Legislature(2007 - 2008)BUTROVICH 205
03/30/2007 01:30 PM Senate RESOURCES
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| += | SB 104 | TELECONFERENCED | |
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ALASKA STATE LEGISLATURE
SENATE RESOURCES STANDING COMMITTEE
March 30, 2007
1:45 p.m.
MEMBERS PRESENT
Senator Charlie Huggins, Chair
Senator Bert Stedman, Vice Chair
Senator Lyda Green
Senator Gary Stevens
Senator Lesil McGuire
Senator Bill Wielechowski
Senator Thomas Wagoner
MEMBERS ABSENT
All members present
COMMITTEE CALENDAR
SENATE BILL NO. 104
"An Act relating to the Alaska Gasline Inducement Act;
establishing the Alaska Gasline Inducement Act matching
contribution fund; providing for an Alaska Gasline Inducement
Act coordinator; making conforming amendments; and providing for
an effective date."
HEARD AND HELD
PREVIOUS COMMITTEE ACTION
BILL: SB 104
SHORT TITLE: NATURAL GAS PIPELINE PROJECT
SPONSOR(S): RULES BY REQUEST OF THE GOVERNOR
03/05/07 (S) READ THE FIRST TIME - REFERRALS
03/05/07 (S) RES, JUD, FIN
03/14/07 (S) RES AT 3:30 PM BUTROVICH 205
03/14/07 (S) Heard & Held
03/14/07 (S) MINUTE(RES)
03/16/07 (S) RES AT 3:30 PM BUTROVICH 205
03/16/07 (S) Heard & Held
03/16/07 (S) MINUTE(RES)
03/19/07 (S) RES AT 3:30 PM BUTROVICH 205
03/19/07 (S) Heard & Held
03/19/07 (S) MINUTE(RES)
03/21/07 (S) RES AT 3:30 PM SENATE FINANCE 532
03/21/07 (S) Heard & Held
03/21/07 (S) MINUTE(RES)
03/21/07 (S) RES AT 5:30 PM SENATE FINANCE 532
03/21/07 (S) Heard & Held
03/21/07 (S) MINUTE(RES)
03/22/07 (S) RES AT 4:15 PM FAHRENKAMP 203
03/22/07 (S) Heard & Held
03/22/07 (S) MINUTE(RES)
03/23/07 (S) RES AT 1:30 PM BUTROVICH 205
03/23/07 (S) Heard & Held
03/23/07 (S) MINUTE(RES)
03/24/07 (S) RES AT 1:00 PM SENATE FINANCE 532
03/24/07 (S) Heard & Held
03/24/07 (S) MINUTE(RES)
03/24/07 (S) RES AT 3:00 PM SENATE FINANCE 532
03/24/07 (S) Heard & Held
03/24/07 (S) MINUTE(RES)
03/26/07 (S) RES AT 3:30 PM BUTROVICH 205
03/26/07 (S) Heard & Held
03/26/07 (S) MINUTE(RES)
03/27/07 (S) RES AT 3:00 PM BUTROVICH 205
03/27/07 (S) Heard & Held
03/27/07 (S) MINUTE(RES)
03/28/07 (S) RES AT 3:30 PM BUTROVICH 205
03/28/07 (S) Heard & Held
03/28/07 (S) MINUTE(RES)
03/29/07 (S) RES AT 5:00 PM BUTROVICH 205
03/29/07 (S) Heard & Held
03/29/07 (S) MINUTE(RES)
03/30/07 (S) RES AT 1:30 PM BUTROVICH 205
WITNESS REGISTER
COMMISSIONER PATRICK GALVIN
Department of Revenue (DOR)
Juneau AK
POSITION STATEMENT: Commented on SB 104.
MARCIA DAVIS, Deputy Commissioner
Department of Revenue (DOR)
Juneau AK
POSITION STATEMENT: Commented on SB 104.
KEVIN BANKS, Acting Director
Division of Oil and Gas
Department of Natural Resources (DNR)
Anchorage AK
POSITION STATEMENT: Commented on SB 104.
MARTY RUTHERFORD, Acting Commissioner
Department of Natural Resources (DNR)
Juneau AK
POSITION STATEMENT: Commented on SB 104.
ACTION NARRATIVE
CHAIR CHARLIE HUGGINS called the Senate Resources Standing
Committee meeting to order at 1:45:05 PM. All members were
present at the call to order.
SB 104-NATURAL GAS PIPELINE PROJECT
CHAIR HUGGINS announced SB 104 to be up for consideration and
members of the administration would be testifying and would
begin on page 8, Section 43.90.150 of the original bill.
1:47:36 PM
COMMISSIONER PATRICK GALVIN, Department of Revenue (DOR), and
Deputy Commissioner Marcia Davis introduced themselves.
COMMISSIONER GALVIN explained that Section 150 is about the
initial application review time where the commissioners
determine if additional information is needed. It ties in with
the next section on page 9 dealing with criteria information and
the use of confidential information as part of the application.
He then let Ms. Davis comment on their ideas about dealing with
confidential information.
MARCIA DAVIS, Deputy Commissioner, Department of Natural
Resources (DNR), explained that they tried to balance what
confidential information the state needs to thoroughly evaluate
the merits of an application while not placing them at a
competitive disadvantage. Industry is very guarded about how it
structures rates among other items although that information
eventually comes out once a pipeline is successful in being
produced, but until that happens they are all competing with one
another to think outside the box and come up with novel ways of
doing that. That is balanced against that is the desire of the
public to want to know the information and to "see the full
goods" on the successful applicant.
1:51:42 PM
MS. DAVIS said that language was added in the CS that says the
information in an application will remain confidential and
proprietary unless the applicant is a successful licensee.
However, all the information from the successful licensee will
come out including the confidential and proprietary information
under the theory that you beat out the competition and now let
the people see what you are doing.
