, acknowledging it's a                                                               
bit simplified.   He said  it's how many  seats on the  train one                                                               
wants to buy, for how long.  Each  unit of gas is akin to a seat.                                                               
In  the  open season  notice,  the  pipeline  also puts  out  its                                                               
estimate of  the tariff, the  cost of the  seat.  Then  an entity                                                               
bids for  how many  seats it will  buy, for how  many years.   In                                                               
further  response,   he  said  the  pipeline   proposes  a  price                                                               
consistent with FERC  rate making.  If the  pipeline doesn't come                                                               
through  at  this estimated  price,  then  the  deal is  off  and                                                               
shippers usually can get out of the contract.                                                                                   
                                                                                                                                
3:08:02 PM                                                                                                                    
MR.  LOEFFLER returned  to his  overview.   With  respect to  the                                                               
application for this  certificate to build the  pipeline, he said                                                               
FERC reviews it to a  fare-thee-well.  An application is volumes,                                                               
going  into  engineering   design;  permitting;  size,  including                                                               
expandability;  and  proposed  tariff  rates.    One  cannot  add                                                               
compressor stations  or even go  out of the natural  gas pipeline                                                               
business  without permission  from FERC.   Typically,  this isn't                                                               
true of  an oil  pipeline.   Under its  regulations for  this gas                                                               
pipeline, FERC will look at  how the project design considers the                                                               
capacity needs of future shippers  as well as the first shippers.                                                               
When the open  season ends, if successful, there  will be bidding                                                               
for capacity.   If some  bidders are a bit  late but have  a good                                                               
reason, FERC  has said it  will make  the pipeline show  why that                                                               
cannot be accommodated.                                                                                                         
                                                                                                                                
He  characterized the  open season  process as  the first  public                                                               
step, groundwork preceding an application  to FERC.  The pipeline                                                               
tests the  market, ensuring there  are enough shippers  that want                                                               
to  ship gas.    Mr.  Loeffler said  those  commitments are  like                                                               
leases for anchor tenants in a  shopping center that can be taken                                                               
to the bank to permit financing.                                                                                                
                                                                                                                                
He  reported  that FERC's  expectation  is  that an  Alaska  gas-                                                               
transportation project will be designed  and built, to the extent                                                               
possible,  to accommodate  all qualified  shippers ready  to sign                                                               
these  firm transportation  (FT) agreements,  since this  will be                                                               
the only  pipeline for  many years  to bring  gas from  the North                                                               
Slope.    Mr. Loeffler  noted  that  bidding methodology  in  the                                                               
Lower 48 usually  includes tie-breaking methodology;  net present                                                               
value is one way of deciding that.                                                                                              
                                                                                                                                
3:12:42 PM                                                                                                                    
MR.  LOEFFLER  gave some  history  and  then explained  that  the                                                               
Alaska Natural Gas Pipeline Act (ANGPA)  of 2004 is a special set                                                               
of  provisions removing  some bureaucratic  hurdles and  ensuring                                                               
competitive access.   It  also provides  regulations for  an open                                                               
season; such  regulations don't exist  in the Lower  48, although                                                               
there is a  lot of case law.  For  this pipeline, Congress wanted                                                               
regulations  that control  access to  the pipeline,  and a  level                                                               
playing field for potential shippers.                                                                                           
                                                                                                                                
He  continued,  saying  the  Energy Policy  Act  of  2005  vastly                                                               
strengthened the penalties.   It also created a  new section 4(a)                                                               
of  the Natural  Gas  Act, which  prohibits market  manipulation,                                                               
covering  not  only  jurisdictional entities,  but  also  related                                                               
activities.   It makes  it unlawful for  any entity,  directly or                                                               
indirectly, to  use in  connection with the  purchase or  sale of                                                               
natural gas -  or the purchase or sale  of related transportation                                                               
services  subject  to FERC  jurisdiction  -  any manipulative  or                                                               
deceptive  device or  contrivance.   Mr. Loeffler  referenced the                                                               
SEC  Act and  said the  commission  has implemented  this with  a                                                               
definition of fraud that he'd show members later.                                                                               
                                                                                                                                
3:15:02 PM                                                                                                                    
MR. LOEFFLER  discussed FERC  orders.   He informed  members that                                                               
the  only FERC  orders specific  to  Alaska are  Orders 2005  and                                                               
2005-A;  the  others  apply  to all  interstate  pipelines.    He                                                               
characterized  FERC as  the  "cop  on the  beat"  at the  various                                                               
stages:   1) the open season  notice, 2) the application  to FERC                                                               
resulting   in  a   certificate,  3) pipeline   construction  and                                                               
4) pipeline operations.   A FERC certificate  typically has pages                                                               
of construction conditions, and  a notice-to-proceed process will                                                               
be done with other federal agencies.   Typical in the Lower 48 is                                                               
that  a deadline  is established  by which  the pipeline  must be                                                               
built after the certificate is accepted.                                                                                        
                                                                                                                                
He  noted Order  436  was  the predecessor  to  Order 636,  which                                                               
required    that    any    transportation   offered    must    be                                                               
nondiscriminatory.   Pipeline customers that used  to buy bundled                                                               
service thus could contract directly  with producers; this was to                                                               
encourage competition.  Mr. Loeffler  referred to the Alberta Hub                                                               
and said the  whole idea of trading natural gas  evolved from the                                                               
separation of transportation and gas  markets; that was what FERC                                                               
wanted, and  people quickly set  up affiliates.  With  respect to                                                               
independent pipelines,  he pointed  out that many  have marketing                                                               
affiliates that sell gas.                                                                                                       
                                                                                                                                
He skipped  over capacity  release, turning  to Order  637, which                                                               
put   in  more   stringent  standards   on  proper   conduct  and                                                               
scheduling, for  instance, separating it into  fine gradations of                                                               
service.  Mr.  Loeffler said Order 2004 filled in  the content of                                                               
the standards of  conduct; the idea was to  not give preferential                                                               
treatment to  the affiliated gas  marketer.  Some  were expressly                                                               
adopted in  Order 2005,  but apply  regardless; he  gave details.                                                               
Before  the  most recent  statute,  he  noted, FERC  could  order                                                               
discouragement  of  unjust  profits   and  could  revoke  various                                                               
authorities   including   the   basic   certificate   of   public                                                               
convenience and necessity.                                                                                                      
                                                                                                                                
