Legislature(2003 - 2004)

04/14/2003 03:32 PM RES

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
                    ALASKA STATE LEGISLATURE                                                                                  
              SENATE RESOURCES STANDING COMMITTEE                                                                             
                         April 14, 2003                                                                                         
                           3:32 p.m.                                                                                            
MEMBERS PRESENT                                                                                                               
Senator Scott Ogan, Chair                                                                                                       
Senator Thomas Wagoner, Vice Chair                                                                                              
Senator Ralph Seekins                                                                                                           
Senator Kim Elton                                                                                                               
MEMBERS ABSENT                                                                                                                
Senator Fred Dyson                                                                                                              
Senator Ben Stevens                                                                                                             
Senator Georgianna Lincoln                                                                                                      
COMMITTEE CALENDAR                                                                                                            
SENATE BILL NO. 31                                                                                                              
"An Act relating to a railroad utility corridor for extension of                                                                
the Alaska Railroad to Canada and to extension of the Alaska                                                                    
Railroad to connect with the North American railroad system."                                                                   
     HEARD AND HELD                                                                                                             
SENATE BILL NO. 151                                                                                                             
"An Act relating to the regulation of natural gas pipelines                                                                     
under the Pipeline Act."                                                                                                        
     HEARD AND HELD                                                                                                             
SENATE BILL NO. 50                                                                                                              
"An Act amending the manner of determining the royalty received                                                                 
by the state on gas production as it relates to the manufacture                                                                 
of certain value-added products."                                                                                               
     HEARD AND HELD                                                                                                             
PREVIOUS ACTION                                                                                                               
SB 31 - See Transportation minutes dated 2/11/03 and 3/27/03.                                                                   
SB 151 - See Labor and Commerce minutes dated 3/27/03 and                                                                       
SB 50 - See Resources minutes dated 3/26/03 and 4/11/03.                                                                        
WITNESS REGISTER                                                                                                              
Mr. Richard Schmitz                                                                                                             
Staff to Senator Cowdery                                                                                                        
Alaska State Capitol                                                                                                            
Juneau, AK  99801-1182                                                                                                          
POSITION STATEMENT:  Testified for the sponsor of SB 31                                                                       
Mr. Pat Gamble                                                                                                                  
Alaska Railroad Corporation                                                                                                     
PO Box 107500                                                                                                                   
Anchorage, AK 99510-7500                                                                                                        
POSITION STATEMENT:  ARRC stands ready to make the [SB 31                                                                     
railroad extension] project work                                                                                                
Mr. Bob Loeffler                                                                                                                
Division of Land, Mining and Water                                                                                              
Department of Natural Resources                                                                                                 
400 Willoughby Ave.                                                                                                             
Juneau, AK  99801-1724                                                                                                          
POSITION STATEMENT:  Supports SB 31                                                                                           
Ms. Mary Jackson                                                                                                                
Staff to Senator Wagoner                                                                                                        
Alaska State Capitol                                                                                                            
Juneau, AK  99801-1182                                                                                                          
POSITION STATEMENT:  Presented SB 151 for the sponsor                                                                         
Mr. Ben Schoffmann                                                                                                              
Marathon Oil Company                                                                                                            
PO Box 196168                                                                                                                   
Anchorage, AK 99519                                                                                                             
POSITION STATEMENT:  Supports SB 151                                                                                          
Mr. Jim Strandberg                                                                                                              
Regulatory Commission of Alaska                                                                                                 
701 W Eighth Ave Ste 300                                                                                                        
Anchorage, AK  99501                                                                                                            
POSITION STATEMENT:  The RCA has no position on SB 151 and does                                                               
not believe it will have any fiscal impact on the agency                                                                        
Mr. Mark Myers, Director                                                                                                        
Division of Oil and Gas                                                                                                         
Department of Natural Resources                                                                                                 
550 W 7th Ave.                                                                                                                  
Anchorage, AK  99501                                                                                                            
POSITION STATEMENT:  DNR has no position on SB 151                                                                            
Mr. Anthony Scott                                                                                                               
Division of Oil and Gas                                                                                                         
Department of Natural Resources                                                                                                 
550 W 7th Ave.                                                                                                                  
Anchorage, AK  99501                                                                                                            
POSITION STATEMENT: Answered questions related to SB 151                                                                      
ACTION NARRATIVE                                                                                                              
TAPE 03-28, SIDE A                                                                                                            
CHAIR SCOTT  OGAN called the  Senate Resources  Committee meeting                                                             
to order at 3:32 p.m.  Senators Wagoner, Seekins, Elton and Chair                                                               
Ogan  were present.  The  committee took  a  brief at-ease.  Upon                                                               
reconvening, Senator  Dyson arrived. The first  order of business                                                               
to come before the committee was SB 31.                                                                                         
         SB 31-RAILROAD UTILITY CORRIDOR TO & IN CANADA                                                                     
MR.  RICHARD   SCHMITZ,  staff  to  Senator   Cowdery,  gave  the                                                               
following explanation of SB 31.                                                                                                 
SB 31  allows the  Alaska Railroad  Corporation (ARRC)  to extend                                                               
its tracks  from Eielsen Air  Force Base to the  Canadian border.                                                               
It also allows  ARRC to explore the possibility  of extending its                                                               
tracks as  far as the  North American  rail system to  connect at                                                               
Fort  Nelson, British  Columbia. The  bill does  not provide  any                                                               
funding for this  project but it allows ARRC  to pursue financing                                                               
wherever  possible.  The state  land  for  the railroad  corridor                                                               
would  be granted  to ARRC,  fee simple  title, after  a specific                                                               
process is underway.                                                                                                            
Former Representative Jeanette James  introduced SB 31 last year.                                                               
It was  not enacted  because of concerns  about the  corridor and                                                               
the  natural  gas  pipeline.  Senator  Cowdery  reintroduced  the                                                               
identical  bill this  year and,  during  a Senate  Transportation                                                               
Committee hearing,  a discussion  took place  with Administration                                                               
officials and  ARRC officials about  the work  Governor Murkowski                                                               
did on  the Rails to  Resources Act when he  was a member  of the                                                               
U.S. Senate.  The goal [of  the discussion] was to  find language                                                               
that  everyone could  agree to  that addressed  the circumstances                                                               
under  which ARRC  would  get  land. Some  of  that language  was                                                               
incorporated  into a  Senate Transportation  Committee substitute                                                               
(CS) beginning on  page 2, line 4. That language  contains a list                                                               
of parameters.  He deferred  to ARRC staff  to explain  why those                                                               
parameters were chosen.                                                                                                         
MR.  SCHMITZ told  members he  provided  background material  for                                                               
members   that   contains   tourism  and   engineering   reports,                                                               
geological information,  and maps showing the  route from Eielson                                                               
Air Force  Base to the  Canadian border and to  British Columbia.                                                               
