Legislature(2007 - 2008)BUTROVICH 205

03/14/2008 03:30 PM Senate RESOURCES


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Audio Topic
03:36:24 PM Start
03:37:22 PM SJR17
03:43:47 PM Agia Update - Steve Porter, Lb&a Consultant
04:55:41 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ Presentation: AGIA/Gasline Update TELECONFERENCED
Steve Porter, LB&A Consultant
-- Testimony <Invitation Only> --
+= SJR 17 OFFSHORE OIL & GAS REVENUE TELECONFERENCED
Moved SJR 17 Out of Committee
+ Bills Previously Heard/Scheduled TELECONFERENCED
                    ALASKA STATE LEGISLATURE                                                                                  
              SENATE RESOURCES STANDING COMMITTEE                                                                             
                         March 14, 2008                                                                                         
                           3:16 p.m.                                                                                            
                                                                                                                                
MEMBERS PRESENT                                                                                                               
                                                                                                                                
Senator Charlie Huggins, Chair                                                                                                  
Senator Lyda Green                                                                                                              
Senator Lesil McGuire                                                                                                           
Senator Gary Stevens                                                                                                            
Senator Bill Wielechowski                                                                                                       
Senator Thomas Wagoner                                                                                                          
                                                                                                                                
MEMBERS ABSENT                                                                                                                
                                                                                                                                
Senator Bert Stedman, Vice Chair                                                                                                
                                                                                                                                
COMMITTEE CALENDAR                                                                                                            
                                                                                                                                
SENATE JOINT RESOLUTION NO. 17                                                                                                  
Urging  the  United  States  Congress  to  provide  a  means  for                                                               
consistently  sharing, on  an  ongoing  basis, revenue  generated                                                               
from oil and gas development  on the outer continental shelf with                                                               
all coastal  energy-producing states to ensure  that those states                                                               
develop,  support,  and  maintain  necessary  infrastructure  and                                                               
preserve environmental integrity.                                                                                               
     MOVED SJR 17 OUT OF COMMITTEE                                                                                              
                                                                                                                                
Presentation: Alaska Gas Inducement Act (AGIA) update by Steve                                                                  
Porter, Legislative Budge and Audit (LB&A) Consultant                                                                           
                                                                                                                                
PREVIOUS COMMITTEE ACTION                                                                                                     
                                                                                                                                
BILL: SJR 17                                                                                                                  
SHORT TITLE: OFFSHORE OIL & GAS REVENUE                                                                                         
SPONSOR(s): SENATOR(s) WIELECHOWSKI                                                                                             
                                                                                                                                
02/19/08       (S)       READ THE FIRST TIME - REFERRALS                                                                        
02/19/08       (S)       RES                                                                                                    
03/01/08       (S)       RES AT 11:00 AM BUTROVICH 205                                                                          
03/01/08       (S)       -- MEETING CANCELED --                                                                                 
03/14/08       (S)       RES AT 3:30 PM BUTROVICH 205                                                                           
                                                                                                                                
WITNESS REGISTER                                                                                                              
                                                                                                                                
SENATOR WIELECHOWSKI                                                                                                            
Alaska State Capitol                                                                                                            
Juneau, AK                                                                                                                      
POSITION STATEMENT: Sponsor of SJR 17.                                                                                        
                                                                                                                                
MICHELLE SYDEMAN                                                                                                                
Staff to Senator Wielechowski                                                                                                   
Alaska State Capitol                                                                                                            
Juneau AK                                                                                                                       
POSITION STATEMENT: Commented on SJR 17.                                                                                      
                                                                                                                                
STEVE PORTER                                                                                                                    
Consultant to the Legislative Budget and Audit Committee                                                                        
Juneau AK                                                                                                                       
POSITION STATEMENT: Presented an update  on AGIA labeled The Road                                                           
Not Taken                                                                                                                     
                                                                                                                                
ACTION NARRATIVE                                                                                                              
                                                                                                                                
CHAIR  CHARLIE  HUGGINS  called  the  Senate  Resources  Standing                                                             
Committee meeting to order at 3:36:24  PM. Present at the call to                                                             
order  were  Senators   Green,  McGuire,  Stevens,  Wielechowski,                                                               
Wagoner and Huggins.                                                                                                            
                                                                                                                                
               SJR 17-OFFSHORE OIL & GAS REVENUE                                                                            
                                                                                                                                
3:37:22 PM                                                                                                                    
CHAIR HUGGINS announced SJR 17 to be up for consideration.                                                                      
                                                                                                                                
SENATOR WIELECHOWSKI, sponsor of SJR  17, said this measure calls                                                               
on Congress  to provide  Alaska and other  coastal states  with a                                                               
fair share of revenue from oil  and gas leases and development in                                                               
the  outer  continental  shelf  (OCS).  He  explained  under  the                                                               
Mineral Lands Leasing Act of  1920, the federal government shares                                                               
50 percent of  the revenues generated from  mineral production on                                                               
federal lands within each state's  boundaries with the state. The                                                               
shared mineral  revenue is  distributed automatically  outside of                                                               
the budget process and is not subject to appropriation.                                                                         
                                                                                                                                
     Unfortunately there is no  comparable authority for the                                                                    
     federal government to  automatically share revenue from                                                                    
     oil  and  gas  activity  occurring six  miles  or  more                                                                    
     offshore  with  adjacent  coastal  states  despite  the                                                                    
     contribution  made  by  those states  to  the  nation's                                                                    
     energy supplies.                                                                                                           
                                                                                                                                