He reported  that the penalty or  forfeiture provisions, however,                                                               
were  trivial and  lacked teeth.    In 2005,  Mr. Loeffler  said,                                                               
penalties increased to  $1 million a day for  civil penalties and                                                               
the same for  criminal penalties, in addition  to possible prison                                                               
time of five years.                                                                                                             
                                                                                                                                
3:20:06 PM                                                                                                                    
MR. LOEFFLER elaborated, pointing  out that anyone who improperly                                                               
manipulated transportation rights or  contrived to manipulate gas                                                               
sales could face  huge penalties and a  lot of time in  jail.  He                                                               
said FERC  would look at  how the  markets were harmed,  what the                                                               
harm was,  whether the company  did anything to cure  it, whether                                                               
it  was fraudulent  and  whether it  was a  repeat  offense.   He                                                               
highlighted  improvement  at  FERC  following  what  happened  in                                                               
California, noting FERC has become  strict in enforcing even some                                                               
of its  simplest rules, a real  change from Chairman Wood  to the                                                               
current chairman.                                                                                                               
                                                                                                                                
He  said Order  670,  the  latest one,  implements  new 4(a),  on                                                               
energy market  manipulation, which  applies if something  is even                                                               
connected  with   a  jurisdictional  transaction  and   makes  it                                                               
unlawful to:   defraud using  a device, scheme or  artifice; make                                                               
any untrue  statement of material  fact or omit a  material fact;                                                               
or operate or  engage in any act, practice or  course of business                                                               
that  operates  as   a  fraud  or  deceit.     Mr. Loeffler  also                                                               
emphasized the breadth  of the definition of fraud:   any action,                                                               
transaction  or   conspiracy  for   the  purpose   of  impairing,                                                               
obstructing or defeating the honest functioning of the market.                                                                  
                                                                                                                                
He  turned to  special regulations  for an  Alaska gas  pipeline,                                                               
summarized in  Part IV  of his  handout.   Mr. Loeffler  said the                                                               
orders  themselves  exceed  100  pages and  are  specific.    For                                                               
enforcing  penalties, the  more specific  the regulation  is, the                                                               
easier it is to show whether  a violation occurred.  He indicated                                                               
FERC wanted  to:   provide certainty  for this  pipeline; promote                                                               
competition  and  prevent  unduly  discriminatory  behavior;  and                                                               
prevent a  project applicant from unduly  favoring its affiliate.                                                               
With respect to the words  "undue" and "unjust," he reported that                                                               
the federal statutes use those terms, as well as "unreasonable."                                                                
                                                                                                                                
He  explained that  the pipeline  must construct  an open  season                                                               
notice that complies  with the 21 requirements.   To put everyone                                                               
on equal  footing, this is  given to  bidders in advance  so they                                                               
can prepare by  running economic models and so forth.   Then FERC                                                               
will review  that, in advance of  the open season, to  ensure its                                                               
regulations are complied with.   Mr. Loeffler noted FERC reserves                                                               
the right to reject the certificate application.                                                                                
                                                                                                                                
3:25:56 PM                                                                                                                    
MR. LOEFFLER  advised members  that in the  open season,  by law,                                                               
information must be provided about  in-state bidding and tariffs,                                                               
because interested  parties must  be ready to  bid when  the open                                                               
season  notice  goes out.    He  cited  18  C.F.R. 157.34  as  an                                                               
important  catch-all  that  says all  information  regarding  the                                                               
proposed  service to  be offered  - including  pipeline capacity,                                                               
the  proposed  tariff, design  and  cost  projections -  must  be                                                               
available to, or in the hands  of, any potential shipper prior to                                                               
public  notice  of an  open  season;  this  is to  provide  equal                                                               
footing.   For the same  reason, affiliated marketing  units must                                                               
be  identified  and  are   prohibited  from  obtaining  nonpublic                                                               
information.   The open  season during which  parties can  bid is                                                               
open at  least 90 days by  regulation.  Usually there  is a fine-                                                               
tuning period for the bids.                                                                                                     
                                                                                                                                
He  referred  to  undue  preference  and  discrimination,  saying                                                               
general requirements  under 18  C.F.R. 157.35 include  that there                                                               
shall be no preference in  rates, terms, conditions of service or                                                               
allocation of  capacity, and  that the  commission shall  use its                                                               
fast-track  procedures to  resolve any  complaint.   In addition,                                                               
(c) provides that  those connected with the  pipeline who conduct                                                               
the open season  must function independent of  any other division                                                               
of the  project applicant.   Mr. Loeffler alluded  to information                                                               
in  his  handout  relating  to subsections  (d)  through  (g)  of                                                               
18 C.F.R. 157.35.                                                                                                               
                                                                                                                                
3:29:30 PM                                                                                                                    
MR. LOEFFLER  turned to basin  control, the idea that  those with                                                               
warehouse capacity  would sign  up for  more "tickets"  than they                                                               
need,   for   a  longer   time   than   needed,  thus   excluding                                                               
independents.   Although  there might  be a  business reason,  it                                                               
might be done to  lock out a competitor.  He  said FERC will look                                                               
for that and  be suspicious if someone takes capacity  for a long                                                               
time while  having no more resource  to ship.  He  noted FERC has                                                               
suggested it  wouldn't be in  the shipper's economic  interest to                                                               
bid for capacity beyond the projected life of its reserves.                                                                     
                                                                                                                                
He expressed confidence  that there is a big tool  kit to respond                                                               
to this concern.   For example, FERC can force  separation of the                                                               
marketing  affiliate from  the pipeline  affiliate  and from  the                                                               
entity  that  conducts the  open  season.    In addition  to  the                                                               
special  requirements  for  this  gas  pipeline  he'd  discussed,                                                               
Mr. Loeffler  indicated  FERC  has  said  it  will  review  anti-                                                               
competitive  behavior -  both in  a letter  from former  Chairman                                                               
Wood in  response to  a query from  the Alaska  State Legislature                                                               
and  "because it  will do  it  naturally" -  and will  be on  the                                                               
lookout for unusual occurrences.                                                                                                
                                                                                                                                