The actual gap  to be covered equals about  1,000 miles. Governor                                                               
Murkowski  and  Senator Cowdery  believe  in  order for  Alaska's                                                               
economy to  grow, better  transportation is  necessary. Railroads                                                               
can carry  heavy, bulk  items over  long distances  very cheaply.                                                               
Senator Cowdery also  believes it is important to  build the rail                                                               
connection because of the gas  pipeline. Trucks will be unable to                                                               
ship the  steel pipe  but rail  could. In  addition, it  might be                                                               
possible to build the railroad and pipeline simultaneously.                                                                     
MR. SCHMITZ  told members  the railroad  corridor covers  some of                                                               
the richest  mineral land  in Alaska and  the Yukon  Territory. A                                                               
geological formation,  the Tintina  Trench, is  particularly rich                                                               
in the platinum group of metals and gold.                                                                                       
CHAIR  OGAN   informed  members   that  Phyllis   Johnson,  Wendy                                                               
Lindskoog,  Pat  Gamble  and  James   Blasingame  of  the  Alaska                                                             
Railroad Corporation were available  via teleconference to answer                                                               
questions.  He then  announced that  Senators Dyson,  Lincoln and                                                               
Stevens joined  the committee a  while ago. He asked  Mr. Schmitz                                                               
to  review   the  changes  made  in   the  Senate  Transportation                                                               
Committee substitute for members.                                                                                               
MR.  SCHMITZ said  the original  bill would  have given  ARRC the                                                               
state land via fee simple  title. ARRC wanted a 500-foot corridor                                                               
for safety reasons; DNR was  concerned about locking up that much                                                               
land  unnecessarily. Also,  some practical  issues arose  about a                                                               
500-foot corridor in  communities such as Delta.  The CS provides                                                               
DNR with more flexibility when  the corridor is delineated.  ARRC                                                               
will have to follow a process  to obtain state land that requires                                                               
it to be in a position  to begin construction. Therefore, no land                                                               
would be transferred unless project financing was obtained.                                                                     
CHAIR OGAN  asked the  width of the  current right-of-way  on the                                                               
existing railroad corridor.                                                                                                     
MR. SCHMITZ said he believes it varies from 100 to 500 feet.                                                                    
MR.  PAT GAMBLE,  President of  the Alaska  Railroad Corporation,                                                               
informed  members  that Phyllis  Johnson,  Bob  Loeffler and  Joe                                                               
Joiner were also present to  answer questions. He told Chair Ogan                                                               
the current average right-of-way is 200 feet.                                                                                   
CHAIR OGAN asked why ARRC wants so much land.                                                                                   
MR. GAMBLE said  that was the nature of the  compromise when ARRC                                                               
talked to  DNR. The state  wanted a corridor  for transportation,                                                               
communications and a possible pipeline.  ARRC wanted an exclusive                                                               
right-of-way  for control  of the  rail line,  as it  has on  its                                                               
existing  rail line.  The  compromise was  to  survey a  500-foot                                                               
corridor for the  state and within it embed  a 200-foot right-of-                                                               
way for the railroad.                                                                                                           
CHAIR OGAN commented that SB 31 will give ARRC a 500-foot right-                                                                
of-way,  the rights  of eminent  domain,  and subsurface  rights,                                                               
which will have  a big impact on private landowners.  He asked if                                                               
any private landowners have voiced an opinion on this change.                                                                   
MR. GAMBLE clarified that ARRC will not have subsurface rights.                                                                 
CHAIR OGAN referred to  a provision in SB 31 on  page 3, line 26,                                                               
that says the  state shall convey the state's  entire interest in                                                               
the land. He assumed that would include subsurface rights.                                                                      
3:42 p.m.                                                                                                                     
MR. BOB  LOEFFLER, Director of  the Division of Mining,  Land and                                                               
Water, DNR,  explained that DNR  would convey the  state's entire                                                               
interest  except "(a)  the interest  required  by AS  38.05.125",                                                               
which is the subsurface interest.  So, in fact, DNR would reserve                                                               
oil  and  gas rights  and  the  other  things associated  with  a                                                               
mineral estate.                                                                                                                 
SENATOR  ELTON referred  to the  draft sectional  analysis, which                                                               
says that  DNR will retain any  revenues arising from use  of the                                                               
land. He  assumed any revenues  would also include  revenues from                                                               
fiber  optic cable  rights-of-way or  other things  that generate                                                               
revenue for ARRC.                                                                                                               
MR.  LOEFFLER explained  that  before the  railroad  is ready  to                                                               
construct, DNR  will remain  as the land  manager and  retain the                                                               
revenues. Once  the railroad is  ready to construct a  portion of                                                               
the rail line, ARRC will  get those revenues within its right-of-                                                               
way  on that  portion. Therefore,  DNR will  retain the  revenues                                                               
while it manages  the land and, when it  transfers the management                                                               
authority for each portion, the  revenue for that portion will be                                                               
transferred with it.                                                                                                            
SENATOR ELTON asked if that includes the subsurface rights.                                                                     
MR. LOEFFLER said DNR will retain the subsurface rights.                                                                        
SENATOR SEEKINS  asked what  safety issues  might be  involved in                                                               
putting a 54-inch  high-pressure gas pipeline within  300 feet of                                                               
a railroad.                                                                                                                     
MR. GAMBLE  said he is  not an expert  on the safety  radius from                                                               
the  pipeline but  that is  one  reason a  500-foot corridor  was                                                               
attractive. He  said more  work needs  to be  done as  the entire                                                               
route  is reviewed  to maintain  that safety  buffer. That  might                                                               
require   special   engineering   solutions  depending   on   the                                                               
CHAIR OGAN pointed out that language on page 4 reads:                                                                           
     If the [Alaska Railroad]  corporation provides a survey                                                                    
     alignment  to the  department, the  department may  not                                                                    
     authorize  construction  of  the natural  gas  pipeline                                                                    
     within a 200-foot-wide corridor  centered on the survey                                                                    
     alignment  unless  the  department   does  not  find  a                                                                    
     feasible and  prudent alternative for the  route of the                                                                    
He assumed that  language refers to safety issues.   He asked how                                                               
much of  an area a typical  train wreck covers and  whether it is                                                               
more than 200 feet.                                                                                                             
MR. GAMBLE said the wreckage can  cover more than 200 feet if the                                                               
train is moving fast. He said  it depends on several factors such                                                               
as speed, topography, train length and others.                                                                                  
CHAIR OGAN  commented that on a  visit to Florida two  years ago,                                                               
he was amazed to see how fast the trains travel through towns.                                                                  
SENATOR SEEKINS  said he assumes  the 200-foot  railroad corridor                                                               
would  be on  one  side or  the other  of  the 500-foot  corridor                                                               
rather than  down the middle.  He asked  if that is  addressed in                                                               
the bill.                                                                                                                       
MR.  LOEFFLER said  a 500-foot  corridor was  chosen for  several                                                               
reasons, one  to allow ARRC  to move  the railroad base  around a                                                               
little bit when it is ready  to begin construction and another to                                                               
allow DNR to retain additional  land as a transportation corridor                                                               
for  other complementary  uses. After  the construction  is done,                                                               
DNR  could  adjust  the corridor.  Any  unusable  remnants  would                                                               
probably be turned back to general domain state land.                                                                           
SENATOR  SEEKINS  said  his  concern  is  that  a  transportation                                                               
corridor that includes a natural  gas pipeline will need a safety                                                               
MR. LOEFFLER said he believes  the natural gas pipeline will have                                                               
a separate  right-of-way. The 500-foot  corridor is  not expected                                                               
to be  the only right-of-way for  both, but it doesn't  rule that                                                               
possibility out.                                                                                                                
SENATOR  LINCOLN  referred  to  the  provision  about  subsurface                                                               
rights in the  last paragraph of page 3, which  says, "subject to                                                               
the existing valid  rights."  She asked whether the  state or the                                                               
