Legislature(2003 - 2004)

03/05/2003 03:30 PM RES

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
                    ALASKA STATE LEGISLATURE                                                                                  
              SENATE RESOURCES STANDING COMMITTEE                                                                             
                         March 5, 2003                                                                                          
                           3:30 p.m.                                                                                            
                                                                                                                                
MEMBERS PRESENT                                                                                                               
                                                                                                                                
Senator Scott Ogan, Chair                                                                                                       
Senator Thomas Wagoner, Vice Chair                                                                                              
Senator Fred Dyson                                                                                                              
Senator Ralph Seekins                                                                                                           
Senator Ben Stevens                                                                                                             
Senator Kim Elton                                                                                                               
Senator Georgianna Lincoln                                                                                                      
                                                                                                                                
MEMBERS ABSENT                                                                                                                
                                                                                                                                
All members present                                                                                                             
                                                                                                                                
COMMITTEE CALENDAR                                                                                                            
                                                                                                                                
SENATE BILL NO. 74                                                                                                              
"An  Act   extending  the  renewal   period  for   oil  discharge                                                               
prevention and contingency plans;  and providing for an effective                                                               
date."                                                                                                                          
     MOVED CSSB 74(RES) OUT OF COMMITTEE                                                                                        
                                                                                                                                
SENATE BILL NO. 79                                                                                                              
"An Act  extending the  termination date  of the  Alaska Minerals                                                               
Commission."                                                                                                                    
     MOVED SB 79 OUT OF COMMITTEE                                                                                               
                                                                                                                                
SENATE BILL NO. 92                                                                                                              
"An  Act   amending  the  standards  applicable   to  determining                                                               
whether,  for purposes  of the  Alaska  Stranded Gas  Development                                                               
Act, a  proposed new investment constitutes  a qualified project,                                                               
and  extending  the deadline  for  applications  relating to  the                                                               
development of  contracts for payments  in lieu of taxes  and for                                                               
royalty  adjustments  that  may be  submitted  for  consideration                                                               
under that Act; and providing for an effective date."                                                                           
     HEARD AND HELD                                                                                                             
                                                                                                                                
PREVIOUS ACTION                                                                                                               
                                                                                                                                
SB 74 - See Resources minutes dated 2/24/03.                                                                                    
                                                                                                                                
SB 79 - No previous action to record.                                                                                           
                                                                                                                                
SB 92 - No previous action to record.                                                                                           
                                                                                                                                
WITNESS REGISTER                                                                                                              
                                                                                                                                
Marilyn Crockett                                                                                                                
Alaska Oil and Gas Association (AOGA)                                                                                           
121 West Fireweed Lane                                                                                                          
Anchorage, Alaska  99503                                                                                                        
POSITION STATEMENT:  Stated support for Amendment 2 to SB 74.                                                                 
                                                                                                                                
Dr. Lance Miller                                                                                                                
Executive Director                                                                                                              
Juneau Economic Development Council                                                                                             
612 W. Willoughby Ave.                                                                                                          
Juneau, AK  99801                                                                                                               
POSITION STATEMENT:  Supports SB 79                                                                                           
                                                                                                                                
Neil MacKinnon                                                                                                                  
Vice Chair                                                                                                                      
Alaska Minerals Commission                                                                                                      
Hyak Mining Co.                                                                                                                 
1114 Glacier Avenue                                                                                                             
Juneau, AK  99801                                                                                                               
POSITION STATEMENT:  Supports SB 79                                                                                           
                                                                                                                                
Irene Anderson                                                                                                                  
Chair                                                                                                                           
Alaska Minerals Commission                                                                                                      
Sitnasuak Native Corporation                                                                                                    
PO Box 905                                                                                                                      
Nome, AK 99762                                                                                                                  
POSITION STATEMENT:  Supports SB 79                                                                                           
                                                                                                                                
Dan Dickinson, Director                                                                                                         
Tax Division                                                                                                                    
Department of Revenue                                                                                                           
PO Box 110400                                                                                                                   
Juneau, AK  99811-0400                                                                                                          
POSITION STATEMENT:  Supports SB 92                                                                                           
                                                                                                                                
Roger Marks, Petroleum Economist                                                                                                
Department of Revenue                                                                                                           
PO Box 110400                                                                                                                   
Juneau, AK  99811-0400                                                                                                          
POSITION STATEMENT:  Supports SB 92                                                                                           
                                                                                                                                
Mark Myers, Director                                                                                                            
Oil and Gas Division                                                                                                            
Department of Natural Resources                                                                                                 
400 Willoughby Ave.                                                                                                             
Juneau, AK  99801-1724                                                                                                          
POSITION STATEMENT:  Supports SB 92                                                                                           
                                                                                                                                
ACTION NARRATIVE                                                                                                              
                                                                                                                                
TAPE 03-9, SIDE A                                                                                                             
                                                                                                                              
CHAIR SCOTT  OGAN called the Senate  Resources Standing Committee                                                             
meeting to order  at 3:30 p.m. Senators  Wagoner, Stevens, Dyson,                                                               
Seekins, Elton and Chair Ogan were present.                                                                                     
                                                                                                                                
         SB 74-DISCHARGE PREVENTION & CONTINGENCY PLANS                                                                     
                                                                                                                              
CHAIR OGAN  reminded members  that SB  74 was  heard at  the last                                                               
meeting and that an amendment is pending.                                                                                       
                                                                                                                                
SENATOR  SEEKINS moved  to withdraw  his motion  to amend  SB 74.                                                               
There being no objection, the motion carried.                                                                                   
                                                                                                                                
SENATOR  SEEKINS  moved to  adopt  Amendment  2, which  reads  as                                                               
follows:                                                                                                                        
                                                                                                                                
                          AMENDMENT 2                                                                                         
                                                                                                                                
OFFERED IN THE SENATE RESOURCES              BY SENATOR SEEKINS                                                                 
     COMMITTEE                                                                                                                  
                                                                                                                                
     TO:  SB 74                                                                                                                 
                                                                                                                                
Page 1, following line 10:                                                                                                      
     Insert a new bill section to read:                                                                                         
     ** Sec. 2  The uncodified law of the State of Alaska is                                                                    
amended by adding a new section to read:                                                                                        
     TRANSITION.  Notwithstanding any contrary provision of AS                                                                  
46.04, including the  review procedures in AS  46.04.030, and the                                                               
regulations adopted  under AS  46.04, the  expiration date  of an                                                               
oil  discharge prevention  and contingency  plan approved  by the                                                               
Department  of Environmental  Conservation  before the  effective                                                               
date  of this  Act shall  be  extended for  two years,  or for  a                                                               
shorter period if a shorter period  is requested by the holder of                                                               
the approved plan, if                                                                                                           
          (1)  the plan is still in effect on the day before the                                                                
effective date of this Act; and                                                                                                 
          (2)  the Department of Environmental Conservation has                                                                 
not given a notice of violation  of AS 46.04.030 to the holder of                                                               
the plan that  has not been corrected to the  satisfaction of the                                                               
Department of Environmental Conservation.                                                                                       
                                                                                                                                