He emphasized that FERC has the  power to order expansion of this                                                               
pipeline -  which isn't true for  any pipeline in the  Lower 48 -                                                               
if someone  is excluded down  the road, at  a time when  there is                                                               
more  gas to  ship  than  there is  capacity.    Showing a  slide                                                               
labeled  "Daniel  Johnston  Testimony  on  SB  305  and  HB  488,                                                               
April 9, 2006," Mr.  Loeffler recalled Mr. Johnston's  use of the                                                               
term "basin master"  in the context of projects  around the world                                                               
where  there  are  cozy  relationships  between  governments  and                                                               
project developers,  for instance.  Mr.  Loeffler recapped points                                                               
from   Mr. Johnston's   testimony,   emphasizing   that   whereas                                                               
Mr. Johnston had  said early  infrastructure corridors  often are                                                               
overbuilt,  the concern  for this  current project  has been  the                                                               
opposite, that it won't have enough capacity.                                                                                   
                                                                                                                                
He quickly  addressed the appendix  to his  presentation, showing                                                               
open   season   notice   requirements  in   18   C.F.R.   157.34.                                                               
Mr. Loeffler  explained that  those are  so detailed  because the                                                               
state, the legislature and the  shippers wanted to know there was                                                               
a  fair  playing  field.     He  drew  attention  to  item  (15),                                                               
specifying  to  Senator  Ben  Stevens  that  one  requirement  is                                                               
disclosure of the methodology by  which capacity will be awarded.                                                               
Mr. Loeffler turned the presentation  over to Ken Griffin, deputy                                                               
commissioner of DNR.                                                                                                            
                                                                                                                                
3:35:16 PM                                                                                                                    
^Ken Griffin, Deputy Commissioner, DNR                                                                                          
MR. GRIFFIN said  he didn't have much to add,  but emphasized his                                                               
belief  that  explorer access  has  been  dealt with  effectively                                                               
through  this.     Equal  opportunity  on  the   North  Slope  is                                                               
maintained,  largely  through  DNR's  leasing  program;  that  is                                                               
unchanged by the proposed fiscal  contract.  In addition, primary                                                               
lease terms, royalties  and so forth remain  under DNR's purview.                                                               
The uniform  upstream fiscal contract, proposed  through separate                                                               
legislation in the  past session, provides "equal  footing to the                                                               
economic  benefits of  exploration," Mr.  Griffin said,  agreeing                                                               
with Mr. Loeffler  that FERC  rules provide  equal access  to the                                                               
infrastructure system through the  open season process and FERC's                                                               
unique expansion authority.   He turned the  presentation back to                                                               
Mr. Loeffler.                                                                                                                   
                                                                                                                                
MR.  LOEFFLER recalled  that  FERC's open  season  rules say,  in                                                               
essence,  that in  any expansion  it will  look to  be sure  that                                                               
shippers  other  than for  Point  Thomson  and Prudhoe  Bay  have                                                               
capacity  available to  them.   He  characterized  it as  another                                                               
check, since  FERC will  look at  who has the  gas today  and who                                                               
might have it in the future.                                                                                                    
                                                                                                                                
3:37:23 PM                                                                                                                    
SENATOR  BEN   STEVENS  referred   to  the  open   season  notice                                                               
requirements   in   18  C.F.R.   157.34   in   the  appendix   to                                                               
Mr. Loeffler's presentation.   He called attention  to item (15),                                                               
which read:                                                                                                                     
                                                                                                                                
    (15) The methodology by which capacity will be                                                                              
     awarded,  in  the  case of  over-subscription,  clearly                                                                    
     stating all  terms that  will be  considered, including                                                                    
     price and contract term.  If capacity is oversubscribed                                                                    
     and  the prospective  applicant does  not redesign  the                                                                    
     project  to  accommodate  all capacity  requests,  only                                                                    
     capacity   that   has   been  acquired   through   pre-                                                                    
     subscription or was bid in  the open season on the same                                                                    
     rates,  terms,  and  conditions  as  any  of  the  pre-                                                                    
     subscription agreements shall  be subject to allocation                                                                    
     on a pro  rata basis; no capacity  acquired through the                                                                    
     open season shall be allocated;                                                                                            
                                                                                                                                
He asked whether "applicant" in  the second sentence of item (15)                                                               
would be the state and the producer group.                                                                                      
                                                                                                                                
MR. LOEFFLER affirmed  that, specifying it would  be the pipeline                                                               
LLC.                                                                                                                            
                                                                                                                                
SENATOR   BEN   STEVENS   requested   a   definition   of   "pre-                                                               
subscription."                                                                                                                  
                                                                                                                                
MR. LOEFFLER  replied there  was a lot  of comment  about whether                                                               
"anchor  shipper"   agreements  should   be  permitted   on  this                                                               
pipeline.   The commission struck  a balance.  An  anchor shipper                                                               
is someone willing  to sign up before the open  season, and there                                                               
are  special  requirements.   The  competitive  concern was  that                                                               
large  North Slope  producer  marketing  affiliates would  strike                                                               
deals with  the pipeline prior  to an open season.   Mr. Loeffler                                                               
indicated "pre-subscription" refers to those anchor shippers.                                                                   
                                                                                                                                
SENATOR  BEN STEVENS  interpreted  the  language following  "pre-                                                               
subscription" in item  (15) to mean that  any pre-subscription or                                                               
open season subscription is treated the same way.                                                                               
                                                                                                                                
3:40:29 PM                                                                                                                    
MR.  LOEFFLER answered  by highlighting  the clause  "no capacity                                                               
acquired  through  the  open  season shall  be  allocated".    He                                                               
explained  that  while  FERC  has  said  it  would  permit  these                                                               
controversial  pre-subscriptions,  the  terms must  be  disclosed                                                               
within 10  days of  execution, and  other shippers  can piggyback                                                               
and  get  the  same  terms.     Thus  someone  could  either  bid                                                               
independently in the  open season or acquire those  same terms on                                                               
a pro-rata basis if there were a shortage of capacity.                                                                          
                                                                                                                                
SENATOR BEN  STEVENS asked:   If there is  over-subscription, are                                                               
all    subscriptions,   whether    pre-subscription   or    post-                                                               
subscription, treated the same?                                                                                                 
                                                                                                                                
MR. LOEFFLER  said the set isn't  100 percent.  While  it is true                                                               
that  pre-subscribers  can get  less  capacity,  as is  true  for                                                               
anyone  who piggybacks,  there is  a  third class  of people  who                                                               
didn't piggyback and aren't "cut down."                                                                                         
                                                                                                                                
CHAIR SEEKINS surmised  that someone who bids in  the open season                                                               
and thereby causes over-subscription isn't subject to proration.                                                                
                                                                                                                                