railroad  will reserve  the valid  existing subsurface  rights if                                                               
private lands are bought.                                                                                                       
MR. LOEFFLER  replied DNR cannot convey  what it does not  own so                                                               
the  state's conveyance  to  the railroad  will  not include  any                                                               
rights it does  not own. DNR will reserve  the subsurface rights.                                                               
Where  the subsurface  is owned  by the  state and  a corporation                                                               
might have a  surface right, one would assume they  would buy the                                                               
surface right. He  cannot imagine [the railroad]  having a reason                                                               
to  acquire the  subsurface  rights unless  it is  to  buy out  a                                                               
placer miner to get that person out of the way.                                                                                 
SENATOR LINCOLN said  she is specifically thinking  of the Native                                                               
corporations that  own surface and  subsurface rights.  She asked                                                               
Mr. Loeffler if  the state or railroad will have  no need for the                                                               
subsurface rights so  would only purchase the  surface rights and                                                               
leave the subsurface rights with the private owner.                                                                             
MR.  LOEFFLER said  that is  his expectation  but he  deferred to                                                               
ARRC representatives to answer for the railroad.                                                                                
CHAIR OGAN  suggested the  legislature does not  want ARRC  to do                                                               
any open  pit mining underneath  the railroad. He  then clarified                                                               
that the bill is silent on the issue of private property.                                                                       
SENATOR  LINCOLN said  that is  because it  applies to  the valid                                                               
existing rights.                                                                                                                
CHAIR OGAN pointed  out the subsurface rights  were conveyed with                                                               
the Native  lands. He asked  Mr. Loeffler whether  eminent domain                                                               
could  be used  to claim  only the  surface rights.  He commented                                                               
that if  he were a private  landowner, he would favor  a railroad                                                               
crossing his land as it would provide access to that land.                                                                      
SENATOR  ELTON said  a couple  of phrases,  beginning on  page 4,                                                               
line 20, suggest  to him the bill's first priority  is a railroad                                                               
and the second priority is a gas pipeline. That language reads:                                                                 
     If the  corporation provides a survey  alignment to the                                                                    
     department,   the   department    may   not   authorize                                                                    
     construction  of the  natural gas  pipeline within  the                                                                    
     200-foot   wide  corridor   centered   on  the   survey                                                                    
     alignment....  The department  shall  consult with  the                                                                    
     corporation  before   authorizing  construction   of  a                                                                    
     natural gas  pipeline in order  to minimize  effects on                                                                    
     the potential rail route....                                                                                               
He said  that language  could be problematic  if the  pipeline is                                                               
prioritized above a railroad extension, which he favors.                                                                        
MR. LOEFFLER  said [DNR] has  not prioritized a railroad  above a                                                               
gas pipeline  and that was not  the intent. He hopes  that is not                                                               
how  this section  operates.  DNR tried  to  include language  to                                                               
ensure complementary  action and  avoid a  conflict. The  bill is                                                               
not about the  pipeline; it's about the railroad  so all language                                                               
modifies [activities of] the railroad.                                                                                          
MR. LOEFFLER explained:                                                                                                         
     Here's how we  think it works. If there  is an existing                                                                    
     application or  right-of-way, that is a  valid existing                                                                    
     right that gets dropped from  - it doesn't get conveyed                                                                    
     to  the railroad.  If we've  already identified  a 500-                                                                    
     foot corridor  and a pipeline  says, gee,  we're really                                                                    
     ready to  go through there,  then what we say  is, well                                                                    
     the   pipeline   typically   -   railroads   are   more                                                                    
     topographically  limited. They  have  trouble going  up                                                                    
     hills and things like that  than in fact a pipeline. So                                                                    
     what we  do is  we say, look  railroad, we're  going to                                                                    
     give you  a chance  to stake  the centerline.  You know                                                                    
     where it's most  important for you and  then we'll make                                                                    
     that decision.  And we make  that decision in  the best                                                                    
     interest of  the state  and if we  can find  a feasible                                                                    
     and  prudent   alternative,  and  that   is  reasonably                                                                    
     general  language, which  gives us  the flexibility  to                                                                    
     take economics and the best  interest of the state into                                                                    
     account. Our expectation  is not to give  a priority to                                                                    
     the  railroad, but  it does  require consultation  with                                                                    
     the railroad.  And, of  course, the  consultation would                                                                    
     go the other  way as well with any  applicants but this                                                                    
      language was really directed to the railroad. I hope                                                                      
     that answers the question.                                                                                                 
SENATOR  ELTON said  it does.  He is  hearing that  is not  DNR's                                                               
expectation.  He  asked if  DNR  attorneys  have looked  at  that                                                               
MR. LOEFFLER said they have,  but not with that specific question                                                               
in mind.  He offered  to do  that and get  back to  Senator Elton                                                               
with a specific answer.                                                                                                         
CHAIR OGAN  said he  shares that  concern and  plans to  hold the                                                               
bill in committee today.                                                                                                        
SENATOR  WAGONER said  a primary  reason  given for  the need  to                                                               
build the railroad is that a  gas pipeline will be built with 80-                                                               
foot sections  of pipe. He said  he has talked to  several of the                                                               
major companies that  would be involved in the  construction of a                                                               
pipeline  who say  they would  use 40-foot  sections. They  asked                                                               
whether a  railroad will be  built to  the North Slope  to handle                                                               
80-foot sections there. He would like  to see a company that will                                                               
build this  pipeline verify what length  of pipe it will  use. He                                                               
surmised if the  pipe can be transported  via truck, transporting                                                               
the  pipe should  not  be  used as  justification  to build  this                                                               
MR. SCHMITZ  replied there  is no  guarantee that  80-foot joints                                                               
will  be  used but,  when  the  pipeline  is  built, it  will  be                                                               
competing with other natural gas  around the world. Using 80-foot                                                               
sections  will require  half  the number  of  welds than  40-foot                                                               
sections.  That cost  savings could  make the  difference in  the                                                               
project's feasibility.                                                                                                          
SENATOR WAGONER  said he  is not  aware of  any company  that can                                                               
roll an 80-foot length of pipe right now.                                                                                       
SENATOR  SEEKINS  said  he  was  in the  Interior  when  the  oil                                                               
pipeline was  built. At  that time,  40-foot joints  were brought                                                               
into  Fairbanks  by  truck  in   80-foot  lengths.  A  tremendous                                                               
additional cost was associated with  the double jointing process,                                                               
which also  caused safety  concerns. He said  he would  imagine a                                                               
company  hired  to build  2,000  miles  of  pipe could  find  the                                                               
technology.  He  favors a  railroad  extension  for a  number  of                                                               
reasons, one being commerce. Alaska should  do its best to try to                                                               
connect  to  the  Lower  48  states  by  railroad  for  commerce,                                                               
national defense,  and resource development. Building  an instate                                                               
railroad will  help but it  will not provide the  flexibility the                                                               
state needs.                                                                                                                    
CHAIR OGAN commented that the  state cannot wait until a railroad                                                               
is built to build a gas line.                                                                                                   
SENATOR SEEKINS agreed  but said the state needs  to move forward                                                               
with  the  right-of-way  and  work   with  the  Canadians  to  do                                                               
likewise.  He   said  he  supports   SB  31  regardless   of  the                                                               
SENATOR LINCOLN  asked if the Canadian  government has officially                                                               
supported the railroad extension.                                                                                               
MR. SCHMITZ said  that some of the Yukon  communities have passed                                                               