Renumber remaining sections accordingly.                                                                                        
                                                                                                                                
SENATOR  LINCOLN   objected  for   the  purpose  of   hearing  an                                                               
explanation of Amendment 2.                                                                                                     
                                                                                                                                
SENATOR SEEKINS explained that Amendment  2 allows a holder of an                                                               
approved plan to  request an extension for a period  of less than                                                               
two years.                                                                                                                      
                                                                                                                                
CHAIR OGAN  noted that several  people were available  to testify                                                               
or  answer  questions on  Amendment  2:  Larry Dietrick,  Marilyn                                                               
Crockett, and Breck Tostevin.                                                                                                   
                                                                                                                                
SENATOR  LINCOLN removed  her objection.  Therefore, Amendment  2                                                               
was adopted.                                                                                                                    
                                                                                                                                
CHAIR OGAN took public testimony.                                                                                               
                                                                                                                                
MS.  MARILYN CROCKETT,  Alaska Oil  and  Gas Association,  stated                                                               
support for Amendment 2.                                                                                                        
                                                                                                                                
SENATOR  DYSON  moved  SB  74  as  amended  [CSSB  74(RES)]  from                                                               
committee with attached fiscal notes.                                                                                           
                                                                                                                                
SENATOR LINCOLN objected to ask  if this legislation will next go                                                               
to the Senate floor.                                                                                                            
                                                                                                                                
CHAIR OGAN  said that  it has  a zero  fiscal note  so it  has no                                                               
further referrals, but that the other body will review it.                                                                      
                                                                                                                                
SENATOR LINCOLN  felt that since  the Senate  Resources Committee                                                               
is the  only committee  of referral,  it should  do the  best job                                                               
possible on this legislation.                                                                                                   
                                                                                                                                
CHAIR OGAN replied,  "For the record I think we  have. We held it                                                               
up a week and  a half and we worked out a  good compromise on the                                                               
amendment. Some questions were addressed."                                                                                      
                                                                                                                                
SENATOR LINCOLN  said Amendment 2  was a good compromise  but she                                                               
still has concerns. She then withdrew her objection.                                                                            
                                                                                                                                
CHAIR OGAN  stated that with  no further objection,  CSSB 74(RES)                                                               
moved from committee.                                                                                                           
                                                                                                                                
                                                                                                                                
            SB 79-EXTEND ALASKA MINERALS COMMISSION                                                                         
                                                                                                                                
SENATOR BEN STEVENS, sponsor of  SB 79, told members this measure                                                               
would  extend  the Alaska  Minerals  Commission  to 2014.  It  is                                                               
currently set  to expire  February 1,  2004. The  Alaska Minerals                                                               
Commission  was established  in 1986  to make  recommendations to                                                               
the governor and  legislature on ways to  mitigate constraints on                                                               
development of  mineral resources in  Alaska.  The  commission is                                                               
comprised of six appointees by  the governor and three appointees                                                               
each by the  Senate President and House Speaker.  He believes the                                                               
commission has done  an excellent job over the last  16 years. He                                                               
highlighted some  of the  commission's recommendations  that have                                                               
been adopted:                                                                                                                   
                                                                                                                                
   · Passage of the Minerals Policy Act.                                                                                        
   · Funding for the airborne geophysical surveys.                                                                              
   · Assisting in the creation of a task force for RS2477 trail                                                                 
     inventory.                                                                                                                 
   · Assertion of RS2477 rights-of-way.                                                                                         
   · Legislative Resolution 31 passed in opposition of the                                                                      
     creation of international parks, world heritage sites, and                                                                 
     marine biosphere reserves in Western Alaska.                                                                               
   · Extending terms of permits when legal impediments prevent                                                                  
     use.                                                                                                                       
                                                                                                                                
SENATOR  BEN STEVENS  stated the  Alaska Minerals  Commission has                                                               
been working well so he  believes the Legislature should allow it                                                               
to do  its good work. He  pointed out the recommendations  in the                                                               
executive  summary of  the  Report of  the  2003 Alaska  Minerals                                                               
Commission are valuable. He encouraged  committee members to pass                                                               
SB 79 on.                                                                                                                       
                                                                                                                                
CHAIR OGAN took public testimony.                                                                                               
                                                                                                                                
MR.  LANCE  MILLER, Executive  Director  of  the Juneau  Economic                                                               
Development  Council  (JEDC),  told  members that  prior  to  his                                                               
current position,  he was the  projects manager with  Placer Dome                                                               
and he  worked as chief geologist  with Echo Bay [Mining]  on the                                                               
A-J  project for  nine  years.  He said  SB  79  will extend  the                                                               
commission  for  a longer  period  of  time  than has  been  done                                                               
previously.   He noted  that the minerals  industry is  a billion                                                               
dollar  industry  -  the  third  largest  in  the  state.  Mining                                                               
companies are committing their capital  to Alaska over the course                                                               
of 10  to 20 years,  just to get a  project going. Mines  take at                                                               
least ten  years to build.  He believes  if the Commission  is in                                                               
existence for at  least ten years running, that will  send a good                                                               
message  to the  industry. He  summarized that  if companies  are                                                               
willing to  commit risk capital for  that time frame in  the hope                                                               
of getting a  mine going, a ten year extension  of the commission                                                               
will show good will toward a working partnership with industry.                                                                 
                                                                                                                                
CHAIR OGAN asked the length of the previous extension.                                                                          
                                                                                                                                
MR. MILLER said it was five years.                                                                                              
                                                                                                                                
MR. NEIL MacKINNON, Vice Chair  of the Alaska Minerals Commission                                                               
and  President  of  Hyak Mining  Company,  a  small  Juneau-based                                                               
exploration company, told  members he has been  on the commission                                                               
through several  five-year extensions and five  years passes very                                                               
quickly. He  said that  when it  comes time  to write  the Alaska                                                               
Minerals  Commission report,  members do  a vast  amount of  work                                                               
that is not accounted for in the  budget: they do the work to get                                                               
it done.                                                                                                                        
                                                                                                                                
MR.  MacKINNON told  members the  Alaska  Minerals Commission  is                                                               
made up of a diverse group  of individuals, from placer miners to                                                               
representatives  of companies  such as  Cominco. Members  bring a                                                               
vast   array  of   views  therefore   the  Commission   takes  an                                                               
overarching view of the problems  facing the mining industry. The                                                               
commission also tries  to look ahead for  potential problems. One                                                               
example is  essential fish habitat,  which the  commission picked                                                               
up  on its  "radar screen"  several years  ago. It  is a  brewing                                                               
problem that has not come to the forefront yet.                                                                                 
                                                                                                                                
SENATOR  DYSON asked  Mr. MacKinnon  to  clarify what  "essential                                                               
fish habitat" means to the mining industry.                                                                                     
                                                                                                                                