MR. LOEFFLER affirmed that.                                                                                                     
                                                                                                                                
SENATOR  BEN STEVENS  asked:   If  an  independent company  waits                                                               
until  the open  season  and  puts in  a  bid  that causes  over-                                                               
subscription,  that   later  bid  isn't  prorated,   whereas  the                                                               
previous bid is?                                                                                                                
                                                                                                                                
MR. LOEFFLER  affirmed that as the  design.  He said  the idea is                                                               
that  prior  bids  are  potentially  anti-competitive  and  hence                                                               
should be subject to proration.                                                                                                 
                                                                                                                                
3:42:51 PM                                                                                                                    
SENATOR BEN  STEVENS suggested the  later someone comes  into the                                                               
bidding  process, then,  the better.    A person  would know  the                                                               
rates and that there wouldn't be proration.                                                                                     
                                                                                                                                
MR. LOEFFLER  responded that someone wouldn't  know whether there                                                               
would  be over-subscription.   Noting  there was  a qualification                                                               
that he would put aside, he explained  that if there are a lot of                                                               
roughly  equal bids,  too many  for the  available capacity,  the                                                               
pre-subscribers are the ones subject  to being reduced.  He noted                                                               
there had been  an argument that pre-subscribers  are entitled to                                                               
equal or better treatment because of  being the first to sign up;                                                               
the argument against  that, however, was that those  would be the                                                               
North  Slope  producers,  who would  have  more  information  and                                                               
shouldn't  receive an  advantage.   Then  FERC  said it  wouldn't                                                               
prohibit pre-subscriptions,  but would require  disclosure within                                                               
10 days  of execution, and in  case of a shortage  those would be                                                               
the ones reduced.                                                                                                               
                                                                                                                                
He said there is another catch  in the clause, if the prospective                                                               
applicant  doesn't  redesign  the  project  to  accommodate  all.                                                               
Mr. Loeffler added that he believes  the pressure from FERC would                                                               
be to ensure it could be  large enough to accommodate everyone so                                                               
the "cut down" situation isn't reached.                                                                                         
                                                                                                                                
3:45:14 PM                                                                                                                    
SENATOR  BEN STEVENS  voiced his  understanding,  then, that  the                                                               
intent is  to build  the project  to meet  capacity, but  if that                                                               
doesn't happen,  it will  be addressed such  that those  who make                                                               
the commitment  first will be  prorated, as opposed to  those who                                                               
make a  commitment at the  same rates  later on, with  the caveat                                                               
that it won't be known whether there is over-subscription.                                                                      
                                                                                                                                
MR. LOEFFLER indicated  there was a technical point  he'd have to                                                               
work on, relating to whether the bids would be exactly the same.                                                                
                                                                                                                                
SENATOR BEN  STEVENS requested a  written answer  from Mr. Harper                                                               
and  Econ One  to the  following:   Given (15),  how can  anybody                                                               
exercise basin control?                                                                                                         
                                                                                                                                
MR.  LOEFFLER  replied  by  reading  the  last  sentence  of  his                                                               
slide 5, a  quotation from FERC  Order 2005-A:   "Our expectation                                                               
is that  an Alaska  gas transportation  project will  be designed                                                               
and built, to  the extent possible, to  accommodate all qualified                                                               
shippers who  are ready to sign  firm transportation agreements."                                                               
He  remarked,  "Hopefully,  you don't  get  to  the  prorationing                                                               
step."                                                                                                                          
                                                                                                                                
SENATOR  BEN STEVENS  restated his  request:   If  Mr. Harper  is                                                               
hired  to say  how  to  manage basin  control,  perhaps he  could                                                               
outline  something  to  be  taken  to FERC  so  that  FERC  could                                                               
implement the changes on basin control,  since FERC - and not the                                                               
Alaska State Legislature  - obviously controls the  basin and the                                                               
regulations surrounding access to the pipeline.                                                                                 
                                                                                                                                
CHAIR  SEEKINS  suggested  that  be  looked at.    He  noted  one                                                               
question has  been where FERC  control begins and thus  where the                                                               
equal-access point begins.                                                                                                      
                                                                                                                                
SENATOR BEN STEVENS also asked  what level of authority the state                                                               
has in basin control related to this project.                                                                                   
                                                                                                                                
CHAIR SEEKINS  opined that the  state has no authority,  but said                                                               
it  could be  looked at.   Elaborating  on the  open question  of                                                               
where FERC  control comes into  play - whether for  the gathering                                                               
system or upstream  or downstream from the  gas-treatment plant -                                                               
he  indicated  that   if  entities  conspired  to   block  out  a                                                               
competitor  at  the  pre-subscription   point,  for  example,  he                                                               
believed they would be the ones to pay the price.                                                                               
                                                                                                                                
3:49:29 PM                                                                                                                    
MR.  LOEFFLER, with  respect to  where FERC  jurisdiction begins,                                                               
clarified   that   all  the   open   season   orders  deal   with                                                               
jurisdictional  facilities.   When Congress  amended the  Natural                                                               
Gas  Act, adding  4(a)  in  the Energy  Policy  Act  of 2005,  it                                                               
created a new tool in the  toolbox.  The order bars energy market                                                               
manipulation by any entity, not  just jurisdictional entities, if                                                               
it's  in  connection with  a  jurisdictional  transaction and  if                                                               
there is contrivance, manipulation or fraud.                                                                                    
                                                                                                                                
SENATOR HOFFMAN asked  if a producer can participate  in both the                                                               
pre-subscription and the open season.                                                                                           
                                                                                                                                
MR. LOEFFLER replied yes.                                                                                                       
                                                                                                                                
SENATOR  HOFFMAN asked  whether  someone  could participate  more                                                               
than once in either one, submitting separate proposals.                                                                         
                                                                                                                                
MR. LOEFFLER  answered, "In  some sense,  yes."   He said  he was                                                               
struggling with  how it would  operate.  He surmised  there could                                                               
be a  pre-subscription agreement for  some part of  the capacity,                                                               
and  then  a bid  with  a  different  term,  a longer  time,  for                                                               
example.  Mr. Loeffler recalled  a practice in some Lower 48 open                                                               
seasons  of  getting local  farmers  to  submit artificial  bids,                                                               
which  Enron did,  but said  he believed  the 2005  statute would                                                               
prohibit that.                                                                                                                  
                                                                                                                                