If the information is submitted and the commissioners decide it
is not a trade secret or proprietary, the applicants will have a
short period of time in which they can decide to pull it back
and not rely on it in their application or decide that it is
important enough to waive whatever detriment would be caused by
its release. The commissioners would not protect the information
from disclosure.
MS. DAVIS said a provision was added that says if an
unsuccessful applicant wants to challenge the award, its
application will be opened up to the public including its
confidential and proprietary information. So the challenged
award would not be at a disadvantage.
1:53:24 PM
She said the department would like to add a definition of what
is proprietary and confidential, but they don't have it at this
time. She said they are mindful that the legislative process is
important and people are looking at the timeliness and ability
to evaluate what the commissioners are evaluating. So the
department is open to suggested language about legislative
members or their delegates signing confidentiality agreements
that would let them into the inner circle that would allow them
to access applicant information that has been designated
confidential and trade secret subject to protection under the
confidentiality agreement.
1:54:28 PM
SENATOR STEVENS said he could see some concerns on the industry
side from a challenger having to release confidential
information.
CHAIR HUGGINS said he could a scenario where a challenger could
limit the provisions they are challenging.
MS. DAVIS said the department didn't want to get too complicated
in terms of confidentiality. They aimed for simplicity and
clarity.
CHAIR HUGGINS said he assumed that proprietary information would
be withheld, but the remainder of the application would be
public.
MS. DAVIS replied that was correct. In addition, the department
is recommending that the summary of the confidential and
proprietary information be made by the applicant so there is no
question about the fairness of how it was written.
COMMISSIONER GALVIN said this idea transitions into the next
section which is the evaluation criteria. He said deciding which
application is better than another is an integrated decision.
Any aspect of it that would be challenged would ultimately
affect the whole.
1:57:25 PM
MS. DAVIS said eight factors in the current bill's application
evaluation criteria struck people as being too broad and not
very instructive of the actual process that the commissioners
would use. So, she asked her technical people to describe what
they would mechanically do with the factors and what emerged
very clearly was identified as a net present value (NPV)
meaning the income stream that the state would receive from a
proposed project. The factors included in the NPV would be the
timing of the project and how quickly it would be delivered (to
get the net present value factor), the volume of the gas (the
design criteria), and the destination value minus the cost to
deliver the gas (essentially a netback, although some people
might call it a wellhead value).
The likelihood of success or probability would also be
considered. In other words, one project could yield $500 billion
to the state and have a 10 percent probability. So, they must
weigh and decide what is in the state's best interest.
1:59:36 PM
MS. DAVIS explained that they took the application criteria and
organized it around those two factors. So their recommended CS
language would be something that says the applications would be
ranked (ordinal) based "according to the net present value to
the state of its anticipated cash flow from the applicant's
project weighted by the project's likelihood of success." The
factors relating to the net present value are listed in (B)(1)
and the factors relating to probability of success are listed in
(B)(2).
2:00:07 PM
SENATOR WIELECHOWSKI asked if enacting more precise evaluation
criteria is probably enhancing the state's likelihood of getting
sued by an unsuccessful applicant.
MS. DAVIS replied that was considered and she believed that
there are positives and negatives that balance each other out.
The factor of having the net present value, which the department
would calculate anyway, is more clearly articulated in their
recommendation and it will be much clearer to track and easier
to verify. The probability factors are still there, but they
have been identified as a weighting, not a precise mathematical
formula. This gives the commissioners some discretion.
2:01:36 PM
SENATOR STEVENS asked how one goes about deciding the likelihood
of success. In the end, isn't it sort of a gut feeling?
COMMISSIONER GALVIN agreed and clarified that they don't
anticipate assigning percentages to the likelihood of success,
but they will have some form of number system that can be
calculated given variables to get a sense of a relationship
between two projects in terms of their value. When they get to
the likelihood of success piece, they would then have to
determine if the difference between the two applicants in terms
of their relative likelihood of success is enough to change the
ranking of their values. He explained:
2:03:38 PM
It is a move towards something that creates a better
understanding of how we see the valuation actually
taking place. It gives both applicants and, I think,
the public an idea of how we're actually going to
evaluate these things against each other. It provides
an opportunity for everyone to see the more objective
numbers part of it and how that isn't the end result -
because it's the project that promises the world isn't
going to be the one that we want to necessarily go
with. And so the balance of that is we're also not
going to give anybody the impression that we can peg a
particular project and say you score a 30 percent on
likelihood of success and so your overall score is X-
value. It's strictly a comparison between the projects
that we get.
2:04:14 PM
SENATOR WIELECHOWSKI asked if the commissioners would be able to
use outside information that is not supplied to them.
MS. DAVIS replied yes, absolutely; the ability to determine the
state's netback value requires them to look at the project, what
its destination is and make the forecast of what they think the
market value of the gas will be at those points - so they can
calculate what the state's revenue ultimately could be from that
project.
SENATOR WIELECHOWSKI asked how they would evaluate a scenario,
for instance, where a pipeline company comes forward and doesn't
have the easements or permits to go through Canada, but they
think that they can get them, although others disagree. It's
basically one's word against another.
2:05:32 PM
COMMISSIONER GALVIN answered that in addition to the
department's ability to hire experts to do the quantitative
analysis, it would also need experts on the likelihood of
success. Senator Wielechowski hit on a big one - which is having
expertise on the Canadian evaluation of whether or not a
particular project can show they know how they are going to get
their authorizations and how much a particular delay in some
aspect of that is going to affect their overall work plan. The
department will make a number of other assumptions will with
regard to overcoming hurdles and other expertise will have to be
brought in to evaluate those. That is why other provisions allow
the department to do that without the formal RFT process.
2:07:01 PM
SENATOR STEVENS asked how the evaluation takes in cost overruns.