MR. MacKINNON said  that the Stevens-Magnuson Act  contains a few                                                               
lines  that give  the National  Marine  Fisheries Service  (NMFS)                                                               
power over  what it deems to  be essential fish habitat.  He said                                                               
when  the act  was written,  he thinks  it was  meant to  address                                                               
ground  fish   and  bottom  draggers.   While  the   tendency  of                                                               
bureaucracies  is to  expand power  as far  as possible,  he sees                                                               
NMFS exercising  that authority over  creeks and any  water body.                                                               
He  noted  that  numerous  groups   are  working  on  the  issue,                                                               
including U.S.  Senator Ted Stevens and  the Resource Development                                                               
Council. He repeated that the NMFS  policy has not yet been fully                                                               
expanded so  that keeping the  issue on  the radar screen  may be                                                               
enough to control the problem.                                                                                                  
                                                                                                                                
SENATOR DYSON asked:                                                                                                            
     So,  when  you  say  'essential  fish  habitat'  you're                                                                    
     talking about  the regulatory  problems that  come from                                                                    
     those  lines being  in the  National Marine  Fisheries.                                                                    
     And  when  you  talk about  wetlands  problems,  you're                                                                    
     talking  about   the  jurisdiction  of  the   Corps  of                                                                    
     Engineers and others over wetlands  and how that impact                                                                    
     might - you're not just talking about the wetlands.                                                                        
                                                                                                                                
MR. MacKINNON stated the Alaska  Minerals Commission sees this as                                                               
a  wetlands problem  coming  from another  angle  - the  National                                                               
Marine Fisheries  Service, based on the  'essential fish habitat'                                                               
definition, which is a rough definition.                                                                                        
                                                                                                                                
SENATOR LINCOLN  noted this will  be the fourth extension  of the                                                               
Alaska Minerals  Commission, which she supports.  She pointed out                                                               
SB 79  does not  address the  length of  the terms  of commission                                                               
members and asked if members are appointed for a five-year term.                                                                
                                                                                                                                
MR.  MacKINNON  said  members  serve   at  the  pleasure  of  the                                                               
appointee. He noted the statute is not clear about term limits.                                                                 
                                                                                                                                
SENATOR LINCOLN  suggested that  the term  be clearly  defined so                                                               
that the people who are serving  understand how long they will be                                                               
in office. She noted that serving  for five-years may seem like a                                                               
lifetime to some people while  that amount of time passes quickly                                                               
for others. She then asked  why, if the five-year extensions have                                                               
posed no  problem, the commission  believes a  ten-year extension                                                               
will be more beneficial.                                                                                                        
                                                                                                                                
MR. MacKINNON replied:                                                                                                          
                                                                                                                                
     Well,  maybe it's  just a  perspective that  five years                                                                    
     comes  real fast.  That was  part of  the comment  that                                                                    
     it's been  over and  over so let's  just put  ten years                                                                    
     and  go  for  ten  because   it  gives  a  little  more                                                                    
     permanence  to it  and, like  I say,  five years  isn't                                                                    
     that long.                                                                                                                 
                                                                                                                                
CHAIR OGAN  pointed out  the statute says  that members  serve at                                                               
the pleasure  of the appointing  authority and members  must have                                                               
at  least five  years experience  in various  aspects of  mineral                                                               
industries in the state.                                                                                                        
                                                                                                                                
SENATOR  LINCOLN asked  if the  commission  has ever  recommended                                                               
terms for members to the legislature.                                                                                           
                                                                                                                                
MR.  MacKINNON  said   that  he  was  appointed   by  the  Senate                                                               
President,  and  if  the  Senate  President  chooses  to  appoint                                                               
someone else,  that is  his choice. He  said that  one commission                                                               
member brought  up this discussion  thinking that  the commission                                                               
should get  some "fresh  blood." However, in  the history  of the                                                               
commission, there  has been enough  turnover from  people leaving                                                               
to take other positions or for  other reasons. As an example, Tom                                                               
Irwin will no longer serve on  the commission as he has taken the                                                               
position  as  the  Commissioner  of  the  Department  of  Natural                                                               
Resources.                                                                                                                      
                                                                                                                                
CHAIR OGAN asked how often the Alaska Minerals Commission meets.                                                                
                                                                                                                                
MR. MacKINNON said  it meets three times per year.  Its report to                                                               
the legislature is due in December.                                                                                             
                                                                                                                                
CHAIR  OGAN asked  Mr.  MacKinnon  if he  feels  the report  gets                                                               
attention.                                                                                                                      
                                                                                                                                
MR.  MacKINNON   said  that  depends   on  the  make-up   of  the                                                               
legislature, but it has during the last few years.                                                                              
                                                                                                                                
SENATOR LINCOLN said  she is pleased to see that  two women serve                                                               
on  the 11  member  commission but  she would  like  to see  that                                                               
number expanded.                                                                                                                
                                                                                                                                
MR. MacKINNON said that Irene Anderson  is the Chair and that the                                                               
women "probably do most of the heavy lifting."                                                                                  
                                                                                                                                
SENATOR  ELTON said  he supports  the Alaska  Minerals Commission                                                               
and  feels it  is  a model  that  is being  looked  at for  other                                                               
economic sector proposals in Alaska.                                                                                            
                                                                                                                                
MS.   IRENE   ANDERSON,   Chair,  Alaska   Minerals   Commission,                                                               
maintained that  a ten-year extension  will save a lot  of people                                                               
time,  such  as  legislators  and  staff.  She  agrees  with  Mr.                                                               
MacKinnon that  members come and  go and  that the group  is very                                                               
diverse. She indicated  that ten years is not a  long time period                                                               
in  the   mining  industry,  especially  when   trying  to  build                                                               
infrastructure in rural Alaska.                                                                                                 
                                                                                                                                
CHAIR OGAN asked Ms. Anderson to describe her background.                                                                       
                                                                                                                                
MS. ANDERSON  said she comes  from a  family of placer  miners in                                                               
the Nome area.  Her husband is originally from  McGrath. She said                                                               
her grandfather began mining in Nome in 1905.                                                                                   
                                                                                                                                
Ms. Frankie  Pillifant, staff to the  Alaska Minerals Commission,                                                               
was available to answer questions, however there were none.                                                                     
                                                                                                                                
SENATOR BEN  STEVENS moved SB  79 from committee  with individual                                                               
recommendations and its attached fiscal note.                                                                                   
                                                                                                                                
CHAIR OGAN  announced that  without objection,  SB 79  would move                                                               
from committee.                                                                                                                 
                                                                                                                                
The committee took a brief at-ease.                                                                                             
                                                                                                                                