3:52:38 PM                                                                                                                    
REPRESENTATIVE  RALPH SAMUELS,  Alaska  State Legislature,  asked                                                               
whether  BP, for  example, could  come in  with a  low bid  as an                                                               
anchor  shipper and  then  a high  bid in  the  open season  that                                                               
couldn't be prorated.   He asked why someone would  want to be an                                                               
anchor shipper  at all.  If  the price was unknown  and there was                                                               
the possibility of proration, why not just wait?                                                                                
                                                                                                                                
MR. LOEFFLER  noted this gets  into bidding theory  and indicated                                                               
he'd  have someone  else  answer.   He  added  that  in the  pre-                                                               
regulation world, anchor shippers  helped to get pipelines built;                                                               
thus  they  got  a  preference.     Because  agreements  must  be                                                               
disclosed  and so  forth,  however, he  wasn't  sure why  someone                                                               
would want to be a pre-subscriber in this pipeline.                                                                             
                                                                                                                                
CHAIR SEEKINS said he didn't  know their bidding strategy either,                                                               
but would be nervous about it.                                                                                                  
                                                                                                                                
3:54:28 PM                                                                                                                    
SENATOR GENE THERRIAULT, Alaska  State Legislature, recalled that                                                               
the  state, federal  agencies, independents  and the  legislature                                                               
had submitted  comments to  FERC during  its development  of this                                                               
package.  While he was  satisfied with the results, the producers                                                               
initiated  litigation to  get FERC  to  back off  on issues  they                                                               
believed   problematic;  that   was  deemed   untimely  and   was                                                               
dismissed, and  the producers came  back after paring it  down to                                                               
one issue.                                                                                                                      
                                                                                                                                
He explained  that a concern of  his, and of the  independents in                                                               
Alaska,  is   how  the  contractual   language  may   limit  full                                                               
application of the FERC rules  detailed here.  Senator Therriault                                                               
indicated the  independents' success, through  robust exploration                                                               
and unfettered access  to the means to ship gas  to market, would                                                               
be  good  for the  state.    Noting  he'd  asked Mr.  Harper  and                                                               
Mr. Shepler to attend  today, he agreed with  Senator Ben Stevens                                                               
that it would be good to have something submitted in writing.                                                                   
                                                                                                                                
3:57:30 PM                                                                                                                    
MR.  CLARK, with  regard to  the contract,  reported there  was a                                                               
recent full-day  discussion at  the Resource  Development Council                                                               
(RDC)  that representatives  from Anadarko  and Tesoro  attended.                                                               
Two issues  raised are relevant to  Senator Therriault's concern.                                                               
One involves  Article 8.7, state-sponsored access  for expansion,                                                               
which  provides  opportunity  for   both  voluntary  expansion  -                                                               
covered in FERC regulations -  and mandatory expansion, unique to                                                               
the Alaska situation.  Anadarko had concerns about the state-                                                                   
sponsored opportunity, while recognizing  the intent to provide a                                                               
third means  of access pursuant to  dispute resolution provisions                                                               
of the contract.  In that  forum, and in other forums attended by                                                               
Anadarko, Mr. Clark said no  other issues were raised by Anadarko                                                               
regarding this issue.                                                                                                           
                                                                                                                                
He   explained  that,   second,   Tesoro   was  concerned   about                                                               
availability  of access  prior  to the  open  season.   Mr. Clark                                                               
noted the  state said several things  in terms of policies  to be                                                               
developed, which  can be  found in  the fiscal  interest finding;                                                               
these aren't in the contract because  how the state uses its gas,                                                               
taken in  kind, is  up to the  state and not  the producers.   He                                                               
indicated  the state,  as it  develops its  policies, intends  to                                                               
make state gas available for  in-state use, which is the in-state                                                               
portion  Tesoro is  concerned about;  it also  intends to  assist                                                               
anyone wanting to bid in  that first open season in understanding                                                               
the  rules if  there  is  in-state usage  for  which  there is  a                                                               
separate open season under FERC.                                                                                                
                                                                                                                                
He specified  that the  aforementioned concerns  are the  two the                                                               
state  has  heard up  to  this  point.   Mr. Clark  concluded  by                                                               
saying, "We are aggressively addressing  those concerns, and will                                                               
address any  others that  come up  as we  get to  the end  of the                                                               
public comment period."                                                                                                         
                                                                                                                                
SENATOR  THERRIAULT opined  that Mr.  Harper would  bring a  good                                                               
perspective  to the  discussion,  as former  head  of a  pipeline                                                               
operation,  and  could  speak  to  how  a  company  can  use  its                                                               
influence, for example.                                                                                                         
                                                                                                                                
4:01:46 PM                                                                                                                    
SENATOR  BEN STEVENS  returned to  earlier  discussion and  asked                                                               
Mr. Loeffler:  Do  the rates submitted by the pipeline  in a pre-                                                               
subscription period  have to be  approved by  FERC?  And  if FERC                                                               
does  an analysis  of  the  applied-for rate  and  says it  isn't                                                               
adequately developed, can it say to go back and change it?                                                                      
                                                                                                                                
MR. LOEFFLER replied  it's more complicated than that.   The open                                                               
season  rates  that   are  offered  are  subject  to   a  lot  of                                                               
conditions, and the rates proposed  with the application ought to                                                               
be consistent  with the successful bids  in the open season.   He                                                               
said FERC really  reviews the rates in  the application, although                                                               
it  has  the  power,  to   his  belief,  under  the  open  season                                                               
regulations, to  look at the proposed  rates that are put  in the                                                               
open  season notice.   He  added that  this was  untested ground,                                                               
from his experience, and he wasn't sure.                                                                                        
                                                                                                                                
SENATOR BEN STEVENS  clarified his point:   The applied-for rates                                                               
must be approved by FERC.   They must be legitimate and detailed,                                                               
and must meet criteria on how the rates are determined.                                                                         
                                                                                                                                
MR. LOEFFLER affirmed  that, but explained that  when FERC grants                                                               
an application for  a new pipeline usually there  is a settlement                                                               
with FERC  staff that  requires the  pipeline to  come in  with a                                                               
rate  case within  three years.   The  Section 7  rates that  are                                                               
approved are "public  interest" rates, rather than  the "just and                                                               
reasonable" rates  under Section 4  or 5.   As general  law, FERC                                                               
approves  the project,  grants the  certificate and  approves the                                                               
rates initially,  but the pipeline  must come back with  the rate                                                               
case  - that  is the  usual compromise,  he said  - within  three                                                               
years of  the startup  of operations, to  see how  experience has                                                               
affected those rates.                                                                                                           
                                                                                                                                