COMMISSIONER GALVIN replied the commissioners will look at the
track record component of an applicant. One aspect is if a
company can stay on-budget and another one is if the project is
feasible and within the parameters of industry norms. For
instance, will a new type of steel need to be developed creating
cost overruns or detract from the ability to bring the project
in as designed.
2:08:41 PM
MS. DAVIS added that this one criterion actually shows up in
both sides of the analysis. In the net present value piece, they
are mindful that pipeline companies can enter into negotiated
rates for commitments and assume the risk of cost overruns over
a certain threshold. So, to the extent a project does that, that
can be factored into the state's NPV model. The probabilities
and likelihood piece is the more subjective one.
2:09:21 PM
CHAIR HUGGINS asked (for a constituent) who would actually
choose the applicant.
MS. DAVIS said this question probably came from discussion in
this committee that two commissioners will choose the applicant
and it's the Governor's job to insure they don't disagree.
COMMISSIONER GALVIN added that the House Oil and Gas Committee
today injected the AGIA project coordinator as a third-party to
be a tie-breaker on selection of a project. Someone suggested
that would be the Governor since she is the one who hires the
two commissioners.
2:11:01 PM
COMMISSIONER GALVIN noted a valid observation that the sequence
of some of the sections may misrepresent what the actual process
is intended to be and having the evaluation criteria come before
the public notice and public comment period is one of those. So
he anticipated the opportunity to switch those around.
In the public notice provisions, he said the main thing is
reference to the confidential information and the need for a
summary submitted by the applicant to cover any information they
want to be held confidential so the public would at least be
aware that there is confidential information and what its nature
is.
CHAIR HUGGINS asked if he envisioned having a traveling road
show that would go to some demographic centers.
COMMISSIONER GALVIN replied they are not anticipating doing that
during those 60 days.
CHAIR HUGGINS encouraged them to consider that because of the
expectation has been created among communities and some
organizations.
2:13:35 PM
SENATOR STEDMAN went back to net present value calculations and
asked how they would handle delays in implementation of cash
flows - particularly in getting through a failed open season or
getting to an open season and then having to drive for the
certificate versus going to a binding open season fairly
quickly.
COMMISSIONER GALVIN replied that they are not assuming that
everything will go smoothly and basing the value on that, but
they would use some probabilistic aspect to the evaluation at
certain junctures and bring those back to the overall value for
that particular project. An element of judgment is also built
into the net present value calculation that is inherent in
trying to determine where the cash flows are going to come from
and what the likelihoods are of each aspect of it.
2:16:18 PM
MS. DAVIS addressed the open season question more specifically
and said based on testimony from pipeline companies and
producers it's very clear that AGIA is geared around having a
successful initial open season. That is why the resource
inducements are tied to it. Because of that bias, the evaluation
process stresses the amount of front-end work a company does
leading up to an open season and that will be part of weighting
the probability of success.
SENATOR STEDMAN assumed the highest net present value would be
given to the volume of gas being committed.
MS. DAVIS replied, "Exactly, sir."
CHAIR HUGGINS took the scenarios of a 20-inch line to Point
MacKenzie and the project that goes to Chicago through Canada
and asked how Point MacKenzie could ever compete against the
Canada route if the pipe carried 4.5 bcf/day.
MS. DAVIS replied that it would first appear that a 4.5 bcf/day
line to Chicago should be superior to a 20-inch line to Point
MacKenzie, but expert evaluation of the probability of success
as part of the NPV might find hang-ups - in the Canadian
processing, for instance. And Point MacKenzie might start up in
a year or two and that would also affect the NPV of the cash
stream to the state. This is how the different projects might
level out on paper.
CHAIR HUGGINS said an expansion would tilt a project radically
and asked if she has an estimate in mind for allocation of time
to evaluate an application.
COMMISSIONER GALVIN replied the close of the comment period is
at the middle of December and the decision will be made by the
end of January. If six different applications are fairly close
in terms of NPV, those judgments might take longer. All the
projects don't have to be scored. He said:
All we have to do is make a determination that given
the value and the likelihood of success, this one
clearly outshines these other two. That could be done
fairly quickly depending on the types of applications
that we get.
CHAIR HUGGINS asked how long it would take to evaluate just one
project if that's all they get.
COMMISSIONER GALVIN replied as long as it meets the "must haves"
they wouldn't go much further than that. The commissioners also
have an ultimate "out clause" that says even if an application
meets the evaluation criteria, the commissioners are not
obligated to give them a license - unless they determine that
giving it to them is in the state's best interest. He couldn't
give him a definite timeframe, but if an application is perfect
it could take a week to 10 days. If further valuations are
needed, it would take longer.
2:23:27 PM
COMMISSIONER GALVIN went to the legislative review process
described on page 10, line 7. It provides for a 30-day review
period in which the legislature can stop the commissioners'
decision. No changes are proposed at this time.
CHAIR HUGGINS noted that the legislature has had some
recommendations to change its role.
2:24:39 PM
MS. DAVIS went to Section 43.90.210 on page 11 that relates to
the requirements of the licensee to proceed forward when a FERC
or RCA certificate has been issued. There are three different
requirements. First they have to accept the certificate once it
has been achieved. However, criticisms have surfaced around this
language because the FERC will frequently attach conditions to a
certificate when it's issued and those sometimes may be viewed
by the pipeline company as onerous or in appropriate. The
conditions can be appealed and the FERC might modify or withdraw
those conditions. The commissioners understand that process and
they are not trying to force someone to have to take a
certificate against their will and give up their legal rights to
do whatever they can to get it shaped the way they want it
shaped. So, language has been suggested that would qualify the
obligation to accept that certificate to the point in time when
all rights of appeal relating to the certificate have expired.
2:25:58 PM
SENATOR WAGONER asked if the companies can book the gas reserves
once the certificate from FERC is granted. He asked if the
certificate is appealed, does that keep the applicant from
booking those reserves.