     For  years,  coastal  states   have  argued  that  they                                                                    
     deserve a  share of OCS  revenues because  they provide                                                                    
     the  infrastructure that  supports offshore  operations                                                                    
     and   bear   the   environmental  risks   of   offshore                                                                    
     development.  Several  times  Congress  has  recognized                                                                    
     this federal  contribution and created  revenue sharing                                                                    
     programs  most of  which have  been  temporary or  were                                                                    
     extended to only  a handful of states.  The most recent                                                                    
     one  of these  programs  was included  in  the Gulf  of                                                                    
     Mexico  Energy Security  Act of  2006. Under  that act,                                                                    
     the   federal  government   agreed  to   give  Alabama,                                                                    
     Louisiana,  Mississippi  and   Texas  37.5  percent  of                                                                    
     revenue  from oil  and gas  leasing and  development in                                                                    
     newly  opened federal  waters in  the  Gulf of  Mexico.                                                                    
     This  act  is  expected  to distribute  more  than  $60                                                                    
     billion to those four states over the next 25 years.                                                                       
                                                                                                                                
     Alaska  was  excluded  from this  program  despite  the                                                                    
     efforts   of   our   congressional   delegation.   This                                                                    
     resolution  supports  the  position  that  all  coastal                                                                    
     states with adjacent OCS  development should receive on                                                                    
     a regular  and ongoing  basis a  fair share  of revenue                                                                    
     from  OCS activities  as  compensation  and reward  for                                                                    
     their  contribution to  the  nation's energy  security.                                                                    
     Since statehood,  oil and gas activities  from Alaska's                                                                    
     OCS have generated billions of  dollars for the federal                                                                    
     government.                                                                                                                
                                                                                                                                
A spreadsheet in their packets  showed that almost $6 billion has                                                               
been  collected  from leasing  and  development  in Alaska's  OCS                                                               
since  1982, not  including  the $2.6  billion  that the  federal                                                               
government is  likely to  earn from the  recent Chukchi  Sea Sale                                                               
known as  lease sale 193, a  record breaking event with  667 bids                                                               
offered for 488  blocks. If the revenue sharing  program had been                                                               
in existence  similar to the  one in  the Gulf of  Mexico, Alaska                                                               
would have  stood to gain $975  million from that sale  alone. He                                                               
said  more leasing  and development  is  likely to  occur in  the                                                               
future and while  Alaska is still considered a  frontier area for                                                               
OCS development, two-thirds  of the nation's OCS  is off Alaska's                                                               
coast.  The Minerals  Management  Service  (MMS) estimates  there                                                               
could  be   as  much  as   55  billion  barrels   of  technically                                                               
recoverable oil  and 280 Tcf  of technically recoverable  gas off                                                               
of  Alaska's coast.  Alaska already  has 263  active oil  and gas                                                               
leases off of its coast covering more than 1.4 million acres.                                                                   
                                                                                                                                
3:40:47 PM                                                                                                                    
SENATOR WIELECHOWSKI  said the Chukchi  Sea sale could  result in                                                               
the  leasing of  an additional  2.7  million acres  and that  his                                                               
office  has been  in touch  with aides  in Senator  Ted Stevens's                                                               
office regarding this resolution and  has been assured it will be                                                               
useful  in the  Senator's effort  to secure  revenue sharing  for                                                               
Alaska.  Senator Ted  Stevens's  chief aide  for  energy and  the                                                               
environment says  he is confident legislation  will be introduced                                                               
in 2008 to create a multi-state revenue sharing program.                                                                        
                                                                                                                                
3:41:28 PM                                                                                                                    
MICHELLE  SYDEMAN,  staff  to Senator  Wielechowski,  added  that                                                               
Senator Ted  Stevens thought it would  be good to act  before the                                                               
November elections for  a number of reasons. One  is that several                                                               
members  of Congress  who  support OCS  revenue  sharing will  be                                                               
retiring this year.                                                                                                             
                                                                                                                                
CHAIR  HUGGINS countered  that three  Alaska legislators  were at                                                               
the  Energy  Council  and  New  Mexico  Senator  Bingaman  didn't                                                               
support  the revenue  sharing concept  and  while he  lives in  a                                                               
landlocked state, he's the Senate Resources Committee chair.                                                                    
                                                                                                                                
SENATOR  WAGONER  added that  Senator  Bingaman  didn't come  out                                                               
strongly opposed to their pursuing it.                                                                                          
                                                                                                                                
SENATOR  STEVENS moved  to report  SJR 17  from committee.  There                                                               
were no objections and it was so ordered.                                                                                       
                                                                                                                                
^AGIA Update - Steve Porter, LB&A Consultant                                                                                  
                                                                                                                                
CHAIR  HUGGINS said  the  committee next  would  hear from  Steve                                                               
Porter.                                                                                                                         
                                                                                                                                
3:43:47 PM                                                                                                                    
STEVE  PORTER, consultant  to the  Legislative  Budget and  Audit                                                               
Committee, said  he titled his  presentation The Road  Not Taken,                                                             
because  over many  years a  number of  different ways  have been                                                               
tried to  get to  an Alaskan  pipeline, but none  of them  got us                                                               
there.                                                                                                                          
                                                                                                                                
MR.  PORTER said  his presentation  would  cover the  differences                                                               
between   corporate   and   government  worlds   and   processes,                                                               
sovereignty responsibility and the  legislative process. He would                                                               
also cover the shippers concerns and  what it really takes to get                                                               
them to  an open season;  he would then  talk a little  bit about                                                               
where AGIA is  now, followed by some informal  comments about the                                                               
TransCanada proposal specifically.                                                                                              
                                                                                                                                