         SB  92-STRANDED GAS DEVELOPMENT ACT AMENDMENTS                                                                     
                                                                                                                                
CHAIR  OGAN told  members that  SB  92, sponsored  by the  Senate                                                               
Resources  Committee, reauthorizes  the Stranded  Gas Development                                                               
Act. He indicated that he spent  hundreds of hours working on the                                                               
original  legislation several  years  ago. He  explained that  he                                                               
does  not intend  to take  action on  this legislation  today, as                                                               
similar  legislation is  working its  way through  the House.  He                                                               
said he would  like the committee to get an  overview of what the                                                               
original Stranded  Gas Act did.  He said this  Act has had  a big                                                               
impact on the State of  Alaska, and especially on the communities                                                               
affected  by  gas  development.  It  gives the  state  a  lot  of                                                               
latitude  to  negotiate  settlements  that  highly  effect  local                                                               
communities. He  indicated that building  a gas  pipeline project                                                               
through a  community causes  high impact  to that  community, for                                                               
example  by  increasing  the  population. He  noted  SB  92  only                                                               
reauthorizes the  original Act. He  asked Dan Dickinson  to brief                                                               
the committee.                                                                                                                  
                                                                                                                                
MR. DAN DICKINSON gave the following testimony.                                                                                 
                                                                                                                                
     My name is Dan Dickinson,  Tax Division director at the                                                                    
     Department  of  Revenue.  With me  is  Roger  Marks,  a                                                                    
     Petroleum  Economist with  the Tax  Division, who  will                                                                    
     speak briefly  about the history, intent  and mechanics                                                                    
     of  the Stranded  Gas Act.  But  first, I  think it  is                                                                    
     important to introduce ourselves,  as the Department of                                                                    
     Revenue  has many  responsibilities under  the Stranded                                                                    
     Gas  Act,   and  the  Tax  Division   has  considerable                                                                    
     expertise and experience in oil and gas matters.                                                                           
                                                                                                                                
     Five years ago  we were three separate  divisions - the                                                                    
     Oil  and  Gas Audit  Division,  the  Income and  Excise                                                                    
     Audit Division  and the Charitable Gaming  Division. We                                                                    
     are now merged into a  single division. Some think that                                                                    
     was a mistake. We named  ourselves the Tax Division. It                                                                    
     is what  we do but no  one wants to be  seen talking to                                                                    
     us anymore so,  again, I appreciate the  chance to come                                                                    
     before this committee.                                                                                                     
                                                                                                                                
     What we do  can be seen from the  FY 2002 Comprehensive                                                                    
     Annual Financial  Report for  the State of  Alaska. You                                                                    
     should have  a copy of  an excerpt from Table  1.13. Of                                                                    
     total governmental fund revenues of $3.5 billion:                                                                          
                                                                                                                                
        · $1.6 billion comes from the feds                                                                                      
        · Taxes are $1 billion                                                                                                  
        · Royalties are $900 million                                                                                            
        · Interest and investment income, plus all the                                                                          
          other ways the government raises money - charges                                                                      
          for services, fines and forfeitures and 'other'                                                                       
          were more than offset by investment losses.                                                                           
                                                                                                                                
     The  Tax Division  administers 19  of  the 20  tax                                                                         
     types that comprise the $1  billion tax figure. Of                                                                         
     the  billion dollars  in taxes,  all but  a little                                                                         
     more  than $100  million were  oil and  gas taxes.                                                                         
     The   state's   oil   and  gas   take   is   often                                                                         
     characterized as  four bites of the  apple, and we                                                                         
     are experienced at all four bites.                                                                                         
                                                                                                                                
     For the  first bite  we are charged  with auditing                                                                         
     royalties  and net  profit  share  leases, and  we                                                                         
     work with DNR closely on those matters.                                                                                    
                                                                                                                                
     The  other  three bites  of  the  apple cover  the                                                                         
     three areas  that we anticipate will  be our focus                                                                         
     in any Stranded Gas Act negotiation.                                                                                       
                                                                                                                                
     The second  bite of the  apple is the oil  and gas                                                                         
     property  tax. Last  Friday, to  meet our  March 1                                                                         
     deadline, the Division's Oil  and Gas Property Tax                                                                         
     assessor  and his  staff mailed  out the  2003 tax                                                                         
     roll,  showing  oil  and gas  property  valued  at                                                                         
     about $13.5  billion. As Senator Ogan  pointed out                                                                         
     in his  introductive remarks, property  taxes play                                                                         
     a  unique  role  in determining  any  natural  gas                                                                         
     project's profitability.                                                                                                   
                                                                                                                                
     The  next bite  of the  apple is  the oil  and gas                                                                         
     corporate income tax. Income  taxes are focused on                                                                         
     taxing profits. As Roger  will elaborate later on,                                                                         
     the  more we  focus  on taxing  profits, the  more                                                                         
     progressive  our system  becomes. This  is one  of                                                                         
     the stated goals of the  Stranded Gas Act. We have                                                                         
     a  large experienced  group in  our division  that                                                                         
     works  these  issues  and we  expect  them  to  be                                                                         
     critical.                                                                                                                  
                                                                                                                                
     The last bite of the  apple is the production tax.                                                                         
     Like royalty,  the production  tax focuses  on the                                                                         
     commodity  value of  the resource  at or  near the                                                                         
     wellhead. We have lots of  experience in this area                                                                         
     - market pricing,  inter-company transfer pricing,                                                                         
     how  markets  work,  how  energy  contracts  work,                                                                         
     business practices and cost analysis.                                                                                      
                                                                                                                                
     Now, let  me add  a personal observation,  but one                                                                         
     that  I think  reflects  what many  of  us in  the                                                                         
     division believe  about what  the state  should be                                                                         
     trying  to   achieve  in  any  Stranded   Gas  Act                                                                         
     negotiation -  taxes -  and the  government's take                                                                         
     in  general is  the  subject of  the Stranded  Gas                                                                         
     Act. It  should not distort  commercial realities.                                                                         
     The government's  take should not be  what is red-                                                                         
     lighting this project.                                                                                                     
                                                                                                                                
     As Roger  will explain, our current  fiscal system                                                                         
     intensifies  some  of  the   risks  faced  by  the                                                                         
     producers. Ironically, not  only the producers but                                                                         
     the state could be  better off changing those same                                                                         
     aspects  of its  fiscal system.  Stranded Gas  Act                                                                         
     negotiations should be about  risk sharing and who                                                                         
     among  the  state   and  the  commercial  entities                                                                         
     involved can  best handle what  risks. As  soon as                                                                         
     SB  92 becomes  law, we  can start  discussing how                                                                         
     price risk  will be  shared or  how return  on the                                                                         
     investment  in  the  pipeline will  be  taxed,  or                                                                         
     really  figure out  what each  party wants  to get                                                                         
     from  this project,  aside  from  more. There  are                                                                         
     lots of specifics  that can be set  aside until it                                                                         
     is  clearer  how our  gas  will  fit in  with  the                                                                         
     market mechanisms  that will  be in place  when we                                                                         
     are ready  to market  it. The state's  role should                                                                         
     not be  to increase risks.  Maybe we can  make the                                                                         
     project fly by reducing risk.                                                                                              
                                                                                                                                