COMMISSIONER GALVIN replied that he is not familiar with those
accounting principles, but he could get an answer. He thought it
would depend on whether they have committed their gas to the
project and the nature of how that links in the gas being
already on a line that is set to go. He went back to the
question of how long it would take to evaluate one good
application. He said they would go through the public comment
period with just that one, so the department could be ready near
the close of the 60-day comment period.
2:27:50 PM
SENATOR STEDMAN asked Ms. Davis to elaborate on (c) of Section
43.90.210 on page 11. His concern is that they are trying to get
to first gas without income or sales tax.
2:28:22 PM
MS. DAVIS explained that there are three areas to Section 210
and the first one is the obligation to accept. The other two,
(b) and (c) relate to once a licensee has the certificate, when
they are obligated as a company or consortium to sanction the
project. "Sanction" has been defined in the bill as "the
commitment of $1 billion in contractual commitments to begin
building the pipeline." Subparagraph (b) relates to waiting one
year if they have credit support and (c) relates to waiting five
years after that point if they do not have credit support.
SENATOR STEDMAN asked her to explain the difference between
those two.
COMMISSIONER GALVIN answered that credit support in the context
of previous testimony - is no customers, no credit, no pipeline.
Their concept of credit support is a combination of customers'
credit - if you get to the point of FERC certification, receive
it and either you have the credit and financing ready to build
the line and can begin or you're still in the process of putting
that together - either because you have not had enough
transportation commitments through the open seasons thus far or
those haven't translated into the financing an applicant was
hoping to arrange or some combination of the two.
They are trying to recognize if a party ends up at that place
and needs to put together its package to get financing, the
state has to provide a reasonable period of time in which to do
it. What is a reasonable period of time is subject to debate and
if the state wants to stick with the project, it wants to give
the party enough time to pull it together. His primary concern
with that period of time is to ensure that parties beginning
this road with the state feel confident that they have the
maximum opportunity to have success at the end. Shrinking that
time, although it may be in the state's interest, might take
away the comfort an applicant may have that they will have the
opportunity to make good and this might end up closing out
potential applicants from participating in the process.
2:32:08 PM
SENATOR STEDMAN said he was concerned that the state's timeframe
might get stretched out before first gas and maybe it should
consider having a shorter timeframe for the review so it
wouldn't be stuck with going through a possible court process
and appeal process before being able to get another pipeline in
place.
MS. DAVIS replied that she found MidAmerican's testimony
yesterday very instructive in understanding how pipeline
companies look at their investment and how they require a
certain degree of fiscal stability for it. Thinking through that
scenario where the state would find itself with a licensee that
doesn't have credit support by the time it has a FERC
certificate in hand can happen in only two instances. The most
obvious one is going to be if the project, notwithstanding their
efforts at establishing a good credible project in getting FERC
certification, is clearly not economic enough for shippers to
want to ship and commit their gas. In that situation, the
abandonment provision allows the state an out. If the project is
economic, the state wouldn't be in that situation. The licensee
would have the commitments and then it has one year to sanction
the project. She couldn't really identify where the state would
be stuck.
COMMISSIONER GALVIN elaborated that they recognized at the
outset that the state has to set the timeline, because it has
the imperative to get this project going. The department's
slides have shown how the state loses money each time the
project slips. Once a party has put its hundreds of millions of
dollars into this project, then the state doesn't need to be
setting the timeline with artificial motivation any more; the
party's money creates an imperative all its own that is much
more pressure than the state could exert.
2:35:56 PM
CHAIR HUGGINS shared Senator Stedman's concern with the
timeframe and said that he has been in the Senate for two and
half years - half of this provision; and five years is a long
time.
COMMISSIONER GALVIN responded that it's important to recognize
that the state isn't saying it wants the company to take five
years. If they are at that point in the process, they are not
going to want to take more time than they absolutely have to in
order to make this project work. The state wants to protect
itself from being in a bad situation and so AGIA has those
provisions. The department is concerned that creating too short
of a timeframe would create a lack of confidence among the
parties they are trying to attract to this process.
2:38:18 PM
CHAIR HUGGINS said the second half of the chill factor is that
in that same two and a half years, the state spent a lot of
money and it has two and half more years to go to spend a whole
bunch more.
2:38:43 PM
SENATOR WIELECHOWSKI asked for an example of how a licensee
would get in the situation of not having sufficient credit
support at this time - such that the five-year provision (c)
would kick in.
COMMISSIONER GALVIN replied that MidAmerican has stated it
believes the project is economic and it will show that it's
economic by putting out an offer for someone to commit gas to
the project. They assume that they will get the commitments if
the market works and the players make rational decisions. But,
what if they don't?
SENATOR WIELECHOWSKI asked if (c) kicks in with an unsuccessful
open season.
COMMISSIONER GALVIN responded, "If you have an unsuccessful
initial open season, then you go to the FERC certificate and
your open season at that point is still unsuccessful."
SENATOR WIELECHOWSKI said at that point, you get to the circular
argument which is if it's economic, we won't have a failed open
season because rational players in the game would participate
and if they don't, that raises all kinds of questions as to why
they didn't participate.
2:40:34 PM
MS. DAVIS added that factors can affect the economics of a
project that could be temporal especially with gas prices being
volatile, but trending up. The goddess of timing might not smile
on this project if the open season happens at a time of low
prices. Yet it's fully anticipated that within a year, the
excess supply will be sucked up, demand will continue and the
pricing will go up. MidAmerican said it had six projects on the
shelf waiting the economics to turn around. This tells her they
work the projects in advance, anticipate the market, and work
close on the margin. When they get to that point, they wait for
optimum timing and they spring. Her sense is that they need this
flexibility.