He said  sometimes the  two worlds  don't communicate  very well.                                                               
The  corporate   world  is  a  world   of  gated  decision-making                                                               
processes and  negotiations. So,  when the  State of  Alaska says                                                               
the corporate  world must  make a commitment  by a  certain date,                                                               
they  find that  difficult  to  agree to  especially  in a  major                                                               
project. They  may want to  do a  project, but they  have certain                                                               
gates they need to walk  through first. Certain economic analyses                                                               
have  to  occur before  they  move  on to  the  next  stage in  a                                                               
project. So when the state says  it wants a commitment to build a                                                               
pipeline and  to go  all the  way to  the FERC  certificate, they                                                               
have  a  difficult  time  doing that  from  an  internal  process                                                               
standpoint, not  because they  don't want to  do it,  but because                                                               
they  could   lose  control  of   the  project  and   that  could                                                               
potentially cost them great amounts of money.                                                                                   
                                                                                                                                
The corporations are  in a negotiations world;  that's where they                                                               
don't understand  the government  process which is  generally not                                                               
one  of  negotiations, but  rather  of  decision-making from  the                                                               
standpoint  of a  sovereign. He  suggested that  the corporations                                                               
should have  talked about  their concerns with  the gas  tax, for                                                               
instance,  rather than  trying to  negotiate with  the government                                                               
about them.                                                                                                                     
                                                                                                                                
MR. PORTER said  he wanted to talk a little  more today about how                                                               
to  move  through  the  process   of  hearing  the  corporations'                                                               
concerns and  come to  a good resolution.  He said  two processes                                                               
are occurring currently, one is  the corporate process to build a                                                               
pipeline.  ConocoPhillips   put  a  plan  forward,   but  in  the                                                               
government's  world they  showed what  they were  going to  do to                                                               
move ahead.  ConocoPhillips has  also said  it has  concerns that                                                               
need to  be dealt with to  move the project forward.  That is the                                                               
public process outside of both AGIA and the Stranded Gas Act.                                                                   
                                                                                                                                
He explained  the government  process is  within AGIA  and moving                                                               
the  applicant  forward  through  a  bid  process.  This  is  not                                                               
normally  the   responsibility  of  government,  but   in  unique                                                               
circumstance  when things  are not  occurring  as the  government                                                               
would like, it can  step out of its normal role  into a role that                                                               
will allow an activity to occur.                                                                                                
                                                                                                                                
3:48:36 PM                                                                                                                    
CHAIR HUGGINS likened it to driving in  a car on a road with a 55                                                               
mile  speed limit,  but if  you're  in a  speed boat  in a  canal                                                               
running parallel  to the road, you  don't have to observe  the 55                                                               
mile  speed  limit. It  will  get  you  to  the same  place,  but                                                               
different rules.                                                                                                                
                                                                                                                                
MR. PORTER agreed.  It's the state's responsibility  to make sure                                                               
that  the speed  boat  and  the vehicles  on  the  road have  the                                                               
potential  for getting  to their  final destination.  The state's                                                               
responsibility to both  of those processes is to  create a stable                                                               
fiscal environment upon which commercial activity can occur.                                                                    
                                                                                                                                
3:50:27 PM                                                                                                                    
CHAIR HUGGINS  assumed for a  minute that Enstar would  build the                                                               
bullet  line, then  the  question is  whether or  not  that is  a                                                               
competitive  or  a  parallel  process  with  or  without  an  LNG                                                               
component.                                                                                                                      
                                                                                                                                
MR. PORTER responded  that two AGIA provision  address the Enstar                                                               
proposal; one excludes  them if they want to deal  with less than                                                               
500 Mmcf/day  in terms  of being  a competitive  process. Second,                                                               
AGIA says  if you  are outside  the process  and the  state isn't                                                               
providing you with incentives or  enhancements, you are also out.                                                               
Just to build a separate pipeline  is not competition to the AGIA                                                               
process. So,  as long as Enstar  stays under the 500  Mmcf/day or                                                               
if  they exceeded  that,  so long  as they  are  just building  a                                                               
pipeline and  not asking  for any help,  it doesn't  conflict and                                                               
the state is  not in conflict with doing  its responsibilities as                                                               
a state government,  which is permitting and  managing a project.                                                               
"There is no conflict with the Enstar process."                                                                                 
                                                                                                                                
CHAIR HUGGINS  asked what happens if  the state is part  owner or                                                               
assists in the bonding process or financing.                                                                                    
                                                                                                                                
MR. PORTER  answered if  the project is  less than  500 Mmcf/day,                                                               
it's  probably   okay;  above  500  Mmcf/day   and  with  special                                                               
incentives and  the state's obligations  might have to  be looked                                                               
at.                                                                                                                             
                                                                                                                                
SENATOR WAGONER  said he didn't  hear Enstar say they  needed any                                                               
help from the state to construct a pipeline.                                                                                    
                                                                                                                                
CHAIR HUGGINS  said they  need to understand  what the  rules are                                                               
under all scenarios.                                                                                                            
                                                                                                                                
3:53:22 PM                                                                                                                    
MR. PORTER said Enstar's proposal  was to take Foothills gas from                                                               
Anadarko or  others and  not the  core North  Slope gas.  So that                                                               
should  not  affect the  ability  of  a  major pipeline  to  move                                                               
forward.                                                                                                                        
                                                                                                                                
CHAIR HUGGINS asked what if Enstar's project exceeds 500 Mmcf.                                                                  
                                                                                                                                
MR. PORTER replied you may have  a legal problem, not a practical                                                               
problem. If you're  tapping Pt. Thomson reserves,  you would want                                                               
to examine the impact of that against a second pipeline.                                                                        
                                                                                                                                
3:54:44 PM                                                                                                                    
He  went on  to explain  that sovereign  responsibility is  often                                                               
forgotten,  but  it  is  almost as  important  from  a  stability                                                               
standpoint to  major corporations as  the tax is. The  Majors are                                                               
worried if  the state  government can't  manage its  finances and                                                               
its budgets  properly, then when it  gets out of money,  it would                                                               
come to  them and raise  their taxes. So,  in the short  term, if                                                               
the  state manages  its surplus  properly  and saves  it for  the                                                               
future that  brings stability to  how a corporation  views Alaska                                                               
as a  potential place to invest.  Having a long term  fiscal plan                                                               
is important as well.                                                                                                           
                                                                                                                                