resolutions in support.                                                                                                         
SENATOR DYSON said he visited the  Yukon a week ago and found the                                                               
Yukoners to  be actively  in favor. That  is one  reason language                                                               
was  added to  the bill  to make  sure the  Canadian and  Alaskan                                                               
routes  come  together.  The huge  mineral  rich  trench  extends                                                               
across the Yukon  and British Columbia borders.  If necessary, he                                                               
could get resolutions from both governments.                                                                                    
CHAIR OGAN referred to a sentence on page 6, lines 9 through 12:                                                                
     A corporation may acquire land  or interests in land in                                                                    
     Canada  as the  corporation  considers appropriate  for                                                                    
     the  development,  construction  and  operation  of  an                                                                    
     extension of  the Alaska Railroad  to connect  with the                                                                    
     North American railroad system.                                                                                            
He questioned why ARRC would want  to acquire interest in land in                                                               
MR.  SCHMITZ said  when the  bill  was introduced  last year,  it                                                               
would have allowed the extension  of the railroad to the Canadian                                                               
border   and  stopped   there.   After   discussing  the   issue,                                                               
Representative James  decided to  authorize the railroad  to look                                                               
into  a further  extension  using bonds  or  an appropriation  to                                                               
purchase land  to connect  to an existing  rail line.  He pointed                                                               
out  the White  Pass Railroad  obtained a  right-of-way into  the                                                               
United States.                                                                                                                  
CHAIR OGAN  asked if Canadian  railways own rights-of-way  in the                                                               
United States and vice versa.                                                                                                   
MR.  SCHMITZ  said he  would  imagine  so.  He said  the  private                                                               
corporations do.                                                                                                                
CHAIR  OGAN asked  Mr. Gamble  if he  supports that  language and                                                               
anticipates acquiring land and interests  in Canada to expand the                                                               
MR. GAMBLE said he understood  that language to offer flexibility                                                               
to address the eventuality of having  to deal with the other side                                                               
of the  border in  unforeseen ways. However,  at this  time, ARRC                                                               
has no concrete  plans to acquire land  in Canada. Representative                                                               
James talked  to ARRC about  the flexibility that  language would                                                               
provide and ARRC acknowledges the purpose of that language.                                                                     
SENATOR SEEKINS said he could  envision many reasons the railroad                                                               
might want to  acquire land or interest in land  in Canada simply                                                               
in terms of  support. ARRC may need to have  office space for the                                                               
administration of  the railroad between  Alaska and the  Lower 48                                                               
states or for  housing and warehouse space. He thinks  it is wise                                                               
to include that language in  the bill even though the legislature                                                               
may have to address how ARRC  will get funds to acquire that land                                                               
CHAIR OGAN asked Mr. Loeffler if he wished to testify.                                                                          
MR. LOEFFLER said DNR supports the bill.                                                                                        
MR.  GAMBLE  said,  from  a   strategic  point  of  view,  ARRC's                                                               
perspective on  the extension  from Fairbanks  to the  Delta area                                                               
differs from its  perspective on the extension from  Delta to the                                                               
border.  The  first  leg  of  that  extension  could  provide  an                                                               
opportunity  to   look  at  how   to  fund  the   operations  and                                                               
maintenance of the  railroad by hooking up to  the requirement to                                                               
move goods and  services back and forth from  Fairbanks to Delta.                                                               
Beyond that,  this bill offers the  potential to get at  the kind                                                               
of plan the  current administration wants to pursue,  in terms of                                                               
development. Development  is within  ARRC's mission so  it stands                                                               
ready,  when the  time and  conditions  are right,  to make  this                                                               
project work.                                                                                                                   
CHAIR OGAN asked Senator Lincoln if  she is aware of the position                                                               
of the Native corporations.                                                                                                     
SENATOR LINCOLN said she spoke  with several individuals who felt                                                               
it  was a  little premature  to comment  on this  bill until  the                                                               
project has progressed  further - maybe when  the actual corridor                                                               
route is discussed.                                                                                                             
SENATOR ELTON asked if ARRC  pays property taxes to the organized                                                               
boroughs through which it passes.                                                                                               
CHAIR OGAN said ARRC is on government property.                                                                                 
SENATOR ELTON said he asked because  it has been suggested that a                                                               
portion of that area join an organized borough.                                                                                 
MR. SCHMITZ  commented the  Army surveyed  a right-of-way  in the                                                               
1940s for  a rail route  and a rail  corridor from the  border to                                                               
Fairbanks  is  in  statute.  Therefore,  regarding  questions  of                                                               
eminent  domain  and  private  property,  an  undefined  railroad                                                               
right-of-way does exist.                                                                                                        
CHAIR OGAN assumed an environmental  impact statement (EIS) would                                                               
have to be done. He then  announced he would await an answer from                                                               
DNR  to Senator  Elton's question  and planned  to move  the bill                                                               
from committee on Wednesday. He announced a brief at-ease.                                                                      
           SB 151-REGULATION OF NATURAL GAS PIPELINES                                                                       
MS. MARY  JACKSON, staff  to Senator Tom  Wagoner, sponsor  of SB
151, told members this legislation  is a housekeeping measure and                                                               
provided the following background.                                                                                              
     In 2000,  the legislature  amended the  Alaska Pipeline                                                                    
     Act.  In there  we stuck  in this  term, 'North  Slope'                                                                    
     because, at  that time, that  was the only  natural gas                                                                    
     pipeline that  we ever  saw on  the horizon.  We didn't                                                                    
     anticipate another pipeline to  come along. Since then,                                                                    
     another pipeline has come along  and, in fact, it's the                                                                    
     only one that  we have and it's on  the Kenai Peninsula                                                                    
     - it's  the Kenai  Kachemak Pipeline -  we call  it the                                                                    
     KKPL. It  was initially going  to go from  the Kachemak                                                                    
     Bay area  back to Kenai.  What they drilled at  the far                                                                    
     end of the Peninsula didn't  pan out so it actually now                                                                    
     goes  from  Ninilchik up  to  the  Kenai area....  It's                                                                    
     being constructed  right now and that's  why there's an                                                                    
     immediate effective date on the bill.                                                                                      
     What happened  is they went to  the RCA to ask  for the                                                                    
     authority  to   provide  for  their  carriage   in  the                                                                    
     pipeline and  the RCA  said, well,  it just  says North                                                                    
     Slope natural  gas pipeline and we're  not frankly sure                                                                    
     whether or not  we can do that. So this  bill takes out                                                                    
     North Slope and leaves it  natural gas pipeline so it's                                                                    
     throughout the state of Alaska.  And that's why it is a                                                                    
     housekeeping  measure.  There  are people,  I  believe,                                                                    
     online from Marathon  to speak to how  they're going to                                                                    
     go  about doing  it but  it's a  pretty straightforward                                                                    
Regarding the  fiscal notes, MS.  JACKSON said the  RCA submitted                                                               
two  zero   fiscal  notes.   The  DNR   fiscal  note   amount  is                                                               
indeterminate; the last  line of the analysis  explains why, "For                                                               
the Kenai Kachemak  pipeline these dynamics are  unlikely as only                                                               
63  percent of  the  line's total  capacity  has been  contracted                                                               
CHAIR  OGAN said  he  begs  to differ  that  this legislation  is                                                               
merely  a  housekeeping  measure  because the  state  has  common                                                               
carrier pipelines. The legislature made  an exception for the gas                                                               
line  to  the  Lower  48  because the  producers  would  own  the                                                               
pipeline.  He expressed  concern that  if the  legislature shifts                                                               
away from  a policy  of common carrier  pipelines, it  could have                                                               
the   unintended  consequence   of  inhibiting   development.  He                                                               
explained that  pipeline owners would  control who  can transport                                                               