SENATOR WIELECHOWSKI asked if the state is forcing someone in
paragraph (b) that does have sufficient credit support when the
market has a downturn to go ahead with the project. In that
case, even though there could be an up-tick, he asked if the
state could get out on the abandonment clause.
COMMISSIONER GALVIN answered that the inherent assumption there
is to get the credit support you have to show the project is
economic. If the market changes to destroy the economics, you
risk losing that credit support. The state puts the money in and
the project gets that far, so there is the choice at that point
of abandoning the project or going forward with it. They would
expect a company with credit support and access to the money to
begin to build within a year or the state could abandon it.
2:42:53 PM
SENATOR WIELECHOWSKI asked what they consider the likelihood is
that this project that has the stamp of approval of the State of
Alaska would not be looked upon as a favorable project by
investors.
COMMISSIONER GALVIN said they didn't see it as very likely, but
they have to recognize that the state needs to have an out.
2:44:45 PM
SENATOR MCGUIRE said she thought the provisions work in concert.
But she understood that he said if the licensee has the credit
support sufficient to finance the construction that would mean
by definition that the project was economically viable, but she
didn't think he meant to say that. Economically viable should be
a separate analysis. What she thought he meant was if the
licensee has the credit support, the state wanted it to move
now. If they didn't have it, the state would give them five
years to get the project together. She said the ability to
determine the project is not economically viable still remains.
COMMISSIONER GALVIN replied that was correct. He may have
misspoken.
2:46:02 PM
SENATOR STEDMAN followed up on Senator Wielechowski's comments
that maybe the state will be dealing with a successful applicant
that has four or five projects on the shelf. This project is one
of the longer ones in duration and the size of the cash flow is
unprecedented relative to all other gas projects. He asked if it
wouldn't be in the state's interest to have some flexibility in
that timeframe to encourage the applicant to develop the state's
project rather than one of the other ones on the shelf - so the
state doesn't end up taking second or third place internally
with the applicant's decision process.
MS. DAVIS replied that what Commissioner Galvin said is very
truthful - that the economics of the project and the amount of
money that will have been invested by this company, because of
its size will probably be one of the largest capital outlays
that a company will have of anything on that shelf and that the
desire to drive the repayment of those funds in the here and
now, not in the distant future, is going to be the strongest and
the ultimate driver for how quickly they sanction this project.
She would be shocked if there was anything on the shelf that was
bigger and making them more exposed than this project.
SENATOR STEDMAN agreed with that.
2:48:29 PM
SENATOR MCGUIRE said it looks like the new CS (relating to AS
43.90.21 on page 17) is extending the five years a bit and she
wanted to understand these words:
For purposes of this section, the effective date of
the certificate of public convenience and necessity
issued by FERC or the Regulatory Commission of Alaska
as applicable is the date when all rights of the
appeal relating to the certificate have expired.
2:49:42 PM
MS. DAVIS replied that this provision is intended to put it on
parity with what they did to the first provision on Section (a)
which requires the acceptance of a certificate after the final
rights of appeal have expired.
Because sections (b) and (c), the one year and five
year both kick off of a date certain which in the
language right now states is "effective date the
certificate of public convenience and necessity issued
by FERC or the Regulatory Commission."
So the question is what is the effective date? And in
order to insure that was a date certain, we felt it
appropriate to this on par with the first section and
make the date certain be the date on which all rights
of appeal have expired. So that that way, again, it's
an opportunity for the applicant to, especially in
that short one-year timeframe, they need to make sure
that that's the certificate they are going to end up
with and finalize before they do a project sanction.
So, we wanted to make sure that was a final
certificate.
SENATOR MCGUIRE asked what the timelines are for appeal in the
FERC process if an applicant qualifies under the one-year (b)
and the five-year (c).
COMMISSIONER GALVIN clarified they are not the FERC experts, but
said that these provisions are for administrative appeals, not
court appeals. The department recognized that it is unusual for
a party that is seeking a FERC certificate to be obligated to
accept it. So to protect the state's interest in its investment
they created a contractual right for the state to acquire the
certificate if it were needed. He didn't want to be in a
situation where only the licensee could accept the certificate
and it didn't want to - but the state did. The licensee should
be able to appeal the changes and this acknowledges that the
state is not requiring it to take the first certificate that
FERC issues; appeals can be exhausted before the clock starts
the timelines.
CHAIR HUGGINS said they were not going to vet those provisions
now.
2:53:33 PM
MS. DAVIS went to section 220 on modification of the project
plan. This is intent to not allow applicants to over-inflate
what their project can do with the expectation that once they
got awarded the project; they could begin to chisel it back such
that it ended up being a project that was not as favorable as
one of the unsuccessful applications. It's a desire to ensure
honesty in the application process. She was also recommending to
add in "not only diminish the value of the project to the state,
but also the project's likelihood of success" since they are
using two prongs to evaluate the project.
CHAIR HUGGINS asked if she anticipated this scenario happening.
2:55:17 PM
COMMISSIONER GALVIN replied that realistically circumstances
occur that people don't expect and they wanted to allow for the
commissioners to be able to be responsive to a concern by the
licensee with certain restrictions on it such that the state's
interests are not affected. He expected that there would be
changes to any project of this magnitude, but he wanted to make
sure that the chosen project is the one they intend to see
through. The value would have to stay the same for the state.
2:56:16 PM
MS. DAVIS went to section 230 on page 12 that sets up the
state's rights to audit the records and reports of a licensee to
insure that the license is being complied with and specifically
to insure that the funds that are being advanced under the
state's matching contribution are being properly expended for
their intended purposes. Industry expressed concern that because
the term "licensee" is defined as including its affiliates and
those affiliates include anything for which that entity holds a
10 percent interest and that this not be used as an opportunity
to spring-board into wide scale review of records and audits
that really didn't pertain to this project.