SENATOR WIELECHOWSKI  said Alaska has the  largest Constitutional                                                               
Budget Reserve (CBR) of all  the states and asked if corporations                                                               
would consider that as fiscal stability.                                                                                        
                                                                                                                                
MR. PORTER replied yes.                                                                                                         
                                                                                                                                
3:58:09 PM                                                                                                                    
MR.  PORTER  said  corporations  also  look  at  project-specific                                                               
stability.  He explained  that sometimes  government doesn't  ask                                                               
the right  question of industry. If  it asks what it  needs, they                                                               
will  generally  not  answer.   If  government  asks  what  their                                                               
concerns are  and listens  properly, it would  get the  answer in                                                               
terms of  a list of their  concerns and then they  could begin to                                                               
focus on those areas.                                                                                                           
                                                                                                                                
He  explained  that industry  has  focused  on three  areas  even                                                               
before the Stranded  Gas Act: the term of stability,  the gas tax                                                               
and  a   couple  of  royalty   issues.  Addressing   these  would                                                               
substantially  increase  the  likelihood   of  a  project  moving                                                               
forward.                                                                                                                        
                                                                                                                                
The term  issue has two elements;  one is the level  of certainty                                                               
and two  is the duration of  the certainty. The current  level of                                                               
certainty is  basically by  statute. They  passed AGIA  that says                                                               
anyone  who shows  up at  an open  season has  10 years  worth of                                                               
fiscal stability. It's in statute and  it can be changed any year                                                               
after  this  year. So,  it  really  operates  more as  an  intent                                                               
statement as opposed  to an actual contractual  stability. In its                                                               
favor, 50  percent of the  legislature has to change  their minds                                                               
and that's very hard  to get. So, having it on  the books is more                                                               
than just  a nice statement  and it  is a reasonable  position to                                                               
hold.                                                                                                                           
                                                                                                                                
The position that  both the governor's office  made originally in                                                               
AGIA  and  most  of  the  industry  players  are  asking  for  is                                                               
contractual  stability, which  doesn't allow  the legislature  to                                                               
change its  mind for a  term of  years by contract.  The industry                                                               
would like to see that; it  is much more stable than statute. The                                                               
governor originally  proposed that,  but the  legislature decided                                                               
not to go that far.                                                                                                             
                                                                                                                                
MR.  PORTER said  the constitutional  responsibility is  actually                                                               
the safest of the three.                                                                                                        
                                                                                                                                
3:59:50 PM                                                                                                                    
SENATOR  WAGONER stated  the idea  of  having contractual  fiscal                                                               
certainty was never  voted on by the full  legislature. He wasn't                                                               
sure that isn't still a possibility,  but the problem he has with                                                               
that is  the legislature hasn't  been asked to put  that language                                                               
back into the contract; so maybe it isn't important.                                                                            
                                                                                                                                
MR. PORTER  said industry  doesn't want  to tell  the legislature                                                               
what to  do; rather the  legislature has to listen  to industry's                                                               
concerns.   For  instance,   ConocoPhillips   talked  about   its                                                               
contractual  stability; BP  and  Exxon have  been  a little  more                                                               
silent.   Generally,  the   way   he  has   analyzed  the   three                                                               
corporations is  that he watches  what ConocoPhillips  says; some                                                               
are less forthcoming than others  in explaining whether something                                                               
was sufficient to  move a project forward. This goes  back to the                                                               
basic  responsibility of  government to  determine what  is fair.                                                               
They  might not  get a  specific  answer, but  lawmakers need  to                                                               
listen to  concerns, decide  if they are  valid and  then address                                                               
them. If  they do  those things, the  pipeline will  move forward                                                               
and be built eventually.                                                                                                        
                                                                                                                                
SENATOR WIELECHOWSKI  asked if he  is saying the state  is taking                                                               
the wrong road because he labeled his slides The Road Not Taken.                                                              
                                                                                                                                
MR. PORTER explained  that "basically the road that  has not been                                                               
taken so far is the one that leads to a pipeline."                                                                              
                                                                                                                                
4:03:47 PM                                                                                                                    
SENATOR STEVENS  added that  at the  end of  this poem  by Robert                                                               
Frost he  says the right  road is the  one less traveled.  But he                                                               
didn't know which one is the less traveled.                                                                                     
                                                                                                                                
SENATOR GREEN  asked Senator Wagoner  what the combined  vote was                                                               
on passing that bill out of the Super Committee.                                                                                
                                                                                                                                
SENATOR WAGONER clarified that he was  referring to a vote in the                                                               
Judiciary Committee  and he didn't  know what that vote  was. The                                                               
contractual language that gave a  10-year certainty for those who                                                               
committed gas at an open season was taken out of AGIA.                                                                          
                                                                                                                                
SENATOR WIELECHOWSKI recalled  that they were trying to  do it in                                                               
a way  that would  best withstand challenge  - recognizing  it is                                                               
hard to bind future legislators.                                                                                                
                                                                                                                                
CHAIR HUGGINS  said if  one assumes TransCanada  is going  to get                                                               
the contract, the  state has between now and the  fall of 2009 to                                                               
establish the  fiscal terms.  If it wants  to use  present rates,                                                               
they should just say that so people could plan.                                                                                 
                                                                                                                                
He said  two months  ago he talked  to another  long-time senator                                                               
about how Transcanada would be presented  for an up or down vote,                                                               
but that senator  responded, "There's never an up  and down vote.                                                               
He said  you can change  what ever you  want to within  reason in                                                               
AGIA...." He asked Mr. Porter to elaborate on that.                                                                             
                                                                                                                                