     On the other  hand, we have to make  sure that the                                                                         
     state   is  not   naively  underwriting   a  risky                                                                         
     project.  As  the  only ones  who  will  still  be                                                                         
     around  if things  go sour,  we don't  want to  be                                                                         
     left holding a bag  we didn't quite understand the                                                                         
     dimensions of.                                                                                                             
                                                                                                                                
     That's  my quick  overview  of  the Department  of                                                                         
     Revenue Tax Division.  The administration strongly                                                                         
     supports    reauthorizing    the   Stranded    Gas                                                                         
     Development  Act. We  believe it  creates a  great                                                                         
     mechanism to work these  difficult issues we face.                                                                         
     The Tax  Division looks forward  to being  able to                                                                         
     play our part in that work.                                                                                                
                                                                                                                                
     Thank you  for the  opportunity to testify  and to                                                                         
     introduce the  people who will  be doing a  lot of                                                                         
     the  foot   slogging  in  any  stranded   gas  act                                                                         
     negotiation.                                                                                                               
                                                                                                                                
CHAIR  OGAN asked  Mr. Dickinson  to give  the committee  an                                                                    
overview  of  what he  envisions  the  state negotiations  -                                                                    
pretty  much on  the part  of the  municipalities -  to look                                                                    
like at the end of the day, including the sticking points.                                                                      
                                                                                                                                
MR.  DICKINSON said  Chair  Ogan  correctly identified  what                                                                    
will  be going  on with  the municipalities.  Property taxes                                                                    
could form a  very large piece of the  fiscal take. Property                                                                    
taxes  are set  up  so that  they  are due  as  soon as  the                                                                    
project  begins. It  may  be  six years  before  any gas  or                                                                    
profit flows  to the  project, but  the project  is taxable.                                                                    
Early  property taxes  can  harm  the rate  of  return on  a                                                                    
project. On the other hand,  those taxes are the sole source                                                                    
of  revenue from  those projects  to the  municipalities. In                                                                    
addition,  the municipalities  need those  revenues to  deal                                                                    
with  population pressures  and disruptions.  Those are  the                                                                    
tensions  the state  must balance.  The municipalities  must                                                                    
participate through  a formal  committee but  ultimately the                                                                    
state  is charged  with making  judgments on  behalf of  the                                                                    
municipalities and striking a delicate balance.                                                                                 
                                                                                                                                
CHAIR OGAN commented  that if all of the taxes  are due when                                                                    
the  materials and  equipment  hit the  ground,  it adds  an                                                                    
extra expense for the builders  of the pipeline so the state                                                                    
allows them to negotiate a payment in lieu of taxes.                                                                            
                                                                                                                                
MR. DICKINSON agreed.                                                                                                           
                                                                                                                                
CHAIR OGAN  said if he was  the mayor of a  municipality, he                                                                    
might  not  have  a  high   comfort  level  with  the  state                                                                    
negotiating  payments in  lieu of  taxes on  his behalf.  He                                                                    
asked Mr.  Dickinson if he  has heard any feedback  from the                                                                    
municipalities.                                                                                                                 
                                                                                                                                
MR. DICKINSON said he has, but  he would first like to share                                                                    
some observations. First, the Stranded  Gas Act will have to                                                                    
be  passed by  the  legislature so  if  something is  really                                                                    
askew, the legislature will have  a role in making sure that                                                                    
municipalities have not been left  out. The law specifically                                                                    
states  there  will  be  a  fair  and  reasonable  share  of                                                                    
payments, so  if there is  a payment  in lieu of  taxes, the                                                                    
focus may have  been on how that was arrived  at. He thought                                                                    
the  law establishes  that  the communities  need  to get  a                                                                    
piece of that. As an example, Mr. Dickinson said:                                                                               
                                                                                                                                
     Under our current oil regime,  about 80 percent of                                                                         
     the  government's take  is based  on the  value of                                                                         
     the  wellhead.  About  10   percent  is  based  on                                                                         
     profits and about 10 percent  is based on property                                                                         
     taxes. If  we were to  look at a profit  like this                                                                         
     and say gee,  let's switch it over and  make it 80                                                                         
     percent  based on  profit  and  smaller pieces  on                                                                         
     wellhead value  and property taxes, what  we might                                                                         
     do  is make  sure that  the communities  got those                                                                         
     early dollars  when they will  need them,  but the                                                                         
     state would not be  taking those early dollars and                                                                         
     we  would be  hoping to  be repaid  or to  make up                                                                         
     [indisc.] by  getting a piece of  the profit later                                                                         
     on.  So, those  are the  kind of  larger questions                                                                         
     that we've  got to  deal with conceptually  in the                                                                         
     Stranded Gas Act negotiations.                                                                                             
                                                                                                                                
CHAIR OGAN asked  how it has been working out,  as time goes                                                                    
on, that the state ends up  with its share of these types of                                                                    
taxes  and  revenues due.  He  asked  whether that  keeps  a                                                                    
project from  being front-end loaded  and how it  has worked                                                                    
out  at the  end  of the  project after  the  pipe has  been                                                                    
amortized and is profitable.                                                                                                    
                                                                                                                                
MR.  DICKINSON  said  that  is  one  of  the  things  to  be                                                                    
determined. The division  could look at an  income tax built                                                                    
on a rate  of return built into the tariff  or it could have                                                                    
a simple  measure that defines the  measure of possibilities                                                                    
so  that if  prices  go  above x,  the  payments  will be  a                                                                    
certain amount. He said all  kinds of mechanisms can be used                                                                    
depending on the  amount of price risk the  state is willing                                                                    
to share.                                                                                                                       
                                                                                                                                
CHAIR  OGAN  referred  to  Sec.  43.82.210,  Contract  terms                                                                  
relating  to payment  in lieu  of one  or more  taxes, which                                                                  
lists  nine taxes.  He said  that section  essentially gives                                                                    
the  commissioner  broad  sweeping authority  on  behalf  of                                                                    
affected  municipalities.  He  noted the  "circuit  breaker"                                                                    
protection is that the legislature  has to approve the deal.                                                                    
He  said  he wanted  to  bring  that to  committee  members'                                                                    
attention because  the commissioner  will have  broad powers                                                                    
if a gas line is built in Alaska.                                                                                               
                                                                                                                                
MR. DICKINSON  pointed out  that item (3),  the oil  and gas                                                                    
conservation   tax,    was   repealed   and    replaced   by                                                                    
other state or municipal taxes.  He said the Chair correctly                                                                    
pointed  out  that the  commissioner  of  the Department  of                                                                    
Revenue  has enormous  powers under  this  act. He  observed                                                                    
that the  Department of Revenue  assesses the values  of the                                                                    
properties for which  it levies taxes so it  already plays a                                                                    
critical role in  determining the revenues that  flow to the                                                                    
department.   The  affected municipalities  will be  able to                                                                    
communicate with  an advisory board that  can relay concerns                                                                    
to the  commissioner. He again agreed  that this essentially                                                                    
identifies the  sources from  which the  affected localities                                                                    
finance  their local  operations. The  negotiations will  be                                                                    
curious for the municipalities because  they will have a lot                                                                    
to do  with whether a  project ends  up being a  net benefit                                                                    
for them.                                                                                                                       
                                                                                                                                