CHAIR SEEKINS surmised FERC looks  to see whether those rates are                                                               
in the best public interest.                                                                                                    
                                                                                                                                
MR.  LOEFFLER  answered  that  it   starts  out  "in  the  public                                                               
interest,"  but  "just  and reasonable"  is  a  higher  standard.                                                               
There is a lot of scrutiny.                                                                                                     
                                                                                                                                
CHAIR  SEEKINS invited  Donald  Shepler and  Rick  Harper to  the                                                               
witness table.                                                                                                                  
                                                                                                                                
4:05:57 PM                                                                                                                    
^Donald   Shepler,   Greenberg   Traurig,   Consultant   to   the                                                               
Legislature                                                                                                                     
DONALD  SHEPLER,  Greenberg  Traurig,   LLP,  Consultant  to  the                                                               
Legislature, explained  that he  is an attorney  from Washington,                                                               
D.C., who represented the Legislative  Budget and Audit Committee                                                               
in the FERC  proceedings that gave rise to  the regulations being                                                               
discussed  today.   Speaking  in  favor  of addressing  expansion                                                               
issues  in the  contract,  he  told members  that,  with all  due                                                               
respect to  Mr. Loeffler, he believed  the problem to  be further                                                               
down the road than suggested.                                                                                                   
                                                                                                                                
He proposed thinking of basin  control as exercising control over                                                               
this   essential  pipeline   facility  so   as  to   disadvantage                                                               
competitors in  producing natural  gas on  the North  Slope; this                                                               
could include trying to drive  competitors out of the business or                                                               
acquiring a competitor's  leases over time.  After  a pipeline is                                                               
built, the  risk is  that owners will  engage in  practices which                                                               
make it  difficult to obtain access,  or will delay or  refuse to                                                               
engage in expansion; thus in  later years producers would have no                                                               
place to take their production.                                                                                                 
                                                                                                                                
He asked to put this in writing  at a later date, as requested by                                                               
Senator  Ben  Stevens and  seconded  by  Senator Therriault,  but                                                               
offered an  oral summary.   Mr. Shepler agreed that in  the 1970s                                                               
there was a prohibition of  producer ownership of any interest in                                                               
the  pipeline;  this  was  waived  in the  1980s,  but  with  the                                                               
condition  that  there  be  no  risk  of  basin  control  by  any                                                               
producer-owners with  a stake  in the pipeline.   That  was under                                                               
the guise of the 1977 statute.                                                                                                  
                                                                                                                                
He said  now, in addition  to the  2004 statute, there  is FERC's                                                               
reaction  to the  January 2005  letter from  Representative Ethan                                                               
Berkowitz to  the chairman,  asking about the  status of  the 25-                                                               
year-old prohibition and waiver;  the chairman had responded that                                                               
this will be addressed by FERC  when it issues its orders in this                                                               
proceeding.  Mr. Shepler  made the point that the  issue of basin                                                               
control, in one form or another, goes back 30 years.                                                                            
                                                                                                                                
He agreed  FERC extensively regulates the  gas-pipeline business,                                                               
as summarized  by Mr. Loeffler,  and has regulations  specific to                                                               
the  Alaska pipeline.   Mr.  Shepler pointed  out, however,  that                                                               
FERC  is  far  away;  its proceedings  are  expensive  and  time-                                                               
consuming;   and  the   final   outcome   is  always   uncertain.                                                               
Therefore,  he suggested  the simpler  fix to  the risk  of basin                                                               
control is to address it in the contract now under negotiation.                                                                 
                                                                                                                                
He proposed  that the state  negotiate firm,  binding commitments                                                               
with  the  producers  that voluntary  expansions  will  occur  in                                                               
commercially   reasonable    circumstances,   in   "engineeringly                                                               
reasonable increments  of capacity," with rates  that accommodate                                                               
the  FERC presumption  of rolled-in  pricing.   Thus  Mr. Shepler                                                               
said  future explorers,  in later  years, would  know they  could                                                               
gain  access  to  the  pipeline   under  reasonable  terms,  with                                                               
reasonable, nondiscriminatory  rates that  don't put  100 percent                                                               
of the burden of  expanding the pipeline - once it  gets to be an                                                               
expensive expansion - on newcomers.                                                                                             
                                                                                                                                
He suggested  dealing with  this in  the negotiation  phase would                                                               
put the  state in the  best position.   It could take  control of                                                               
its  own  destiny,  rather  than   relying  on  the  vagaries  of                                                               
expensive  and  lengthy FERC  proceedings  where  the outcome  is                                                               
uncertain.   Although FERC  is a  powerful agency  with extensive                                                               
tools  and  regulations, Mr.  Shepler  pointed  out that  such  a                                                               
contractual  provision could  ensure  expansion under  reasonable                                                               
terms  through the  life of  the pipeline,  and FERC  regulations                                                               
would exist  as backup.  He  reiterated his desire to  flesh this                                                               
out in writing.                                                                                                                 
                                                                                                                                
4:14:05 PM                                                                                                                    
SENATOR  BEN  STEVENS  suggested  "future access"  is  perhaps  a                                                               
better term  than "basin  control" for the  issue.   He requested                                                               
that  Mr. Shepler's  written comments  include that  the designed                                                               
pipe would have cheap expansion built  in.  He said proven gas is                                                               
only  two-thirds of  what is  needed  at 4.2  billion cubic  feet                                                               
(Bcf) a  day, at this point.   He asked to  see justification for                                                               
concern  about future  expansion above  6.0 Bcf,  since there  is                                                               
about a  40 percent expansion  capacity already.  He  opined that                                                               
this allows for "exploration capacity" as well.                                                                                 
                                                                                                                                
He  expressed  appreciation  for the  deliberations  behind  FERC                                                               
decisions and  their longevity,  but pointed  out FERC  was given                                                               
direction by Congress  in 2004, came up with  two major decisions                                                               
and is about ready to make  a third and has submitted two reports                                                               
to Congress on the Alaska  natural gas pipeline.  Yet legislators                                                               
are still struggling  through their own first  decision.  Senator                                                               
Ben  Stevens commented,  "We may  be the  more expensive  and the                                                               
more uncertain  body in  determination of  what's the  outcome of                                                               
this process, versus the FERC."                                                                                                 
                                                                                                                                