gas  in that  line  and  the open  seasons  based  on when  their                                                               
development is  planned to come  on line, in  effect, eliminating                                                               
other users and stranding gas.                                                                                                  
MS.  JACKSON said  she understands  that concern.  An alternative                                                               
was  discussed and  that was  to  specifically name  KKPL in  the                                                               
legislation so  that it would only  apply to the North  Slope and                                                               
KKPL.  She pointed  out the  length of  the KKPL  pipeline is  30                                                               
TAPE 03-28, SIDE B                                                                                                            
CHAIR OGAN said he has been  told there are shallow gas leases on                                                               
the Kenai  Peninsula. His concern is  that SB 151 could  lock out                                                               
and discourage other development.                                                                                               
MS. JACKSON referred to minutes  from a House Resources Committee                                                               
hearing  in which  Mr. Schoffmann  of Marathon  Oil talked  about                                                               
support  from  Aurora  Gas, Forest  Oil  and  Evergreen,  smaller                                                               
CHAIR OGAN noted he has not heard from the smaller producers.                                                                   
SENATOR ELTON said  his understanding is that  without this bill,                                                               
the only  company allowed to  use the pipeline would  be Marathon                                                               
Oil  because  it  could  not  contract  to  others  for  firm  or                                                               
interruptible service.                                                                                                          
CHAIR OGAN  said his  understanding is  that if  SB 151  does not                                                               
pass, the  pipeline will  be a common  carrier pipeline.  In that                                                               
case, if there  is more gas than the pipeline  can carry, the gas                                                               
will be  prorated. SB 151  would allow companies to  contract for                                                               
space in the pipeline, whether or not that space is used.                                                                       
SENATOR  ELTON asked  if  the  RCA would  regulate  whose gas  is                                                               
carried in the common carrier pipeline.                                                                                         
CHAIR OGAN said that is correct.                                                                                                
MR. BEN  SCHOFFMANN told members  he is employed by  Marathon Oil                                                               
and is  the Vice  President of  KKPL, which  is jointly  owned by                                                               
Marathon  and  Unocal. He  told  members  he provided  background                                                               
information on this bill to  the committee [in writing]. He asked                                                               
to address some of the members' previous questions.                                                                             
He told  members the modifications  proposed to the  pipeline act                                                               
are  to the  common carrier  section of  that act.  SB 151  would                                                               
allow,  under the  common carrier  section, a  pipeline to  offer                                                               
both firm and interruptible service.  However, that full offering                                                               
of service  is still  under the  purview of the  RCA. The  RCA is                                                               
authorized to ensure that the  process of accessing that pipeline                                                               
is fair and  balanced and that no party is  favored. In the event                                                               
the  RCA finds  that companies  are  being excluded,  it has  the                                                               
ability to  direct the pipeline  to expand capacity to  make room                                                               
for others who want to ship gas.                                                                                                
Most pipelines in Alaska have  been built by producer affiliates.                                                               
They have the capital and  incentive to do so. Building pipelines                                                               
spurs investment  activity by majors and  by independents. Aurora                                                               
Gas has  written a  letter in  support of SB  151, part  of which                                                               
     Aurora  Gas would  not avoid  exploring and  developing                                                                    
     acreage in  the vicinity  of producer  owner pipelines.                                                                    
     However,  Aurora can  and would  substantially discount                                                                    
     the value  of exploring and developing  acreage with no                                                                    
     infrastructure whatsoever.                                                                                                 
He  said he  believes the  pipeline would  spur investments  and,                                                               
rather than shutting  out smaller independents, they  seem to say                                                               
they   will  look   for  gas   where  there   is  infrastructure.                                                               
Furthermore, the RCA  has the authority to ensure  the process is                                                               
executed fairly.                                                                                                                
SENATOR SEEKINS  said his  understanding is that  the owner  of a                                                               
gas field who knows how much gas  will be produced can get a firm                                                               
commitment to  transfer that gas  through this pipeline.  That is                                                               
considered  to  be non-interruptible  gas.  However,  if the  gas                                                               
field's  potential is  unknown, the  owner could  contract on  an                                                               
interruptible  basis if  there is  capacity within  the pipeline,                                                               
which  would give  him  the opportunity  to  start producing  the                                                               
field.  If, at  a later  time, he  found the  parameters of  that                                                               
field  were  great  enough  to  overcome  the  capacity  of  this                                                               
pipeline, he would  have the option of building  his own pipeline                                                               
or entering  into a non-interruptible  contract. He asked  if his                                                               
understanding is correct.                                                                                                       
SENATOR WAGONER  said that  is correct to  a point.  The carrying                                                               
capacity  of  the  pipeline  can  be  increased  with  additional                                                               
SENATOR SEEKINS  said that at least  allows the owner to  get his                                                               
product  into  the market  on  an  interruptible basis.  However,                                                               
because  the  pipeline does  not  have  infinite capacity,  there                                                               
would come a point where he  would have to build his own pipeline                                                               
if his supply was large enough.                                                                                                 
CHAIR OGAN asked Mr. Strandberg  if Alaska has any regulations on                                                               
open seasons.                                                                                                                   
MR.  STRANDBERG, Regulatory  Commissioner of  Alaska (RCA),  said                                                               
the RCA does  not currently have a regulation that  speaks to the                                                               
open season process.                                                                                                            
CHAIR OGAN asked if that is  by virtue of the fact that pipelines                                                               
are either utility or common carrier pipelines.                                                                                 
MR. STRANDBERG said that is  correct. Currently two gas pipelines                                                               
are  in operation  in Alaska,  the Beluga  pipeline and  Enstar's                                                               
pipeline. Those are both certificated  under the public utilities                                                               
CHAIR OGAN asked Mr. Strandberg  if the RCA intends to promulgate                                                               
regulations  to regulate  open seasons  if  pipelines offer  firm                                                               
MR.  STRANDBERG thought  the RCA  has the  ability to  promulgate                                                               
regulations  through its  own motion  or through  a petition.  He                                                               
said  it is  unclear  whether the  state  immediately needs  open                                                               
season regulations  at this time. However,  if pipeline companies                                                               
see a  need for them,  they could petition  the RCA and  it would                                                               
get involved in a regulation project.                                                                                           
CHAIR  OGAN asked  if open  season is  not an  issue now  because                                                               
Alaska does not have any pipelines built that require them.                                                                     
MR. STRANDBERG  said that is  correct and a lot  of it has  to do                                                               
with the  responsibility of the company  conducting offerings. He                                                               
said  he believes  the RCA  considered open  seasons on  the KKPL                                                               
CHAIR OGAN  asked if a producer-owned  pipeline company purchased                                                               
all of  the available capacity  on a line  to reserve it  for the                                                               
future,  whether  the  RCA  has the  authority  to  require  that                                                               
capacity to be released to a party that needs it now.                                                                           
MR. STRANDBERG said the RCA  believes it has that authority under                                                               
the  existing  statute. The  RCA  regards  the proposed  contract                                                               
carriage  statute  language to  embed  itself  in the  overriding                                                               
common  carrier language  of  the Alaska  Pipeline  Act. The  RCA                                                               
believes  it has  the flexibility,  even with  these changes,  to                                                               
regulate in the public interest.                                                                                                
CHAIR  OGAN asked  if an  independent shipper  wanted the  RCA to                                                               
order  capacity expansion,  but the  producer-affiliated pipeline                                                               
did not  want to  expand, which  party would  have the  burden of                                                               
proof before the RCA.                                                                                                           
MR. STRANDBERG said that is a  difficult question. The RCA has to                                                               
look at the specific circumstances  to establish where the burden                                                               
of  proof  lies. Some  of  the  considerations  are who  has  the                                                               
information, whether the  party is a utility that  is required to                                                               