4:07:55 PM                                                                                                                    
MR.  PORTER  said  he  planed   to  address  that  later  in  his                                                               
presentation.  In  response  to Senator  Wielechowski's  comment,                                                               
having fiscal certainty  in statute presented the  least risk for                                                               
being overturned.  Otherwise a constitutional amendment  would be                                                               
needed  and that  would  require  a near  unanimous  vote of  the                                                               
legislature and the governor would  have to support it. She would                                                               
have to  convince Governor Hickel, Backbone,  the Port Authority,                                                               
and  any  other  major  stakeholders   to  support  it  as  well.                                                               
Otherwise it  would fail the  public vote. Failing a  public vote                                                               
would  make  bringing  it  back  difficult to  even  put  in  the                                                               
contract. The  risk is to  the industry  that a failure  with the                                                               
public would forever close that door.                                                                                           
                                                                                                                                
4:09:04 PM                                                                                                                    
He said  the next  piece talks about  the duration  of certainty.                                                               
Current  statute says  10 years.  A few  weeks ago,  the governor                                                               
said  she is  comfortable with  10-15 years;  ConocoPhillips said                                                               
20-25 years. The Stranded Gas Contract said 35 years.                                                                           
                                                                                                                                
CHAIR  HUGGINS   recalled  that  ConocoPhillips   also  suggested                                                               
indexing the fiscal certainty timeframe  to the length of the gas                                                               
commitments.                                                                                                                    
                                                                                                                                
MR.  PORTER said  that  was  a good  point.  He  said the  public                                                               
perception of  the Stranded Gas  contract is 45 years  because it                                                               
consisted of the  10 years of construction plus the  35 years. He                                                               
saw maybe a 5-year gap under  AGIA with the 10-15 years, which is                                                               
a lot more solvable. So he didn't  see that as a major problem in                                                               
moving the gas pipeline forward.                                                                                                
                                                                                                                                
4:10:57 PM                                                                                                                    
MR. PORTER  said the  next issue  was the gas  tax and  they have                                                               
heard about  billions of  dollars in  concessions, but  those are                                                               
not necessary. All  the industry needs is a fair  tax and that is                                                               
all  it is  asking for.  He  explained that  a fair  tax is  very                                                               
similar to  the PPT. Its  analysis was all  about what is  a fair                                                               
tax at low, medium and high  prices, because if the tax is unfair                                                               
to anybody, the  state or the taxpayer, you get  results than you                                                               
don't want to  see. If it's unfair to the  taxpayers, they invest                                                               
less money  and the state  gets less  revenue; if the  state gets                                                               
less money in relationship to  the industry, it would create what                                                               
he equates  with the ELF  environment where the  state ultimately                                                               
created  a new  tax. So  having a  tax that  is fair  between the                                                               
parties at  all prices  is very important.  "The further  you get                                                               
away from  what I'll  call the fairness  line, the  more unstable                                                               
the tax becomes."                                                                                                               
                                                                                                                                
MR. PORTER said  this tax could be  the one, but the  gas tax has                                                               
not been analyzed yet.                                                                                                          
                                                                                                                                
4:13:32 PM                                                                                                                    
CHAIR  HUGGINS  said  forget about  negotiations.  Just  for  the                                                               
record, last  October and November the  legislature established a                                                               
regime  and everybody  got to  weigh in  and people  he talks  to                                                               
support it.                                                                                                                     
                                                                                                                                
MR.  PORTER agreed.  This is  not about  negotiations; it  is the                                                               
legislature's responsibility to evaluate what  a fair tax will be                                                               
and they should review and change it if need be.                                                                                
                                                                                                                                
4:15:01 PM                                                                                                                    
Regarding  the royalty  in  kind (RIK)  versus  royalty in  value                                                               
(RIV)  issue, he  said concerns  were expressed  by industry  and                                                               
dealt with  in AGIA  which said  the DNR  would establish  how to                                                               
handle  it. Then  the industry  could lock  that in  by contract.                                                               
There is only one concern and  that is that DNR wouldn't complete                                                               
that regulatory process until just  before the open season and it                                                               
therefore would not be reviewable  by the legislature and somehow                                                               
they will do  something unreasonable. The best way  to solve that                                                               
concern  is request  that DNR  complete  that regulatory  process                                                               
before the next legislative session.                                                                                            
                                                                                                                                
4:17:24 PM                                                                                                                    
CHAIR HUGGINS  said the issue  of the regulations not  being done                                                               
had been brought  up a lot. He  asked if they are  doable by next                                                               
January.                                                                                                                        
                                                                                                                                
MR. PORTER replied  that DNR has already had one  year to work on                                                               
them and  state agencies tend to  hit their deadlines. So  if the                                                               
legislature sets a deadline just  before open season, that's when                                                               
the regs  will get  done. If  they put a  priority on  them, they                                                               
will  get  done  sooner.  After listening  to  industry  and  the                                                               
legislature, he found, "You don't have to move very far."                                                                       
                                                                                                                                
4:19:56 PM                                                                                                                    
He  said the  term  issue should  be dealt  with  before the  tax                                                               
issue.  He recommended  starting  to deal  with  it now,  because                                                               
there would be  upward or downward pressure on  the tax depending                                                               
on the term of certainty.                                                                                                       
                                                                                                                                
CHAIR HUGGINS said he had a  requested that LB&A look at the full                                                               
spectrum so they can start reviewing it.                                                                                        
                                                                                                                                
MR. PORTER said the recommendations  he is making are simple, but                                                               
they  will substantially  increase  the likelihood  of a  project                                                               
moving forward.                                                                                                                 
                                                                                                                                