4:18:04 PM                                                                                                                    
MR. SHEPLER responded to Senator  Ben Stevens' first comment.  He                                                               
said during last  week's conversation he was pleased  to hear the                                                               
project characterized as a 5.9  Bcf pipeline, starting at 4.2 but                                                               
anticipated  to expand  to  5.9 or  6.0.   He  related his  first                                                               
reaction:  If  that's the intention of all the  parties, then the                                                               
adage "trust  but verify" from  former President  Reagan suggests                                                               
putting it in the contract.                                                                                                     
                                                                                                                                
He  also  pointed  out  differences  between  deliverability  and                                                               
reserves.      Mr.   Shepler  explained   that   the   level   of                                                               
deliverability -  how much gas  can come out  of the ground  on a                                                               
given day -  is used to size a pipeline,  but reserves are relied                                                               
upon for  a pipeline's longevity.   The problem now  is reserves.                                                               
Deliverability, however,  is an  issue down the  road as  new gas                                                               
wells are drilled, perhaps adding  to the reserves, but adding to                                                               
the gas available to flow on a day-to-day basis.                                                                                
                                                                                                                                
He said  the expansion issue  doesn't need  to wait for  an extra                                                               
15 trillion  cubic feet  (Tcf) to  be discovered;  it can  appear                                                               
now,  with  the  next  well  drilled.    Mr.  Shepler  also  said                                                               
expandability  -  up  to  6.0  Bcf and  beyond,  to  the  maximum                                                               
capability of the pipeline - is  in the long-term interest of the                                                               
state, a crown  jewel the state should capture  to guarantee that                                                               
those  expansions  take place.    He  opined  that the  state  is                                                               
probably  better off  fixing the  problem now,  in the  contract,                                                               
rather than relying on either  the lengthy Article 8.7 process or                                                               
FERC's regulatory process.                                                                                                      
                                                                                                                                
^Rick  Harper,  Econ  One  Research,   Inc.,  Consultant  to  the                                                               
Legislature                                                                                                                     
RICK  HARPER,   Econ  One  Research,  Inc.,   Consultant  to  the                                                               
Legislature, agreed  with Mr.  Shepler and  told members  his own                                                               
comments   would   preface   testimony   anticipated   from   the                                                               
independents,  the real  voice in  this issue,  whom he'd  talked                                                               
with but wouldn't speak for.                                                                                                    
                                                                                                                                
4:22:39 PM                                                                                                                    
MR.   HARPER  concurred   with  Mr. Loeffler's   testimony  today                                                               
relating to  FERC, particularly commending  the job he'd  done of                                                               
addressing  concerns  relating  to marketing  affiliates  and  so                                                               
forth.   Mr. Harper  pointed out that  natural gas  pipelines are                                                               
contract  carriers, for-profit  enterprises  that  are granted  a                                                               
great  deal of  latitude  in the  operation  of their  businesses                                                               
through FERC  and state regulation.   They  pursue self-interests                                                               
with great vigor, although there are checks and balances.                                                                       
                                                                                                                                
He said the  business model emerging here is  different from what                                                               
is seen elsewhere in North America;  he has no quarrel with that,                                                               
but it  raises issues  and concerns.   Mr. Harper  explained that                                                               
pipelines must  construct tariffs, rate structures  and expansion                                                               
policies  on a  case-by-case basis.    Noting there  is a  reason                                                               
companies want to own pipelines,  he provided an analogy of being                                                               
a member of an important  committee or chairing such a committee,                                                               
which gives standing and a seat at the table.                                                                                   
                                                                                                                                
He  said  FERC  is  an  extremely effective  body,  with  a  rich                                                               
history.  But this current  situation hasn't been seen before, at                                                               
least not for a  long time.  Producers want to  own a pipeline as                                                               
well as  subscribe to the  capacity.  Because they  have discrete                                                               
geographic positions at this time,  and because others eventually                                                               
will be  involved and will  have different  positions, Mr. Harper                                                               
suggested  the  need   to  be  careful.     While  agreeing  with                                                               
Mr. Shepler to a great extent,  Mr. Harper surmised much of their                                                               
concern probably arose  because the contract itself  is silent in                                                               
a number of key areas.                                                                                                          
                                                                                                                                
He highlighted  crucial elements  that should  be known  from the                                                               
start:   the size of the  pipeline; how much compression  will be                                                               
in  place from  the beginning;  how expansions  will occur,  on a                                                               
voluntary  basis  and  otherwise;  and  that  there  will  be  an                                                               
expansion-friendly  system.    Mr. Harper observed  that  nothing                                                               
precludes a change in the configuration  of this system.  Thus it                                                               
is important to  know these elements from the  beginning, to know                                                               
initial expansions will be inexpensive  and friendly to those who                                                               
don't currently  have a  seat at  the table.   He  listed unknown                                                               
factors:  the  tariff, which he said could be  known; the capital                                                               
structure;  and   the  debt-equity  ratio,  which   will  have  a                                                               
significant impact on the tariff.                                                                                               
                                                                                                                                
He  explained  that  normally  an  independent  pipeline  company                                                               
without any  interest in the  production doesn't have  a position                                                               
in consumption  like ownership of  power generation,  and doesn't                                                               
have  an  extensive  marketing affiliate;  one  can  presume  the                                                               
interests align in  a certain way.  However, Mr.  Harper said, he                                                               
doesn't come to  that same conclusion about  large producers such                                                               
as ExxonMobil  and BP.   They aren't  precluded from  owning this                                                               
pipeline,  which  he  believes   is  fine.    Nonetheless,  their                                                               
interests  are  different  from,   and  broader  than,  those  of                                                               
independent pipeline companies.                                                                                                 
                                                                                                                                
4:28:21 PM                                                                                                                    
MR. HARPER  continued, saying  one would presume  it would  be in                                                               
their interest  to have a  high tariff,  but they might  not seek                                                               
that.   This  agreement has  gaps and  doesn't reveal  the tariff                                                               
structure  or the  terms of  participation in  firm capacity,  at                                                               
least  as recommended  to FERC.    He suggested  those should  be                                                               
included or,  if not, there  should be an understanding  that the                                                               
risk exists for  the state, and that the  disadvantaged ones will                                                               
be future explorers and developers.                                                                                             
                                                                                                                                