4:10 p.m.                                                                                                                       
                                                                                                                                
CHAIR   OGAN   asked   Mr.   Dickinson   to   consider   the                                                                    
legislature's role  in this. He  noted the  legislature will                                                                    
have a  role in approving  the deal  but the idea  of making                                                                    
sure that a  legislator is appointed to the  committee or in                                                                    
some  oversight  capacity  over the  negotiations  has  been                                                                    
suggested.  He is  opposed  to putting  that  into the  bill                                                                    
because he feels it is a separation of powers issue.                                                                            
                                                                                                                                
TAPE 03-9, SIDE B                                                                                                               
                                                                                                                                
CHAIR  OGAN said  the Administration  has  the authority  to                                                                    
negotiate.  However,   he  believes  it  would   be  in  the                                                                    
Administration's  best interest  to  have  someone from  the                                                                    
legislature be at the table,  if not as an active negotiator                                                                    
as a participant in the  discussions, so that the legislator                                                                    
can report back to  the legislature and provide information.                                                                    
He asked  Mr. Dickinson  if the  Administration has  taken a                                                                    
position on that.                                                                                                               
                                                                                                                                
MR. DICKINSON  said he cannot speak  for the Administration,                                                                    
but stated:                                                                                                                     
                                                                                                                                
     No  administration wants  to bring  a bill  to the                                                                         
     House and then  sit down and -  first impression -                                                                         
     try to  explain it. Clearly, the  legislature will                                                                         
     be  involved. They'll  get  reports.  There are  a                                                                         
     number  of very  big picture  decisions about  the                                                                         
     shape of  the state's revenue, whether  - just how                                                                         
     many risks it  wants to bear that  I think clearly                                                                         
     we're going  to be getting  input - you  know, the                                                                         
     Administration's going  to want input  from across                                                                         
     a  spectrum, especially  the legislature,  because                                                                         
     if  suddenly the  legislature's  unhappy with  the                                                                         
     conceptual basis  on which a negotiation  is being                                                                         
     made, we  might as  well not show  up with  a bill                                                                         
     later. So, I think  if the Administration wants to                                                                         
     get this  stranded gas tax negotiation  going once                                                                         
     it's [indisc.], if they  do, clearly they're going                                                                         
     to be  involved with the legislature  so that when                                                                         
     that bill  comes, you'll certainly get  all of the                                                                         
     oversight   you  need   but  there   basically  is                                                                         
     something that they're  fairly certain will result                                                                         
     into the fiscal system that  will then lead to the                                                                         
     project.  So, I  think just  as a  matter of  self                                                                         
     interest,  they are  certainly going  to keep  the                                                                         
     folks who get to vote on it involved.                                                                                      
                                                                                                                                
SENATOR  ELTON  said he  is  assuming  the broad  powers  as                                                                    
exercised  by the  commissioner under  this act  include his                                                                    
ability  to   negotiate  different  levels   with  different                                                                    
municipalities. For  example, the commissioner  could charge                                                                    
x  mils   in  one  jurisdiction   and  y  mils   in  another                                                                    
jurisdiction under a municipal property tax.                                                                                    
                                                                                                                                
MR.  DICKINSON said  he did  not see  why not.  His personal                                                                    
opinion  is the  focus would  be  on issues  such as  impact                                                                    
rather than on  mils. For example, one  community might have                                                                    
acres  covered by  piles of  steel  but no  one near,  while                                                                    
another community has a work  camp of families with children                                                                    
in  school  and  drawing  on  medical  resources,  therefore                                                                    
looking  at  the  straight  mil rate  would  not  serve  the                                                                    
problems of both communities.                                                                                                   
                                                                                                                                
SENATOR  SEEKINS referred  to Article  3 on  page 10  of SCS                                                                    
CSHB  393(FIN) and  read, "If  the commissioner  approves an                                                                    
application and  proposed project  plan under  AS 43.82.140,                                                                    
the commissioner  may develop a  contract that  may include"                                                                    
specific provisions.  He asked if the  commissioner is under                                                                    
any obligation to include any of the terms in that chapter.                                                                     
                                                                                                                                
MR. DICKINSON replied:                                                                                                          
                                                                                                                                
     Absolutely.  Looked  at  one  way,  the  State  of                                                                         
     Alaska has a set of taxes  in place that are - get                                                                         
     to  be applied  as  is. The  question  is can  the                                                                         
     commissioner use  the power here to  make a better                                                                         
     project  that is  both better  for  the state  and                                                                         
     better for the  folks who want to  do the project.                                                                         
     Obviously  the  negotiator,   if  he  doesn't  see                                                                         
     anything  worth  negotiating,  will  [indisc.].  I                                                                         
     think that's entirely correct.                                                                                             
                                                                                                                                
SENATOR SEEKINS maintained that  the commissioner could make                                                                    
a very simple contract or a very complex one.                                                                                   
                                                                                                                                
MR. DICKINSON agreed. He said  the department doesn't really                                                                    
know  how  many things  it  will  want  to bundle  into  the                                                                    
project yet.                                                                                                                    
                                                                                                                                
With  no  further questions  of  Mr.  Dickinson, CHAIR  OGAN                                                                    
asked Roger Marks to testify.                                                                                                   
                                                                                                                                
MR. ROGER  MARKS, Petroleum Economist with  the Tax Division                                                                    
at the Department of Revenue, gave the following testimony.                                                                     
                                                                                                                                
     Good afternoon,  Mr. Chairman  and members  of the                                                                         
     committee.  My  name  is  Roger   Marks.  I  am  a                                                                         
     petroleum economist  with the Tax Division  of the                                                                         
     Department of  Revenue. I  worked on  the original                                                                         
     Stranded Gas Act in 1998  and am familiar with its                                                                         
     history,  intent and  mechanics. I  would like  to                                                                         
     provide a  very brief  overview of  the Act  at AS                                                                         
     43.82.  A  more  detailed  synopsis  is  with  the                                                                         
     fiscal note.                                                                                                               
                                                                                                                                
     The  Act  originated  in HB  250  in  1997,  which                                                                         
     established  a North  Slope Gas  Commercialization                                                                         
     team  in   the  Administration  to   research  and                                                                         
     recommend  changes  to   state  law  to  encourage                                                                         
     commercialization  of North  Slope  gas. The  team                                                                         
     concluded  that  the  project  faced  considerable                                                                         
     risk,  namely  gas  price risk  and  cost  overrun                                                                         
     risk, and that the  state's fiscal system actually                                                                         
     exacerbated  those  risks.  Two of  the  risks  of                                                                         
     particular  concern  were fiscal  uncertainty  and                                                                         
     the state's regressive tax system.                                                                                         
                                                                                                                                