4:22:26 PM                                                                                                                    
He moved  on to the  AGIA process that is  now in the  bid stage.                                                               
The  most important  thing about  that is  that the  state cannot                                                               
renegotiate with the bidders; it  would be unethical. The winning                                                               
bidder comes before  the legislature and that's when  some of the                                                               
terms  could be  changed  slightly. A  license  could be  awarded                                                               
under that scenario.                                                                                                            
                                                                                                                                
4:24:44 PM                                                                                                                    
CHAIR HUGGINS said the license could have some qualifiers on it.                                                                
                                                                                                                                
MR. PORTER  agreed and explained  that all the economic  terms of                                                               
the license  proposal should be examined.  An up or down  vote is                                                               
one  of the  possibilities;  some argue  the legislature  doesn't                                                               
have  the right  to change  a license.  Someone asked  what their                                                               
authority is  to change  it. His  response is  when a  statute is                                                               
silent,  which this  statute is,  on the  type of  license to  be                                                               
awarded, the courts  would generally give a  reasonable amount of                                                               
deference to  the legislature, because  it is  the decision-maker                                                               
and the writer  of the bill. So, the real  question is, "When the                                                               
statute is silent,  what authority do we have to  write up a bill                                                               
that changes the parameters of TransCanada's license proposal?"                                                                 
                                                                                                                                
MR.  PORTER opined  the risk  is if  the license  is changed  too                                                               
much,  TransCanada might  choose  to not  move  forward with  the                                                               
project.                                                                                                                        
                                                                                                                                
4:28:08 PM                                                                                                                    
SENATOR  WIELECHOWSKI recalled  the governor's  position is  that                                                               
the legislature  could recommend to  AGIA, but she would  have to                                                               
accept the recommendation.                                                                                                      
                                                                                                                                
MR. PORTER responded  that was a good question, but  the way AGIA                                                               
works  is  it  first  has   a  public  hearing,  which  was  just                                                               
completed.   That's   when   the   legislature   can   make   its                                                               
recommendations. Once that  is done, the governor  reviews it and                                                               
decides  whether or  not to  move the  licensee forward.  Someone                                                               
asked  if the  governor  could renegotiate  the  license at  that                                                               
point, but the statute is silent on that as well.                                                                               
                                                                                                                                
4:29:41 PM                                                                                                                    
He  said, "You're  granting the  license;  she gets  a chance  to                                                               
either  sign  the  contract  or   whatever.  I  think  it's  your                                                               
responsibility to  basically approve the license;  it's not hers.                                                               
So you're sitting in the responsibility seat, you might say."                                                                   
                                                                                                                                
CHAIR   HUGGINS   said  a   big   conjecture   in  the   previous                                                               
administration was  if the governor  could just go off  and, say,                                                               
build a pipeline under AGIA no matter what the legislature does.                                                                
                                                                                                                                
4:30:23 PM                                                                                                                    
MR. PORTER answered  that he remembers that  conversation and his                                                               
position is  the same  - it  would have  been irrational  for the                                                               
previous governor to do so; he  would have been violating the law                                                               
and it  would be irrational for  this governor to do  so as well.                                                               
He said, "She has no authority to do it."                                                                                       
                                                                                                                                
In terms of  why they might want to consider  some changes to the                                                               
license, he said it doesn't  change the TransCanada proposal, but                                                               
it changes  the state's commitment  to TransCanada. He  said that                                                               
TransCanada  proposed a  rate of  return on  equity (ROR)  of 965                                                               
basis points  above the  rate of U.S.  10-year treasury  notes in                                                               
effect at the beginning of  that year. The 10-year treasury yield                                                               
has been  somewhere above 3  percent to  just over 5  percent. So                                                               
that  gives a  13-15 percent  ROR, which  isn't too  bad. If  one                                                               
thinks a 14  percent ROR is fair,  it would be okay to  tie it to                                                               
the 10-year  Treasury note. But if  you look at what  is going to                                                               
happen, you  would have 10  years worth of construction,  plus 20                                                               
years of  FTC. So  the question  is: what  is a  10-year treasury                                                               
note going to  do over the next 30 years.  A very different story                                                               
emerges  looking at  the last  30 years  when it's  been anywhere                                                               
from  3-15  percent, which  would  give  the licensee  under  the                                                               
proposal  somewhere between  a 13-25  percent ROR.  That is  very                                                               
healthy for a monopoly pipeline.                                                                                                
                                                                                                                                
SENATOR WIELECHOWSKI  asked if the  FERC doesn't set the  rate of                                                               
return.                                                                                                                         
                                                                                                                                
MR. PORTER  answered that was a  good point and because  the FERC                                                               
and the NEB set the rates  of return anyway, why should the state                                                               
be committed to supporting a rate  of return that doesn't seem to                                                               
be in  its best interest.  The state should allow  TransCanada to                                                               
propose anything  it wants to the  FERC and the NEB  because they                                                               
are the  decision makers. The  state should represent  itself and                                                               
it  taxpayers in  those regulatory  decisions,  but it  shouldn't                                                               
necessarily tie itself to TransCanada's  proposed rate of return.                                                               
It  looks  generous. He  speculated  that  tying ROR  to  10-year                                                               
treasury  notes  transferred  inflation  to  the  state  and  the                                                               
shippers,  because 10-year  treasury bills  generally follow  the                                                               
rate of inflation.                                                                                                              
                                                                                                                                
Another  element   on  his  ROR  page   was  the  up-to-2-percent                                                               
reduction on  the variants between  actual capital costs  and the                                                               
base capital costs  for five years. In other words,  if they make                                                               
a mistake  and have cost overruns,  they are going to  take a hit                                                               
on their  ROR. That's  a good  recommendation and  it's something                                                               
they didn't have  to do and it increases their  commitment to try                                                               
to keep the  costs down. He said  it has two elements  to it; one                                                               
is  the five  years and  he pointed  out that  for large  capital                                                               
overruns a five  year hit on ROR wouldn't come  anywhere close to                                                               
addressing  the hit  the State  of Alaska  or the  shippers would                                                               
take.                                                                                                                           
                                                                                                                                