2:57:16 PM
MS. DAVIS said Section 240 relates to the license violations and
damages and sets up an informal process by which the state and
the licensee can discuss for 90 days and resolve issues or
concerns.
2:57:48 PM
MS. DAVIS said Article 3 is the resource inducement section and
provides primary qualification criteria which says that the
lessee or some other person demonstrate that they have acquired
the firm transportation capacity in the first open season of the
licensed project. She is going to recommend changes relating to
a lessee versus another person because she has heard from
utility companies throughout the state that they may be in a
position to purchase gas on the Slope and they want to be able
to get the benefit of these resource inducements even though
they are the parties making the capacity commitments and not the
resource owner.
MS. DAVIS said Section 310 specifies the royalty inducement and
sets up the legislative mandate to the Department of Natural
Resources (DNR) to implement by regulation provisions that are
going to address minimization of retroactive adjustments
establishing a fair mechanism for establishing market value for
the gas which uses independent market indices and establishes
the terms under which the state can switch between its royalty
in kind (RIK) and royalty in value (RIV) in a manner that will
not infringe or impair the shipper's commercial contracts.
2:59:34 PM
COMMISSIONER GALVIN added that they see this provision addresses
regulation changes. He wanted to clarify that once the lessee
makes the commitment, its lease can be changed to adopt the
regulations.
3:01:32 PM
SENATOR STEDMAN said the RIK/RIV issue is an area that most
people agree needs adjustment and asked if the state will review
it and set it or can it be worked out with the producers.
COMMISSIONER GALVIN replied that the RIK issue is not a
statutory problem; it's the fact that the state's leases are
written to give the state the right to switch. It's just a
question of whether the state wants to acknowledge that in
amending its leases might put a lessee at a commercial
disadvantage. They are trying to recognize that is something of
value to the lessees in terms of putting it to rest. So it is
being offered as an inducement. Whether the state would make a
similar change in its leases outside of AGIA is another issue.
It is basically changing a contract.
3:03:51 PM
SENATOR STEDMAN asked if the RIV/RIK issue is focused more on
the construction and implementation of an oil basin without a
gasline because oil is much easier to switch from RIK to RIV.
Swapping back and forth from RIK to RIV can be problematic for
delivery of long term gas contracts. He asked for that to be
explained a little bit more because it's one of the major
upstream issues.
COMMISSIONER GALVIN replied that the issue comes down to what
deal the state has struck with the lessee. Like any contract
among parties, if one party does something it has a right to,
the other party can also take an action it has a right to and
then that might cause the first party to lose a lot of money. So
parties talk to each other to work out how it will be dealt
with.
This issue has not come to fruition between the state and the
producers. AGIA offers to work it out a certain way in that the
state is giving up significant value and it expects a gas
commitment in return. If they don't take it here, it will have
to be worked out somewhere else.
SENATOR STEDMAN asked if it isn't more valuable to the state to
take its royalty in kind so that gas could be diverted for
instate use while waiting for a petrochemical industry to
develop.
COMMISSIONER GALVIN replied, "Absolutely." The state wants the
ability to meet instate needs one way or the other - cash or
product. At this point, AGIA doesn't give up the right to switch
and it says if the state chooses to switch, it is going to
protect their commercial interest. He reminded them that the
state's share of the gas is more than 12.5 percent and no
projection indicates that the state will ever be close to using
that much instate.
3:10:52 PM
SENATOR STEVENS asked if he was talking about taking RIK in
state only and if there is any value in taking RIK out of state.
COMMISSIONER GALVIN explained that RIK means the state takes
possession at the wellhead and chooses where to ship it from
there. It could choose to ship it to the end of the line just
like oil. The state could choose to save some space on a tanker
and keep possession of it all the way down to a refinery and
sell it there. It could hire the refinery to refine it and then
sell it at a gas station.
However, for oil, it has been found because of the commercial
forces at work that the state would probably not get the best
price for each section of that chain and certain instate oil
needs are not being met currently. They don't know exactly if
the gas will face the same commercial forces the oil does, but
he assumes that the state would not do better selling the gas
itself than through the marketing that the companies can do.
COMMISSIONER GALVIN elaborated that experience has shown that
taking royalty in kind does a couple of things. It makes sure
the state can take advantage of some inefficiency in the market
and to fill an instate need that is not being met.
SENATOR STEVENS said now he understands why it's important for
the state to have that flexibility, but he asked if that
flexibility won't make it hard for the producers to figure out
how much it's going to cost them.
3:14:08 PM
KEVIN BANKS, Acting Director, Division of Oil and Gas,
Department of Natural Resources (DNR), explained that currently
most of the state's North Slope leases have provisions for
switching to RIK and has to only give the lessees three months
notice and can change every month for both oil and gas. If a
company has taken capacity on the gasline maybe anticipating it
will have RIV to move with their own gas and the state switches
- even with a three-month notice, the lessee may not have the
ability to accommodate that.
MR. BANKS said the state's leases work in most settings that
have a vibrant marketplace. He explained that in a place like
Wyoming, a lessee could accommodate a change by buying or
selling gas a few counties over, but that is not how it works in
Alaska where the market is pretty tight with only a few
suppliers, a few lessees, and only one lessor. So the state is
offering to accommodate the lessees, by giving them sufficient
notice to accommodate their contracts and has also come up with
some means for them to manage their reasonable costs if there
are any with stranded capacity or lack of capacity as a result
of the switch.
3:17:34 PM
CHAIR HUGGINS asked what is wrong with fixing RIV in statute.
COMMISSIONER GALVIN replied that the state has a right under the
leases that have been issued over 30 years to something that
probably can't be changed in statute because those are a pre-
existing contracts. One would have to ask what the state would
get back in return.
3:18:23 PM
SENATOR STEDMAN asked for a "guesstimate" of potential instate
use assuming a 48-inch line.
COMMISSIONER GALVIN replied about a .5 bcf/day is the maximum
instate use that has been projected.