     A brief  comment on  the price  risk: the  cost of                                                                         
     the project is very large,  $20 billion. That is a                                                                         
     lot  of money  to any  corporation, even  ones the                                                                         
     size  of Exxon,  BP  or Conoco  Phillips. If  this                                                                         
     project is  built and  something goes  wrong, such                                                                         
     as  low  prices,  the  sponsors  face  very  large                                                                         
     losses.  And even  if  these  are relatively  low-                                                                         
     probability events,  the project may not  be built                                                                         
     if a company cannot tolerate  a loss of that size.                                                                         
     That is why the  risk reduction mechanism proposed                                                                         
     in Congress, which is currently  in place for non-                                                                         
     conventional gas  in the Lower  48, may be  a very                                                                         
     necessary  linchpin  in   making  this  project  a                                                                         
     reality.                                                                                                                   
                                                                                                                                
     By  fiscal  uncertainty  we  mean  the  threat  of                                                                         
     changes in  fiscal provisions  after a  project is                                                                         
     built  that  may  change the  project's  viability                                                                         
     after it  is too late  to do anything about  it. A                                                                         
     project may  be feasible under one  tax system. If                                                                         
     it  is built  under  the assumption  that the  tax                                                                         
     system in  place will stay  in place, but  the tax                                                                         
     system  changes,  the  changes could  cause  heavy                                                                         
     financial losses.                                                                                                          
                                                                                                                                
     Second, there are two  significant elements of the                                                                         
     state's fiscal system that  make it regressive. By                                                                         
     regressive  we mean  that the  state's  take is  a                                                                         
     high  percentage of  income at  low prices,  and a                                                                         
     low   percentage  at   high  prices.   First,  the                                                                         
     property  tax is  based on  cost.  The higher  the                                                                         
     cost, the higher the tax.  This is a double whammy                                                                         
     to  an   investor  who  incurs  a   cost  overrun.                                                                         
     Moreover,  the   property  tax  is   payable  when                                                                         
     construction begins,  years before  revenues start                                                                         
     accruing.  On a  time value  of money  basis, this                                                                         
     diminishes the  rate of  return and  increases the                                                                         
     risk of not recovering the investment.                                                                                     
                                                                                                                                
     The second  regressive elements are  the severance                                                                         
     tax and  royalty. They are  based on the  value at                                                                         
     the point where  the gas comes out  of the ground,                                                                         
     and  ignore upstream  costs  such  as capital  and                                                                         
     operating  costs. Thus,  when costs  are high  and                                                                         
     prices  are  low,  the  state's  take  is  a  high                                                                         
     percentage of low  income. Again, this intensifies                                                                         
     the danger of low prices.                                                                                                  
                                                                                                                                
     I might  add that a regressive  system also limits                                                                         
     the  state's  take  at high  prices.  Fixing  that                                                                         
     could be very important  to the state for securing                                                                         
     more  revenue   when  prices  are   high,  without                                                                         
     threatening the viability of the project.                                                                                  
                                                                                                                                
     The Stranded Gas  Act was the result  of trying to                                                                         
     fix  these   shortcomings.  The  law   provided  a                                                                         
     mechanism  for   converting  the   state's  fiscal                                                                         
     system  from a  statutory basis  to a  contractual                                                                         
     basis.  This  would  provide  for  greater  fiscal                                                                         
     certainty. The  fiscal system would  be negotiated                                                                         
     between the  state and  the project  sponsors, and                                                                         
     approved  by  the   legislature,  after  a  public                                                                         
     review  period. Payments  to  the  state would  be                                                                         
     made  in-lieu  of  taxes. And  per  the  Act,  the                                                                         
     contract   terms   would   provide  for   a   more                                                                         
     progressive or less regressive system.                                                                                     
                                                                                                                                
     Most of the provisions  subject to the negotiation                                                                         
     are  the tax  provisions. Given  that the  royalty                                                                         
     represents the state's  ownership share, there was                                                                         
     not interest  in making  the royalty  rate subject                                                                         
     to change. The only  royalty provisions subject to                                                                         
     negotiation  would be  the  gas valuation  method,                                                                         
     and  the timing  of royalty  in-kind and  in-value                                                                         
     notices.                                                                                                                   
                                                                                                                                
     The Commissioner  of Revenue would be  the primary                                                                         
     agent   for  negotiating   and  implementing   the                                                                         
     contract.  However,  the Commissioner  of  Natural                                                                         
     Resources  is also  responsible for  reviewing the                                                                         
     project   plan   for    acceptability,   and   for                                                                         
     negotiating any changes in those royalty issues.                                                                           
                                                                                                                                
     There  was   concern  by  municipalities   that  a                                                                         
     contract  could  compromise   their  property  tax                                                                         
     revenues.   Accordingly,   the   Act   created   a                                                                         
     municipal   advisory  group   to  participate   in                                                                         
     developing  contract terms,  and the  Act requires                                                                         
     that a  fair and reasonable share  of the payments                                                                         
     due  under  the  contract   be  paid  to  affected                                                                         
     municipalities with regard to  the size of the tax                                                                         
     base that  may be  exempted, and the  economic and                                                                         
     social   burdens  imposed   by  construction   and                                                                         
     operation.                                                                                                                 
                                                                                                                                
     The Act  also has provisions for  sponsors to help                                                                         
     make  gas  available  to communities,  to  promote                                                                         
     local hire, to  deal with confidential information                                                                         
     provided  by the  sponsors, and  to reimburse  the                                                                         
     state for contractors it may  use to assist in the                                                                         
     negotiation process.                                                                                                       
                                                                                                                                
     Finally, there  were some  questions raised  as to                                                                         
     whether this would surrender  or contract away the                                                                         
     power   to  tax,   which  is   forbidden  by   our                                                                         
     Constitution.   It    was   the   Administration's                                                                         
     judgment  that  this  would  not  preclude  future                                                                         
     legislatures from  imposing other taxes,  but this                                                                         
     contract would represent a  solemn pledge, a moral                                                                         
     commitment by  the state, and a  message to future                                                                         
     legislatures that,  once it  agrees to  the terms,                                                                         
     it will not change them.                                                                                                   
                                                                                                                                
CHAIR  OGAN asked  what provision  of  the Constitution  Mr.                                                                    
Marks was referring to.                                                                                                         
                                                                                                                                
MR. MARKS  said questions  have been raised  about switching                                                                    
the  tax system  from a  statutory to  a contractual  basis.                                                                    
Article IX  of Alaska's  Constitution forbids that.  He said                                                                    
it was the judgment of  the Attorney General's Office that a                                                                    
contract  would   not  prohibit  future   legislatures  from                                                                    
imposing  taxes.  Insofar  as  it  would  not  prohibit  the                                                                    
legislature from  imposing taxes, the contract  would not be                                                                    
airtight.                                                                                                                       
                                                                                                                                