The other element is the  difference between the actual costs and                                                               
the base  capital costs. The  base capital costs are  those costs                                                               
that are  determined at the  end of  the FERC process.  The costs                                                               
that the  shippers commit to  are the  costs at the  open season.                                                               
Definitely TransCanada gets quite a  bit more certainty as to the                                                               
economics of  the project and  they get  a higher class  level of                                                               
understanding of capital costs. It's  not a major issue, but it's                                                               
important to recognize  that the shippers are taking  the risk in                                                               
a less  informed environment and  TransCanada is taking  the risk                                                               
on the  differential. But  he thought  this was  a good  term and                                                               
that  TransCanada  brought  it forward  to  enhance  the  overall                                                               
economics of the project.                                                                                                       
                                                                                                                                
4:35:56 PM                                                                                                                    
MR. PORTER  said the next  issue had  to do with  the debt/equity                                                               
ratio.  TransCanada  proposed  a 70/30  during  the  construction                                                               
phase; they  proposed to  refinance that debt  equity to  a 75/25                                                               
during the  operations phase.  That is very  good for  the state.                                                               
The 60/40 during expansions is a  violation of the statute and is                                                               
a bad idea. He would change it to 70/30.                                                                                        
                                                                                                                                
4:36:58 PM                                                                                                                    
CHAIR HUGGINS interrupted and asked where he got these ratios.                                                                  
                                                                                                                                
MR. PORTER replied from the TransCanada proposal.                                                                               
                                                                                                                                
CHAIR  HUGGINS  said  the  TransCanada  proposal  is  just  their                                                               
thoughts.                                                                                                                       
                                                                                                                                
MR.  PORTER  said  that's  an  interesting  question  -  if  this                                                               
proposal is  their thoughts or  is the state committing  to every                                                               
term in  the license. He  believes that TransCanada  thinks every                                                               
single financial  term in  the proposal is  a commitment  by them                                                               
and  a commitment  by  the  State of  Alaska  if  the license  is                                                               
granted to them. And he thought they were right.                                                                                
                                                                                                                                
On the 60/40  issue, you have to first  understand the definition                                                               
of "project."  This is  where he  differs a  little bit  from the                                                               
administration  that says  there's  a difference  in the  statute                                                               
between the initial project and  subsequent expansions. He didn't                                                               
find that  in law, but  Marty Rutherford showed him  the language                                                               
that  she  believed  backed  up  that  view.  The  definition  of                                                               
"project" in  the statute says  it means "a natural  gas pipeline                                                               
authorized  under  a license  issued  under  this chapter."  This                                                               
means  the whole  thing. He  went to  section 130  [AS 43.90.130]                                                               
where all  the "must haves"  were located and found  that section                                                               
130 didn't  have any distinctions  between those sections  of 130                                                               
that apply to  an initial project and those sections  of 130 that                                                               
apply to expansions. They all apply to the project.                                                                             
                                                                                                                                
He  said the  problem is  that section  130(10) says  "commit to,                                                               
propose  and support  rates for  post project  and for  any North                                                               
Slope gas  treatment plant an  applicant may  own in whole  or in                                                               
part that  are based on  a capital  structure for rate  making if                                                               
it's not  less than 70  percent debt."  The problem with  using a                                                               
60/40 debt  equity ratio is  that this language says  anything in                                                               
the project has to be a 70/30 ratio  and he didn't see any way of                                                               
getting around that.                                                                                                            
                                                                                                                                
However, he talked to TransCanada and  they are that the RFA says                                                               
the  applicant  may commit  to,  propose  and support  a  capital                                                               
structure for expansion  facilities that consist of  less than 70                                                               
percent debt.  So, the administration  does believe  and intended                                                               
that TransCanada  could move  to a  60/40 debt  equity structure.                                                               
The only  question if they  follow the RFA, is  their application                                                               
deemed to be complete. Then you  go back to the statue that says,                                                               
"The commissioner  shall reject an incomplete,  as incomplete, an                                                               
application   that  does   not  meet   the  requirements   of  AS                                                               
43.90.130."   So,  it   is  a   difficult  situation   where  the                                                               
administration  gave the  wrong  guidance to  the applicant;  the                                                               
applicant  followed  and  they  are  both  in  violation  of  the                                                               
statute. He  wanted to leave  that problem with  the legislature,                                                               
but he  would make some  recommendations that would take  them to                                                               
the next stage.                                                                                                                 
                                                                                                                                
4:40:18 PM                                                                                                                    
MR. PORTER  said TransCanada explained  its concern to  him about                                                               
being able to  finance an expansion with 70/30  debt equity; they                                                               
believed they  needed 60/40  to do it.  So, Mr.  Porter suggested                                                               
finding out if  that is true. If they can't  finance an expansion                                                               
with 70/30  debt equity,  then the statute  probably needs  to be                                                               
fixed. If  they don't need 60/40,  then TransCanada's application                                                               
needs to be fixed by dealing with it in its license.                                                                            
                                                                                                                                
SENATOR  WAGONER  remarked  that   TransCanada  didn't  say  they                                                               
couldn't  build the  line  at  70/30; it  was  talking about  the                                                               
expansion of capacity.                                                                                                          
                                                                                                                                
MR. PORTER agreed  and said if they need 60/40  for an expansion,                                                               
the legislature has to decide if  that is fair and that should be                                                               
addressed  in the  license.  He  said that  was  the  end of  his                                                               
presentation.                                                                                                                   
                                                                                                                                
4:43:22 PM                                                                                                                    
CHAIR HUGGINS  said you mentioned  equity, but not  about someone                                                               
taking equity in the pipeline - maybe 51 percent.                                                                               
                                                                                                                                