SENATOR STEDMAN said maybe that's 10 percent of daily North
Slope volume.
COMMISSIONER GALVIN replied a little less than 10 percent.
3:19:56 PM
MS. DAVIS went to Section 320 on page 16 that contains the gas
production tax exemption. The only comment they have heard from
folks is to fortify it against legal attacks. So, she recommends
a few additional pieces of language that would "fortify that
this is a contract embedded in a contract and as such should be
protected under constitutional law."
She said that Section 330 is the AGIA coordinator section that
calls for that position to be filled by the governor and will
serve much like the federal pipeline coordinator but only with
respect to coordinating the activities within the state between
state agencies and the federal coordinator.
COMMISSIONER GALVIN clarified that the position stays, not the
person who is appointed, because the drafting was ambiguous.
3:21:46 PM
SENATOR STEDMAN said he missed the discussion on Section
43.90.320 on tax stability.
MS. DAVIS said that section provides for a 10-year timeframe for
tax stability and it addresses gas production tax solely and the
benchmark year is the point in time in which the producer makes
a commitment of its gas to the capacity that they arrange in the
first initial open season.
3:22:48 PM
SENATOR STEDMAN asked for her to estimate how many years it
would take at different gas prices for the gross value of the
gas going through the pipe to equal a capitalized project of $20
billion to $30 billion to get a feel of where they will be in 10
years. Quite a bit of testimony from the producers as well as
the midstream folks has indicated that 10 years would be short
and he thought some points of reference were needed to strike a
balance.
3:24:36 PM
COMMISSIONER GALVIN said the Judiciary Committee chair said he
intends to look at this also.
3:25:31 PM
SENATOR MCGUIRE said she thinks it's important for the state to
have the ability to take royalty in kind versus royalty in value
particularly looking at the country over 50 years. She would not
be comfortable with anything that would change the overall
statutes and she thought it was critical that it remain an
incentive that's given exclusively to induce this to go forward.
Third, she wanted to be sure about a previous discussion on why
the application evaluation criteria which is narrower didn't
provide for in-state gas availability. However, the application
requirements are broader and talk about the five take-off points
and the commitment to making gas available to the state, etc.
She started thinking about making sure there is gas for
Alaskans. So, she wanted to know why the application evaluation
criteria are narrower than the application requirements.
MS. DAVIS replied the before they get to point of applying the
application evaluation criteria, the commissioners first
evaluate the applications to make sure they contain all of the
must-have provisions. So it would not get to first base with the
state unless it has satisfied the requirement that it have the
off-take points for instate use.
3:27:44 PM
MS. DAVIS went to Section 340 on page 17 that mandates the
requirement for all state agencies to expedite their review of
projects. It allows the pipeline coordinator to step in and
apply only the strict requirements of law to the project so it
is not unnecessarily delayed. The pipeline coordinator uses this
as the hammer to insure that agencies are moving in an expedited
fashion, but still be within the confines of the law.
3:28:28 PM
CHAIR HUGGINS asked them to ponder this question during a break.
Say the state gets a bid under AGIA and another from a company
that says it's going to build the pipeline independently. He
asked if the federal coordinator works with one or both.
3:28:59 PM recess 3:44:52 PM
MS. DAVIS explained that the AGIA project doesn't preclude a
parallel or collateral pipeline project and the federal pipeline
coordinator is free to help both projects or any project that
fits within the criteria of the Alaska Natural Gas Policy Act.
CHAIR HUGGINS asked if AGIA modeled that position after the Act.
MS. DAVIS replied that those provisions were pulled from that
Act, but this bill designs it as an additional inducement for
participants to apply to the AGIA process. As written now, it
has the pipeline coordinator and the expedited agency provisions
applying to the licensed project only.
CHAIR HUGGINS said it is important to the state to consider
viable or even superior pipelines and that the pipeline
coordinator's office could hire a couple of people to help doing
that.
MS. DAVIS agreed.
3:47:11 PM
MARTY RUTHERFORD, Acting Commissioner, Department of Natural
Resources (DNR) said everything that has been said is accurate.
She looked further at the Title 38.04.020 (b) (9) provision,
which is an existing statute that allows the DNR to lead and
coordinate all matters relating to the state's review and
authorization of resource development projects, to determine
when it has acted as a coordination streamlining process on
projects other than large mines. One was the Anchorage fuel line
from the Port of Anchorage to the airport; another was the
Bullen Point Road and right-of-way, which is basically from TAPS
towards Pt. Thomson; and two oil and gas projects - Liberty and
Alpine. Liberty is an offshore drilling facility and Alpine was
three or four drill sites and the associated roads. Currently it
is coordinating the Knik Arm Bridge and Toll Authority project
and the northern rail extension project spur line from Fairbanks
to Delta. These sometimes are full-fledged teams and use this
authority regularly to exercise something very similar to what
is embedded here. That is why they proposed this to be a
distinct inducement for AGIA.
CHAIR HUGGINS asked if it is good enough for one project; why
not adopt it for AGIA.
COMMISSIONER GALVIN responded that the primary difference in
their views is the linkage between the expedited review and
agency actions and the coordinator position. Those two go hand
in hand in AGIA to provide for the streamlined process. The
expedited review provisions don't apply to a project that comes
under the reference that Ms. Rutherford eluded to that just deal
with coordination and hiring a project lead. The other concern
is making it clear that AGIA is designed to get a project to
come forward and meet the state's must haves. It would be a
mixed message to offer alternatives.
3:52:24 PM
CHAIR HUGGINS commented that his point is that the average
Alaskan would appreciate if they were the competitor and they
really had a robust agile potentially revenue superior project,
that the department could evaluate it.
MS. DAVIS went to the next section that makes it clear that the
pipeline employment development program is freestanding and
available at large. ConocoPhillips said it would be hard to say
they were developing jobs and employment programs only for the
licensed project and those people couldn't be used for other
projects.