He  noted  there is  a  reason  why a  producer  wants  to be  an                                                               
operator in  a field,  getting back to  his earlier  analogy, and                                                               
why  a  particular  pipeline  owner might  want  to  operate  the                                                               
pipeline.   There are  distinct advantages.   While  that's okay,                                                               
Mr. Harper  recommended erring  on the  side of  caution, putting                                                               
the "belt and suspenders" in the  agreement in those key areas of                                                               
tariffs and expansion.                                                                                                          
                                                                                                                                
He  explained  that  relying  on  FERC  processes  can  be  time-                                                               
consuming and cumbersome.   Characterizing time as  both a friend                                                               
and a  weapon, Mr. Harper  pointed out there  could be  a company                                                               
that discovers  a new field and  has 3 Tcf  of gas.  If  there is                                                               
requirement to  sign up  for 30  years for  firm capacity,  or to                                                               
agree to terms  that don't fit that company's  business regimen -                                                               
and  if  the  company  running the  pipeline  isn't  amenable  to                                                               
changes -  then there are  remedies, yes, but they  are expensive                                                               
and time-consuming.   Thus he indicated it  would be advantageous                                                               
to  fill  the  voids  in  the  agreement  now,  as  mentioned  by                                                               
Mr. Shepler, to the extent reasonable.   Mr. Harper requested the                                                               
right to submit a written document to add to his comments.                                                                      
                                                                                                                                
SENATOR  THERRIAULT  suggested that  as  a  past chief  executive                                                               
officer  of  a  pipeline  company, Mr.  Harper  could  provide  a                                                               
glimpse into  how things really operate,  with concrete examples.                                                               
He noted there  is a spirited debate going on  now about who will                                                               
be the operator, a position that carries advantages.                                                                            
                                                                                                                                
4:32:31 PM                                                                                                                    
CHAIR SEEKINS  observed that the  government process is  slow and                                                               
cumbersome  compared with  rapid  decisions possible  in a  small                                                               
business.   He  offered  his  experience that  all  parties in  a                                                               
business  relationship, even  the independent  companies in  this                                                               
situation,  are motivated  by self-interest,  although they  must                                                               
operate  within the  boundaries of  the regulatory  process.   He                                                               
opined that the pipeline is  fairly low-risk, whereas getting the                                                               
gas to  market carries  higher risk;  he surmised  that balancing                                                               
those is one motivation.   Chair Seekins also said he understands                                                               
the forces  in the business process,  but there is a  boundary of                                                               
reasonableness and regulation, which is  where he sometimes has a                                                               
problem.                                                                                                                        
                                                                                                                                
He  announced he  would ask  someone from  FERC to  speak to  the                                                               
committee on  this issue, though  not because he  was discounting                                                               
the   testimony  from   the  FERC   attorneys.     Chair  Seekins                                                               
acknowledged  the   varying  interests   of  the   producers  and                                                               
independents, saying  that is business  - not bad,  but sometimes                                                               
tough.   He highlighted the  state's need to ensure  that whoever                                                               
finds gas has a  way to get it to market so the  state can tax it                                                               
and get its  royalty, but without somehow degrading  the value of                                                               
the  gas  before  it  is  taxed.    Chair  Seekins  concluded  by                                                               
emphasizing the need to balance  these interests, expressing hope                                                               
that this  is what the  administration is  trying to do  with the                                                               
contract as well.                                                                                                               
                                                                                                                                
MR. CLARK responded, "We are  trying to balance these things up."                                                               
He said it would be helpful  when the written comments come in to                                                               
have more  specificity.  With  regard to looking at  Article 8.7,                                                               
he indicated  the administration  is doing that.   He  also noted                                                               
Anadarko has raised  the issue of how to get  ready for the first                                                               
open season,  and that the  administration's response is  that it                                                               
will provide some help.                                                                                                         
                                                                                                                                
4:38:18 PM                                                                                                                    
MR.  CLARK continued,  saying he'd  also heard  today that  there                                                               
should be a  "tariff target" in the documents, and  a bit more on                                                               
debt-equity structure.   In addition,  rolled-in rates  should be                                                               
covered, up  to the  amount of  the expansion.   He noted  he was                                                               
listing  the  administration's  items  for  discussion  with  the                                                               
producers.   He said it  would be helpful  if that list  could be                                                               
expanded   beyond   the   more  general   topics,   because   the                                                               
administration  is  trying  to   find  ways  to  address  access,                                                               
expansion and other highly important issues for the state.                                                                      
                                                                                                                                
CHAIR SEEKINS remarked  that he doesn't think it is  wrong to ask                                                               
the state  to try  to intervene in  some of  those relationships;                                                               
otherwise, he  himself wouldn't have been  before the legislature                                                               
previously  asking  for  franchise  laws to  be  passed  to  help                                                               
protect him from one of the largest corporations in the world.                                                                  
                                                                                                                                
MR.  CLARK said  that  was  the purpose  of  Article  8.7 in  the                                                               
contract.   He  indicated the  administration had  asked Anadarko                                                               
how that  might be  changed, and  he said there  are a  number of                                                               
requirements  in that  article, which  is designed  to provide  a                                                               
contractual way to  speed the process before FERC;  it deals with                                                               
some of the issues raised by Mr. Shepler and Mr. Harper.                                                                        
                                                                                                                                
4:39:48 PM                                                                                                                    
CHAIR  SEEKINS expressed  hope that  Anadarko would  be ready  to                                                               
testify soon on these matters.                                                                                                  
                                                                                                                                
MR. LOEFFLER  added to Mr.  Clark's comments, saying a  number of                                                               
issues  such  as voluntary  expansion  and  a "capital  structure                                                               
target" are  addressed in the  LLC, which  admittedly Mr. Shepler                                                               
and Mr. Harper hadn't seen.  He said more is coming.                                                                            
                                                                                                                                
CHAIR  SEEKINS expressed  appreciation  to  the participants  and                                                               
indicated SB 3002  would be discussed specifically  tomorrow.  He                                                               
closed the hearing, with both SB 3001 and SB 3002 held over.                                                                    
                                                                                                                                
There being  no further  business to  come before  the committee,                                                               
Chair Seekins  adjourned the Senate Special  Committee on Natural                                                               
Gas Development meeting at 4:42:35 PM.                                                                                        

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