prove something is in the public  interest, and who is the moving                                                               
party. He  noted the RCA employs  some rules of thumb  but it has                                                               
to look at each specific case.                                                                                                  
CHAIR OGAN asked if the RCA has a position on the bill.                                                                         
MR. STRANDBERG replied,  "We take no position other  than to note                                                               
that there's  a zero  fiscal note  and we  feel we  can certainly                                                               
accommodate the statute changes within our current statute."                                                                    
SENATOR LINCOLN referred  to the fiscal note  from the Department                                                               
of  Community   and  Economic  Development  and   read  from  the                                                               
     There are  no fiscal impacts  on RCA for  this bill....                                                                    
     However, it  is expected that where  producers elect to                                                                    
     own  and  operate a  pipeline,  which  is allowed,  the                                                                    
     contract  carriage with  service under  these statutory                                                                    
     terms  will be  proposed to  RCA in  a pipeline  tariff                                                                    
She asked Mr. Strandberg to elaborate on that statement.                                                                        
MR. STRANDBERG said perhaps the  "however" is slightly misplaced.                                                               
The  RCA does  not foresee  any fiscal  impact from  the bill.  A                                                               
company may petition  the RCA for the contract  carriage but that                                                               
would be considered part of  the RCA's normal course of business.                                                               
The RCA  expects that the cost  would be absorbed in  its current                                                               
budget through the regulatory cost charge.                                                                                      
CHAIR OGAN asked  why Alaska disallowed contract  carriage in the                                                               
MR.  STRANDBERG said  that is  a good  question. He  said he  has                                                               
learned  from some  of the  corporate memory  within the  RCA the                                                               
Pipeline Act  and Right-of-Way Leasing  Act were  passed together                                                               
in 1972.  The Legislature wanted  to establish a policy  of equal                                                               
and unfettered  access to oil  and gas  in Alaska. At  that time,                                                               
the common carrier mechanism appeared  to be an excellent vehicle                                                               
to use to avoid any discrimination.  He pointed out that act pre-                                                               
dates  the TransAlaska  Pipeline  Act. He  said  he believes,  in                                                               
terms  of  the specific  circumstances  surrounding  the need  to                                                               
assure delivery, a contract carriage  approach does not establish                                                               
that discrimination  will occur. He believes  offering the choice                                                               
of  either vehicle  that  a pipeline  company  can approach  this                                                               
under is  effective. It is  important that the RCA  consider each                                                               
application  or  proposal for  contract  carriage  in the  public                                                               
SENATOR ELTON commented that he  finds it bothersome that the RCA                                                               
does not have a preference and  takes no position on the bill. He                                                               
said it almost  sounds as though Mr. Strandberg's  argument is an                                                               
argument for  the common  carrier approach.  He remarked  that SB
151 addresses a fairly significant public policy issue.                                                                         
MR. STRANDBERG said  he was attempting to give  the committee the                                                               
best factual  information about possible  outcomes. He  said when                                                               
pressed, he  would say  the RCA  does have  a position.  It feels                                                               
these statute  changes will  still allow the  RCA to  protect the                                                               
public interest  and to  accommodate and  work with  the pipeline                                                               
companies  to  certificate  and bring  pipelines  into  operation                                                               
under either contract or common carriage.                                                                                       
SENATOR  SEEKINS  asked  Mr.  Strandberg  if  the  RCA  sees  any                                                               
downside  to the  proposed  legislation in  terms  of the  public                                                               
4:45 p.m.                                                                                                                     
MR. STRANDBERG said he sees  no downside to this legislation with                                                               
the  caveat   that  the  RCA   can  continue  to   discharge  its                                                               
responsibility  to  look at  each  application  and its  specific                                                               
circumstances  and  determine  how  that  particular  application                                                               
works within its statute.                                                                                                       
SENATOR  SEEKINS asked  if SB  151 will  help the  state get  its                                                               
resources to market  sooner and more efficiently.  He then asked,                                                               
if no downside  exists in terms of the public  interest, what the                                                               
upside is.                                                                                                                      
MR. STRANDBERG told members the  RCA's mission is to regulate for                                                               
the public  interest. Implicit  in that  mission is  providing an                                                               
environment to  make the investment  climate as good  as possible                                                               
and to  protect ratepayer  interests. He said  the dynamics  of a                                                               
gas pipeline  under the  common carrier portion  of the  act does                                                               
not allow a  definite commitment for the conveyance of  gas. As a                                                               
commodity, gas is time-sensitive. He  said he spoke earlier about                                                               
the  need  for  having  the   ability  to  fulfill  a  production                                                               
contract. He believes  the upside of this legislation  is that it                                                               
will increase surety for investors  in a pipeline. They will know                                                               
that a pipeline company will be  able to comply with the terms of                                                               
the contract it signs for the delivery of gas.                                                                                  
SENATOR SEEKINS  commented that the upside  to SB 151 is  that it                                                               
encourages development and increases surety  for those who put up                                                               
the  capital  to build  the  line  and  there is  no  foreseeable                                                               
CHAIR OGAN asked Mr. Schoffmann to give his presentation.                                                                       
MR.  BEN SCHOFFMANN,  Vice-President of  KKPL, gave  a PowerPoint                                                               
presentation and offered the following highlights.                                                                              
SB  151  will provide  an  additional  option  to offer  firm  or                                                               
interruptible  service.  It  allows other  pipelines  to  operate                                                               
under  the same  methods provided  to  the North  Slope gas  line                                                               
during the  2000 legislative session.  SB 151 is  consistent with                                                               
policy elsewhere in  the United States, where  the Federal Energy                                                               
Regulatory Commission  (FERC), since deregulation, has  been very                                                               
accustomed to  granting firm and interruptible  transportation or                                                               
contract carriage.  This issue has  not arisen in  Alaska because                                                               
there has not been pipeline construction here.                                                                                  
The  difference  between firm  and  interruptible  service is  as                                                               
follows. For  firm service, the  shipper agrees to pay  a monthly                                                               
reservation charge for a set level  of capacity, which is due and                                                               
payable whether  or not that  capacity is used. The  pipeline, in                                                               
turn, agrees  to make that  capacity available. The  shipper only                                                               
pays interruptible service  if and when the service  is used, and                                                               
the pipeline makes best efforts to provide capacity.                                                                            
MR. SCHOFFMANN  told members SB  151 has two  important benefits.                                                               
It  will  give pipeline  investors  the  opportunity to  see  the                                                               
demand  for the  services,  thereby reducing  the  risk. It  also                                                               
helps to establish a minimum level  of what people are willing to                                                               
Prospective  shippers will  be able  to  choose the  type of  gas                                                               
transportation service  which best aligns their  gas supplies and                                                               
customer  contracts. Gas  contracts  are  typically entered  into                                                               
between  producers  and end  users  on  a firm  or  interruptible                                                               
basis. Those with firm gas sales  contracts may be more likely to                                                               
want  firm  transportation  and  be   willing  to  pay  for  that                                                               
transportation. Those  with interruptible supply  contracts would                                                               
be  more  likely  to be  biased  toward  selecting  interruptible                                                               
transportation services. The  key word associated with  SB 151 is                                                               
"alignment."  It allows  companies  to align  gas contracts  with                                                               
transportation services.                                                                                                        
SB 151 does not change the  open access status of pipelines under                                                               
the  Pipeline Act.  He agreed  with Mr.  Strandberg that  the RCA                                                               
will  still  act  in  the  public  interest  to  make  sure  that                                                               
suppliers have  access to the  system either through  open season                                                               
or  forced expansion.  SB 151  will  not have  an adverse  fiscal                                                               
impact on the state or  on smaller shippers. The smaller shippers                                                               
like the idea of building  pipelines because they will be assured                                                               