MS. DAVIS went to Article 4, miscellaneous provisions. Section
400 deals with the mechanical act of setting up the matching
contribution fund within the Department of Revenue and how that
would be established and audited. She said Section 410 section
deals with the authority to issue regulations by both
commissioners. Section 420 deals with statute of limitations;
section 430 addresses interest rates.
3:54:36 PM
CHAIR HUGGINS went back to the regulations of concern to the
producers and asked if those had been resolved to most people's
satisfaction.
COMMISSIONER GALVIN replied yes. The concern about the
regulations was linked to the royalty provision that appeared to
allow the state to change its terms every couple of years. The
CS addressed that by locking it in when the lessee accepts that
term.
MS. RUTHERFORD added that the locking in process happens through
a lease amendment.
3:55:48 PM
MS. DAVIS said Section 440 deals with license project assurances
and target only the royalty, the tax or the monetary treatment
as being elements that could give rise to the 300 percent
damages for lending that type of support to a competing natural
gas pipeline project.
COMMISSIONER GALVIN stressed that they wanted to clarify how
long the assurance is in place by adding language that it
terminates whenever gas is flowing. So the state would be free
to go after other projects once gas is flowing on the first
project.
3:56:35 PM
MS. DAVIS said section 450 deals with assignments of the license
issued under AGIA and separately the assignment of the right to
receive the royalty inducements.
COMMISSIONER GALVIN added that Chair Huggins heard a detailed
discussion of the process of assigning a FERC certificate and
that first it has to be abandoned and then have somebody else
apply for it. Abandonment was captured in the sections that deal
with the transfer of the FERC certificate. The FERC folks have
said the process was described properly.
3:57:49 PM
CHAIR HUGGINS asked if the issue of brokering a certificate was
resolved.
COMMISSIONER GALVIN replied that FERC requires abandonment
before a certificate could be transferred to someone else,
because the commission didn't want to have people brokering
them. A side deal would be frowned upon.
SENATOR STEVENS commented that this would be a very lengthy and
serious matter.
MS. DAVIS replied absolutely. That is the reason for a second
criterion that insures that a transfer would not increase or
decrease the obligations created by the licensee or diminish the
value of the license to the state. It is a technical assignment
as opposed to a full scale one such as what would happen in an
asset sale or a bankruptcy.
3:59:57 PM
SENATOR STEVENS asked what the options are if transfer of
ownership has occurred.
COMMISSIONER GALVIN replied if the state denies a company's
ability to assign and it goes ahead and does it anyhow, it is in
the violation provision. He said the state's primary interest is
not where another company gobbles up the licensee, but over the
issue of alignment with the various parties. What was most
clearly presented by the MidAmerican is that an economic project
is often what drives alignment. He anticipates that as this
project moves forward, it will draw interest. Most pipelines end
up with a large number of third parties to share the risk
associated with it and he anticipates that even if only one
applicant comes in for the AGIA license, further down the road
there would be more than just that one involved. The assignment
allows for that to take place through the incremental addition
of the different players.
4:02:14 PM
MS. DAVIS said Section 460 relates to conflicting laws and is
essentially boiler plate. At the end of this section, she will
be recommending a provision that deals with severability because
several legislators were concerned if one provision was found
unconstitutional that wouldn't cause the whole bill to fail. The
structure of AGIA places the risk of unconstitutionality on the
applicant. A severability clause establishes that very clearly.
She said that Article 5 contains the definitions and she is
recommending two changes. A legislative attorney pointed out
that the word "controlling" isn't used so that was deleted and a
definition for North Slope was added that comes out of the tax
regulations.
4:03:17 PM
MS. DAVIS added that the definition of sanction was changed also
because one of the producers was concerned that the use of the
word "procurement" was somewhat limiting. Their FERC certificate
might have a requirement for them to hire environmental reviews
and other things that might not be strictly procurement like
buying a pipe or materials. So the commissioners are suggesting
using "financial commitment", which doesn't change the tenor of
the contract.
MS. DAVIS said Section 2 continues the extraction of this
process from the procurement code for purposes of entering into
contracts. It also specifies a three-party panel through the
American Arbitration Association for the impartial arbitration
panel. "And that's the bill."
CHAIR HUGGINS asked what the timings for the $500 million are.
4:05:17 PM
MS. DAVIS replied that the logistics are under Section 400 on
page 17 of the original bill.
COMMISSIONER GALVIN said that the fiscal note had the $500
million depending on what kind of proposals come in. But they
don't know what ultimately the applicant would draw. A $300
million appropriation in last year's budget put money into the
Alaska Housing Finance Corporation for purposes of the gasline
and if that slid over to AGIA it would hold the state for a
number of years until it knows what they are looking at. The
rest could be addressed later once they know what the obligation
is.
CHAIR HUGGINS said they are probably not talking about using the
entire $300 million at once.
COMMISSIONER GALVIN replied they have estimated maximum state
participation for getting to an open season would be 50 percent
and that would indicate a low of $50 million and ConocoPhillips
said $400 million. So, that could work out to $200 million over
the next four years on the high side.
CHAIR HUGGINS asked it there were any other concerns.
4:07:56 PM
COMMISSIONER GALVIN said he had one that wasn't in the bill, but
the project labor agreement needs to be addressed in the CS and
he wanted a commitment from the applicant to negotiate a project
labor agreement as part of their obligations under the AGIA
license.
CHAIR HUGGINS said that most members are anticipating that, but
it's just a matter of timing and the sooner the better within
reason.
COMMISSIONER GALVIN said he has provided language for the CS.
CHAIR HUGGINS said the committee will meet at noon tomorrow and
start the amendment process. There being no further business to
come before the committee, he adjourned the meeting at 4:12:20
PM.
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