There being  no further questions  of Mr. Marks,  CHAIR OGAN                                                                    
asked Mr. Myers to testify.                                                                                                     
                                                                                                                                
MR. MARK  MYERS, Director  of the Division  of Oil  and Gas,                                                                    
Department of  Natural Resources  (DNR), told members  it is                                                                    
hard to  overestimate the importance  of the gas  line. With                                                                    
over 35  trillion cubic  feet (TCF) of  proven and  over 100                                                                    
TCF of additional potential gas,  a gas pipeline will enable                                                                    
development  of Alaska's  incredible gas  resources for  the                                                                    
next 50  plus years.  The stranded gas  bill sets  the stage                                                                    
for  a broad  based  technical negotiation.  It is  strongly                                                                    
supported by  the Administration as a  vehicle to accelerate                                                                    
the construction  of the North  Slope gas line.  In addition                                                                    
to  dealing with  issues  of oil  taxes,  it also  addresses                                                                    
major  royalties and  resource ownership  issues managed  by                                                                    
DNR,  including royalty  in-kind and  royalty in-value,  the                                                                    
evaluation  methodology  used  for calculating  the  state's                                                                    
royalty  share and  appropriate  transportation charges  for                                                                    
royalty gas.  On the oil  side, the state's sale  of royalty                                                                    
in-kind oil  has stimulated Alaska's refining  industry with                                                                    
a huge positive  effect on the state's  economy. The state's                                                                    
royalty  in-kind  sales for  its  gas  could  be used  as  a                                                                    
vehicle  for  opening  a  major  petrochemical  business  in                                                                    
Alaska or for exploration  on currently untapped basins. The                                                                    
Stranded Gas Act also opens  the door for other negotiations                                                                    
in key  areas involving DNR's resource  management role with                                                                    
respect  to oil  and gas  production on  state land.  As the                                                                    
state's manager  of the  state's oil  and gas,  the Division                                                                    
understands project risk and economic  drivers from both the                                                                    
industry and government perspective.                                                                                            
                                                                                                                                
SENATOR STEVENS  asked if, during  the enactment of  HB 393,                                                                    
under  the  tariff  settlement methodology  (TSM)  with  the                                                                    
pipeline, the  state would  get its money  at the  front end                                                                    
and then the amount would shrink as the project aged.                                                                           
                                                                                                                                
MR. MARKS replied:                                                                                                              
                                                                                                                                
     In  the   oil  pipeline,  actually   the  original                                                                         
     tariffs were  very high, in  the order  of upwards                                                                         
     of $6 as  filed by the pipeline  owners. What that                                                                         
     did  was actually  lead -  and since  our wellhead                                                                         
     values  derived after  subtraction of  the tariff,                                                                         
     what  that   did  was  create  lower   values  for                                                                         
     severance tax and royalty early on.                                                                                        
                                                                                                                                
     What  happened  in TSM  in  the  settlement -  the                                                                         
     settlement  method that  you refer  to, what  that                                                                         
     did was  actually lower  tariffs and  it partially                                                                         
     compensated  for   the  high  tariffs   that  were                                                                         
     derived  early  on.  So, it  wasn't  really  -  it                                                                         
     didn't   really  start   out   to   be  that   way                                                                         
     intentionally  but, as  a matter  of history,  the                                                                         
     pipeline  tariffs were  actually,  as  far as  the                                                                         
     state's concerned  or as far  as the sponsor  - or                                                                         
     who built  the pipeline, that was  back end loaded                                                                         
     as well  because they got  to recover a  big chunk                                                                         
     of their money in the early years.                                                                                         
                                                                                                                                
SENATOR STEVENS said  that when the TAPS began  operation, it was                                                               
back-end loaded.                                                                                                                
                                                                                                                                
MR. MARKS  said the tariff  itself was front-end loaded  but what                                                               
that did  was create  a back-end loaded  fiscal system  because a                                                               
high tariff on the front end  resulted in low severance taxes and                                                               
royalties for the producers.                                                                                                    
                                                                                                                                
CHAIR OGAN  asked if the  tariff is  lower because the  costs are                                                               
lower,  more revenue  should be  generated for  the state  in the                                                               
front end of the project, regarding well price and netback.                                                                     
                                                                                                                                
MR.  DICKINSON said  an  important observation  is  if the  state                                                               
chooses to get most of its  revenue from the wellhead, the tariff                                                               
will become  very important. He  said the higher the  tariff, the                                                               
lower the wellhead.  He explained:                                                                                              
                                                                                                                                
     Let's  propose that  a portion  of the  pipeline is  in                                                                    
     Alaska and it costs $10  billion. A very large piece of                                                                    
     the  tariff is  going to  be the  interest on  that $10                                                                    
     billion, it's like the first  couple years when you buy                                                                    
     a  house most  of the  mortgage payments  are interest.                                                                    
     That interest  is going to  be taxable. If you  look at                                                                    
     it  from an  income tax  point of  view, we  say that's                                                                    
     return  on investment.  So, for  folks  on that  piece,                                                                    
     then  in fact  what  happens at  the  wellhead is  less                                                                    
     important. And  those are the  kind of  mechanisms that                                                                    
     we need to trade off as we  look at how we are going to                                                                    
     quantify our fiscal [indisc.].                                                                                             
                                                                                                                                
MR. MARKS  commented that if  the [gas] pipeline goes  to Chicago                                                               
and the  upper Midwest, the Federal  Energy Regulatory Commission                                                               
(FERC)  will establish  a tariff.  He  does not  envision that  a                                                               
tariff would  come out of  this negotiation process. That  is not                                                               
to  say that  another way  of accounting  for the  pipeline costs                                                               
could not come  out of the negotiations, but  the official tariff                                                               
that  shippers  will  have  to   pay  to  the  pipeline  will  be                                                               
established in a federal jurisdiction.                                                                                          
                                                                                                                                
SENATOR  STEVENS thanked  Mr. Marks  and  said he  was trying  to                                                               
clarify back-end loading in relation  to the other large pipeline                                                               
project in the state and how it compared.                                                                                       
                                                                                                                                
CHAIR  OGAN  said  that  SB  92  extends  actions  taken  by  the                                                               
legislature  before for  North Slope  gas,  contains a  provision                                                               
banning an  over-the-top route  and contains  a deadline  for the                                                               
application. He explained, regarding the deadline:                                                                              
                                                                                                                                
     We're saying we'd like to -  if we don't have a project                                                                    
     in the next  few years, whether or  not the legislature                                                                    
     wants to  take up  the issue again.  So, those  are the                                                                    
     policy  calls I  think we  need to  make on  this bill.                                                                    
     And, to  be honest with  you, I  kind of picked  a date                                                                    
     out of the  - kind of an arbitrary date  so that's open                                                                    
     for discussion and I expect  we'll get some comments on                                                                    
     that.                                                                                                                      
                                                                                                                                
With no further  questions or comments, CHAIR  OGAN adjourned the                                                               
meeting at 4:52 p.m.                                                                                                            

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