that if  their exploration efforts  are successful, they  will be                                                               
able to  transport that gas.  He told  members he is  speaking on                                                               
behalf of Aurora  Gas and Forest Oil. He added  that the RCA will                                                               
be  looking at  individual situations  to make  sure the  smaller                                                               
producers  do  not  get  locked  out.  Maximizing  throughput  is                                                               
advantageous  to smaller  companies.  There is  no incentive  for                                                               
them  to   artificially  constrain  throughput.  He   said  other                                                               
agencies  do   not  seem   to  have   a  concern   with  producer                                                               
affiliation. FERC has not prohibited  that sort of situation, nor                                                               
did  the 2000  amendments to  AS 42.06.  Two entities  have built                                                               
pipelines  in  Alaska:  the public  utilities  (Enstar)  and  the                                                               
producers.  Those  entities  have   the  capital,  resources  and                                                               
incentives.  He believes  SB 151  will accelerate  investments by                                                               
allowing firm and interruptible transportation services.                                                                        
KKPL's contention  is that  pipelines are  good for  business. It                                                               
believes  SB  151  will  spur activity.  It  will  give  pipeline                                                               
investors  more   assurance  that   their  investments   will  be                                                               
efficiently utilized  and in demand.  It will give  the producers                                                               
and gas suppliers  the assurance that if they have  firm gas sale                                                               
commitments, they can transport that  gas to market to meet their                                                               
contracts. KKPL has two tentative  contracts for firm shipment of                                                               
gas. It  would like to  offer that  service as the  pipeline goes                                                               
into operation later  this year. This is a timely  issue for KKPL                                                               
but it  believes SB 151  will also encourage  pipeline investment                                                               
and development activities.                                                                                                     
CHAIR OGAN asked Mr. Schoffmann  why KKPL needs contract carriage                                                               
if it is already a producer and  owns the gas it wants to ship on                                                               
the pipeline.                                                                                                                   
MR. SCHOFFMANN  said Marathon and  Unocal have formed  a separate                                                               
pipeline  entity,  Kenai  Kachemak Pipeline  (KKPC),  whose  sole                                                               
business is  to own and operate  this pipeline so it  is a stand-                                                               
alone  business venture  that will  be regulated  by the  RCA. He                                                               
     It is in  our interest to make sure  that that pipeline                                                                    
     company  we created  is not  a  loser of  money but  is                                                                    
     financially  viable  in  its own  right.  So,  we  have                                                                    
     attempted to  conduct the  open season  and set  up the                                                                    
     pipeline  tariffs treating  everyone equally,  inviting                                                                    
     other people to nominate gas  or book for services, but                                                                    
     the real issue is, because  of a variety of reasons, it                                                                    
     made  the most  business  sense to  set  up a  separate                                                                    
     company for this aspect and  that company would like to                                                                    
     be - have some financial underpinning to it.                                                                               
CHAIR OGAN  commented that is  a moot point  if KKPL had  an open                                                               
season and invited participation but no one else had gas.                                                                       
MR. SCHOFFMANN said KKPL anticipated  that others might have gas.                                                               
Others with  leases had  the opportunity  to express  interest or                                                               
make commitments. The  open season at least  helped KKPL identify                                                               
the minimum size  line. KKPL wants to be  financially stable but,                                                               
in   addition,  the   producers,   Marathon   and  Unocal,   have                                                               
commitments to  ship firm gas  to various supply  contracts. They                                                               
want  to be  assured  they have  the  ability to  do  so and  are                                                               
willing to pay for it.                                                                                                          
CHAIR OGAN  commented that one  cannot nominate gas if  there are                                                               
no "bookable" reserves.                                                                                                         
MR. SCHOFFMANN said in this  instance, other investments are tied                                                               
to the  old development  program -  the Ninilchik  gas discovery.                                                               
Millions of  dollars are  being spent. It  is incumbent  upon the                                                               
suppliers  to  ensure  that  money spent  will  result  in  their                                                               
ability to ship  the gas they believe they are  in the process of                                                               
proving up and deliver as early as the end of this year.                                                                        
CHAIR  OGAN asked  if the  KKPL  pipeline is  contracted for  100                                                               
percent capacity at this point.                                                                                                 
MR. SCHOFFMANN  said it is  not. He  explained the gas  line will                                                               
not come on  stream at full capacity. The gas  supplies will ramp                                                               
up to  a certain  level and  then begin to  decline. At  its peak                                                               
rate, the anticipated  throughput that has been  contracted is 90                                                               
million cubic  feet. Under a reasonable  operating scenario, that                                                               
being the  inlet pressure  of about 1,050  pounds and  the outlet                                                               
pressure of about  750 pounds, the gas line capacity  would be in                                                               
the neighborhood  of 120 to  130 million  cubic feet per  day. On                                                               
that basis,  at the peak, there  will be about 25  percent excess                                                               
capacity that is  not contracted for. The line  could be expanded                                                               
if other supplies are proved up and firm commitments are made.                                                                  
CHAIR  OGAN   asked  if  the   pipeline  would  be   expanded  by                                                               
compression or looping.                                                                                                         
MR.  SCHOFFMANN  said it  would  be  expanded by  compression  or                                                               
changing the  inlet or outlet  conditions. The  compression could                                                               
be put  at the  beginning, middle  or end.  Looping would  be the                                                               
last resort but it is possible.                                                                                                 
5:03 p.m.                                                                                                                     
SENATOR SEEKINS noted  that Mr. Schoffmann said this  is a common                                                               
scenario in other states and asked how common.                                                                                  
MR. SCHOFFMANN  clarified that he  said this is commonly  used by                                                               
FERC in  the Lower  48 states.  KKPL did look  at what  other gas                                                               
producing  states, notably  Oklahoma, Texas,  and Louisiana,  are                                                               
doing. They  each have slightly  different statutory  schemes but                                                               
they  all   permit  gas   to  be  transported   on  a   firm  and                                                               
interruptible basis.                                                                                                            
SENATOR SEEKINS asked  if KKPL is building  some flexibility into                                                               
its pipeline to  allow other producers a  structured rate process                                                               
that may help them get their product on line.                                                                                   
MR. SCHOFFMANN said  that is essentially correct  with the caveat                                                               
that under the  common carrier regulations, the  RCA is concerned                                                               
about two  things: making sure  the pipeline has  enough capacity                                                               
to  let  others in  while  making  sure it  is  not  too big.  He                                                               
explained  the nature  of pipeline  design  being what  it is,  a                                                               
change in  pipeline size  creates a  large amount  of incremental                                                               
capacity.  He noted  that an  increase of  one diameter  size can                                                               
create an  increase in  capacity of 50  to 100  percent. Pipeline                                                               
capacity is the function of a  lot of factors, but an increase in                                                               
diameter from 8 inches to 12 inches almost doubles the capacity.                                                                
SENATOR SEEKINS asked Mr. Schoffmann  if anything in the proposed                                                               
rate structure  in SB 151  would put a potential  competitor with                                                               
either Marathon or Unocal at a disadvantage.                                                                                    
MR.  SCHOFFMANN said  he  does  not see  how  that would  result.                                                               
Everyone  has  been  offered  the   same  two  options,  firm  or                                                               
interruptible  transportation.  The  RCA  will  be  ruling  on  a                                                               
tariff,  assuming SB  151 passes,  that sets  the rates  for each                                                               
form of transportation.  Everyone will know what  those rates are                                                               
in  advance. The  rates will  not discriminate  between producers                                                               
and  independents. Therefore,  Marathon and  Unocal will  have to                                                               
contract with KKPL under the same exact terms as others.                                                                        
CHAIR OGAN said that is assuming  no one finds more quantities of                                                               
gas than they can ship through the excess capacity.                                                                             
MR. SCHOFFMANN said at the  point extra capacity is needed, there                                                               