MR.  PORTER responded  that he  was the  state's lead  negotiator                                                               
under  the  Stranded Gas  Act  for  the  pipeline. A  51  percent                                                               
position is  very high-risk venture.  He is now trying  to figure                                                               
out how much risk the state could  take on. Owning a piece of the                                                               
pipeline ultimate is  not a bad thing, because of  the value. The                                                               
question is  do you  want to  take the  risk during  the building                                                               
stages. Under the  gas pipeline contract he  negotiated the state                                                               
took  an ownership  position at  project  sanction. This  exposed                                                               
basically $200-$300  million to project sanction.  At that point,                                                               
if  the parties  wanted to  move  forward with  the project,  the                                                               
state got  the choice of what  piece of the project  it wanted to                                                               
hold based  on its own risk  portfolio. It could own  portions of                                                               
the upstream feeder lines or  the Alaskan portion only et cetera.                                                               
It could actually  sell everything else off at that  point to the                                                               
other  applicants at  100  percent of  value.  Buying before  the                                                               
pipeline is built  is risky; after the pipeline  is built, buying                                                               
a  piece is  a  fine idea.  If the  state  wanted to  participate                                                               
during the construction  phase, he suggested 51  percent was very                                                               
high risk.                                                                                                                      
                                                                                                                                
CHAIR HUGGINS said their concern  is about the rate subsequent to                                                               
construction and  if the  small players get  together and  buy 51                                                               
percent of the project. How  could they get around that potential                                                               
scenario?                                                                                                                       
                                                                                                                                
MR. PORTER  replied he didn't  think that concern  was necessary.                                                               
He explained there is a very  different role between the FERC and                                                               
a regulated  pipeline and the TAPS  pipeline. Commissioner Galvin                                                               
talked about  this and said the  TAPS issues won't occur  on this                                                               
pipeline because every  single change will have to  go before the                                                               
FERC before it happens.                                                                                                         
                                                                                                                                
CHAIR  HUGGINS said  some members  were pretty  overwrought about                                                               
this.                                                                                                                           
                                                                                                                                
MR. PORTER replied that he  didn't think it got thoroughly vetted                                                               
because of the circumstances under which AGIA was passed.                                                                       
                                                                                                                                
SENATOR WAGONER asked what position  FERC would take on the 60/40                                                               
ratio for an expansion.                                                                                                         
                                                                                                                                
MR.  PORTER guessed  they wouldn't  have a  problem with  it, but                                                               
they  could   change  it.   FERC  would   see  through   all  the                                                               
manipulations of contracts and determine what is fair.                                                                          
                                                                                                                                
4:49:37 PM                                                                                                                    
CHAIR HUGGINS  said FERC's theorem  is that potentially  in going                                                               
forward, they would be the authority  over the LNG plants and the                                                               
pipeline, which  is different  than what he  had heard  that they                                                               
would have the LNG plant.                                                                                                       
                                                                                                                                
4:50:47 PM                                                                                                                    
MR. PORTER responded if an open  season allows for an LNG project                                                               
to go  forward as  well as  the Canadian  project, you  allow the                                                               
commercial players to  make the decisions they have  to make. The                                                               
state shouldn't stand in the way.                                                                                               
                                                                                                                                
SENATOR WAGONER asked what he  meant by external FERC control. He                                                               
would support  an LNG project and  then shipping to the  Lower 48                                                               
and  being  reinjected  into  a FERC  regulated  system;  but  he                                                               
wouldn't if  it the  LNG gets  exported. FERC  would have  no say                                                               
over that.                                                                                                                      
                                                                                                                                
SENATOR MCGUIRE  countered that  FERC does have  a say  under the                                                               
export license.                                                                                                                 
                                                                                                                                
SENATOR  WAGONER  said  that's  under the  Department  of  Energy                                                               
(DOE), not FERC.                                                                                                                
                                                                                                                                
SENATOR  MCGUIRE  added,  but through  their  coordination,  FERC                                                               
would  have a  say in  any LNG  project. When  the Yukon  Pacific                                                               
license was  granted the world  looked a whole lot  different. In                                                               
2005  when  the legislation  passed,  FERC  believed it  had  the                                                               
authority  to  revisit  that  issue  in  a  completely  different                                                               
manner. It went out of its way to say so.                                                                                       
                                                                                                                                
SENATOR  WAGONER  said  his  point   is  that  it's  not  a  FERC                                                               
responsibility, but rather DOE's.                                                                                               
                                                                                                                                
CHAIR HUGGINS recalled that one  of BG Group's major concerns was                                                               
who regulated the  pipe in an LNG operation.  They were concerned                                                               
about a conflict  with the state and  the RCA. It was  new to him                                                               
when FERC said it would be involved.                                                                                            
                                                                                                                                
4:54:14 PM                                                                                                                    
SENATOR  MCGUIRE  said  FERC's  point was  that  there  would  be                                                               
federal authority over the project.  Some people have thought the                                                               
old  Yukon  Pacific license  was  a  separate viable  ready-to-go                                                               
deal, but it's not. She also added  that FERC went out of its way                                                               
to say  it didn't care  about politics  whether it's AGIA  or the                                                               
Stranded Gas Act.                                                                                                               
                                                                                                                                
CHAIR HUGGINS said some of  the financial houses have referred to                                                               
a non-equity partner or owner and  asked what that conjures up in                                                               
his mind.                                                                                                                       
                                                                                                                                
MR.  PORTER replied  that he  wasn't familiar  with a  non-equity                                                               
owner.                                                                                                                          
                                                                                                                                
CHAIR HUGGINS thanked Mr. Porter for his presentation and                                                                       
adjourned the meeting at 4:55:41 PM.                                                                                          

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