would be  a new  RCA rate  case to determine  the cost,  how that                                                               
capacity will be provided, and who will pay for it.                                                                             
CHAIR OGAN  said he hopes that  happens. He then asked  Mr. Myers                                                               
to testify.                                                                                                                     
MR. MARK  MYERS, Director of  the Division  of Oil and  Gas, DNR,                                                               
told members  that Kevin  Banks and Anthony  Scott were  with him                                                               
and available to answer questions.                                                                                              
SENATOR ELTON asked  Mr. Myers if DNR has taken  a position on SB
MR. MYERS said DNR has taken no position on SB 151.                                                                             
SENATOR  SEEKINS asked  Mr. Myers  his view  of the  downside and                                                               
upside of SB 151.                                                                                                               
MR. MYERS  said he  believes contract  carriage can  provide more                                                               
certainty, which  helps with financing.  The downside is  that an                                                               
affiliated  pipeline may  not  have the  same  motivations as  an                                                               
independent pipeline.  An independent  pipeline will  always want                                                               
to expand.  An affiliated pipeline  owner could find itself  in a                                                               
competitive situation  for the gas  market with a company  with a                                                               
new discovery. He  said affiliation can be an issue  but, in this                                                               
case,  the RCA  can compel  expansion, help  allocate production,                                                               
work out clear rule making  and put together rules for conducting                                                               
open seasons. The RCA has more  authority than FERC. He said some                                                               
contract  carriage pipelines  might be  built that  would not  be                                                               
built under common  carrier so the infrastructure  will be there.                                                               
However, one's ability  to get into that  infrastructure will not                                                               
be as  clear as it  would be  in an non-affiliated  pipeline that                                                               
might  want to  expand. He  is not  saying that  anti-competitive                                                               
behavior will  happen, but there  is concern that those  who make                                                               
the  initial investment  have priority  in the  market place.  He                                                               
repeated Alaska has more protection  with the RCA. On the federal                                                               
side, the Minerals Management Service  has had some problems with                                                               
access to  offshore pipelines. They  are more akin to  the Alaska                                                               
situation  than Oklahoma  or  Texas,  where there  are  a lot  of                                                               
competing pipelines.                                                                                                            
SENATOR SEEKINS asked,  "If this was not  an affiliated pipeline,                                                               
if this was  simply a common contract carrier, do  you think they                                                               
would  be looking  for the  same  kind of  flexibility that  this                                                               
pipeline is?"                                                                                                                   
MR. MYERS  said he  does. He  added that  contract carriage  is a                                                               
"take or  pay" contract. He  explained in an  affiliated producer                                                               
built pipeline,  the producer has  a good  idea of the  amount of                                                               
gas  going into  the line  and  understands the  market, and  the                                                               
pipeline is self  financed. However, in the case  of someone else                                                               
going  to the  market  to try  to get  financing,  the fact  that                                                               
contracts  are locked  in  for a  long period  of  time would  be                                                               
SENATOR SEEKINS  asked if it  is a good flexibility  component in                                                               
general  so, by  looking at  it  as an  affiliated pipeline,  the                                                               
legislature may be reading more into  it than just seeing this as                                                               
a common procedure  used in other places and a  better way to get                                                               
gas to market.                                                                                                                  
TAPE 03-29, SIDE A                                                                                                            
MR. MYERS  said that is  basically correct.  He  said affiliation                                                               
could create a problem when there  are no alternatives, but he is                                                               
not saying that is  the case with KKPL.  He said  when there is a                                                               
single pipeline coming  out of a basin and no  one knows how much                                                               
gas  is in  that basin,  there could  potentially be  more demand                                                               
than that  pipeline can  deliver and  it will  require expansion.                                                               
Regarding the point of expansion,  if the burden of demonstrating                                                               
the need  not to expand is  on the pipeline company,  that is one                                                               
thing.  If the  burden  to show  the  need to  expand  is on  the                                                               
explorer, that  places more risk on  the explorer. He said  a lot                                                               
depends on  how the RCA weighs  the evidence as far  as mandating                                                               
CHAIR OGAN asked Mr. Myers if  he would suggest clarifying in the                                                               
statutes where the burden of proof should fall.                                                                                 
MR. MYERS said he is not  qualified to say whether that should be                                                               
in the  RCA rule  making or  in statute.  He deferred  to Anthony                                                               
Scott for an answer.                                                                                                            
MR. ANTHONY  SCOTT, Division  of Oil and  Gas, DNR,  told members                                                               
that  Commissioner  Strandberg  mentioned  if  the  RCA  had  the                                                               
authority  to weigh  these matters  on a  case-by-case basis,  it                                                               
would be able  to protect the public interest. He  said he thinks                                                               
rule making could potentially be quite useful.                                                                                  
CHAIR   OGAN    referred   to   DNR's   fiscal    note   analysis                                                               
and quoted the following sentence:                                                                                              
     Meanwhile, contract carriage on  a pipeline owned by an                                                                    
     affiliated  producer  could   potentially  be  used  to                                                                    
     impede  pipeline access  for non-affiliated  producers.                                                                    
     This   could  hinder   natural   gas  exploration   and                                                                    
     development and ultimately result  in a negative fiscal                                                                    
     impact for the State.  For the Kenai-Kachemak pipeline,                                                                    
     however,  these  dynamics  are  unlikely,  as  only  63                                                                    
         percent of the line's total capacity has been                                                                          
     contracted for.                                                                                                            
He said  he is trying to  reconcile that with Mr.  Myers' earlier                                                               
comment that  there could be  more supply than  capacity sometime                                                               
in the future.  He then asked if the  legislature should consider                                                               
narrowing this legislation to this specific pipeline.                                                                           
MR. MYERS said that is a policy  call. He said if the RCA has the                                                               
ability to mandate expansion and the  burden of proof lies on the                                                               
pipeline  company,  he  thinks  it's okay.  He  said  since  this                                                               
applies to  all pipelines, there  is the potential  for pipelines                                                               
to  be built  for a  specific project  with a  limited amount  of                                                               
capacity.  The RCA  could mandate  expansion but  explorers would                                                               
have to go to  the RCA and take the risk they  would or would not                                                               
succeed.  In that  case, there  is additional  risk but  there is                                                               
still a  remedy. He said affiliation  is not a huge  issue in his                                                               
mind but  he had to bring  the committee's attention to  the fact                                                               
that affiliation could change pipeline behaviors.                                                                               
CHAIR OGAN  announced he would  hold the bill in  committee until                                                               
Wednesday. He then announced a brief at-ease.                                                                                   
                  SB  50-ROYALTY GAS CONTRACTS                                                                              
CHAIR  OGAN  announced  a  committee  substitute  (CS)  had  been                                                               
prepared, labeled  Version Q. He  informed members that a  lot of                                                               
committee members'  questions and concerns were  addressed in the                                                               
CS  but a  few additional  amendments need  to be  considered. He                                                               
said because  this CS is  new, he would  hold it in  committee to                                                               
give members time to review it.                                                                                                 
SENATOR WAGONER moved to adopt  Version Q as the working document                                                               
of the committee.                                                                                                               
CHAIR  OGAN  announced  that without  objection,  Version  Q  was                                                               
SENATOR WAGONER  moved to adopt  an amendment with  the following                                                               
     On page 2, line 31, change "shall" to "may"                                                                                
     On page 3, line 17, change "and" to "or"                                                                                   
     On page 3, line 20, change "and" to "or"                                                                                   
CHAIR OGAN noted without objection, the amendment was adopted.                                                                  
He then said SB 50 would be taken up on Wednesday and adjourned                                                                 
the meeting at 5:20 p.m.                                                                                                        

Document Name Date/Time Subjects