Legislature(2005 - 2006)Anch LIO Conf Rm

10/27/2006 01:00 PM RESOURCES


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01:04:52 PM Start
01:06:50 PM Administration Presentation - Public Comments on the Draft Alaska Gas Pipeline Contract
04:36:24 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
-- Teleconference --
--JOINT WITH HOUSE RESOURCES COMMITTEE--
Presentation by Administration -
Public Comments on Draft Alaska Gas
Pipeline Contract
                    ALASKA STATE LEGISLATURE                                                                                  
                         JOINT MEETING                                                                                        
              SENATE RESOURCES STANDING COMMITTEE                                                                             
               HOUSE RESOURCES STANDING COMMITTEE                                                                             
                        October 27, 2006                                                                                        
                           1:04 p.m.                                                                                            
                                                                                                                                
MEMBERS PRESENT                                                                                                               
                                                                                                                                
SENATE RESOURCES                                                                                                                
                                                                                                                                
 Senator Thomas Wagoner, Chair                                                                                                  
 Senator Fred Dyson                                                                                                             
 Senator Bert Stedman                                                                                                           
 Senator Kim Elton                                                                                                              
                                                                                                                                
HOUSE RESOURCES                                                                                                                 
                                                                                                                                
 Representative Jay Ramras, Co-Chair                                                                                            
 Representative Ralph Samuels, Co-Chair                                                                                         
 Representative Paul Seaton, Vice Chair                                                                                         
 Representative Kurt Olson                                                                                                      
 Representative Harry Crawford                                                                                                  
 Representative Gabrielle LeDoux                                                                                                
 Representative Carl Gatto                                                                                                      
                                                                                                                                
MEMBERS ABSENT                                                                                                                
                                                                                                                                
SENATE RESOURCES                                                                                                                
                                                                                                                                
 Senator Ralph Seekins, Vice Chair                                                                                              
 Senator Ben Stevens                                                                                                            
 Senator Albert Kookesh                                                                                                         
                                                                                                                                
HOUSE RESOURCES                                                                                                                 
                                                                                                                                
 Representative Jim Elkins                                                                                                      
 Representative Mary Kapsner                                                                                                    
                                                                                                                                
OTHER LEGISLATORS PRESENT                                                                                                     
                                                                                                                                
Representative Bill Thomas                                                                                                      
Representative Bill Stoltze                                                                                                     
                                                                                                                                
COMMITTEE CALENDAR                                                                                                            
                                                                                                                                
Presentation by the Administration - Public Comments on the                                                                     
Draft Alaska Gas Pipeline Contract                                                                                              
                                                                                                                                
PREVIOUS COMMITTEE ACTION                                                                                                     
                                                                                                                                
No previous action to record.                                                                                                   
                                                                                                                                
WITNESS REGISTER                                                                                                              
                                                                                                                                
JIM CLARK, Chief Negotiator                                                                                                     
Office of the Governor                                                                                                          
PO Box 110001                                                                                                                   
Juneau, AK  99811-0001                                                                                                          
POSITION STATEMENT:  Presented information related to public                                                                  
comments on the draft Gas Pipeline Contract.                                                                                    
                                                                                                                                
WILLIAM A. CORBUS, Commissioner                                                                                                 
Department of Revenue                                                                                                           
PO Box 110400                                                                                                                   
Juneau, AK  99811-0400                                                                                                          
POSITION STATEMENT:  Presented information related to public                                                                  
comments on the draft Gas Pipeline Contract.                                                                                    
                                                                                                                                
MARCUS HARTLEY                                                                                                                  
Northern Economics                                                                                                              
     th                                                                                                                         
880 8 Street, Ste 210                                                                                                           
Anchorage, AK                                                                                                                   
POSITION STATEMENT:  Presented information related to public                                                                  
comments on the draft Gas Pipeline Contract.                                                                                    
                                                                                                                                
STEVE PORTER, Deputy Commissioner                                                                                               
Department of Revenue                                                                                                           
PO Box 110400                                                                                                                   
Juneau, AK  99811-0400                                                                                                          
POSITION STATEMENT:  Presented information related to public                                                                  
comments on the draft Gas Pipeline Contract.                                                                                    
                                                                                                                                
BEN LEVINE, URS Corporation                                                                                                     
Northern Economics Sub-Contractor                                                                                               
     th                                                                                                                         
880 8 Street, Ste 210                                                                                                           
Anchorage, AK                                                                                                                   
POSITION STATEMENT:  Presented information related to public                                                                  
comments on the draft Gas Pipeline Contract.                                                                                    
                                                                                                                                
KEN GRIFFIN, Deputy Commissioner                                                                                                
Department of Natural Resources                                                                                                 
400 Willoughby Avenue                                                                                                           
Juneau, AK  99801-1724                                                                                                          
POSITION  STATEMENT:   Presented  information  related to  public                                                             
comments on the draft Gas Pipeline Contract.                                                                                    
                                                                                                                                
MICHAEL WILLIAMS, Chief Economist                                                                                               
Department of Revenue                                                                                                           
PO Box 110400                                                                                                                   
Juneau, AK  99811-0400                                                                                                          
POSITION  STATEMENT:   Presented  information  related to  public                                                             
comments on the draft Gas Pipeline Contract.                                                                                    
                                                                                                                                
BOB LOEFFLER                                                                                                                    
Morrison & Foerster                                                                                                             
Counsel to the Governor                                                                                                         
Office of the Governor                                                                                                          
PO Box 110001                                                                                                                   
Juneau, AK  99811-0001                                                                                                          
POSITION  STATEMENT:   Presented  information  related to  public                                                             
comments on the draft Gas Pipeline Contract.                                                                                    
                                                                                                                                
ROGER MARKS, Economist                                                                                                          
Department of Revenue                                                                                                           
PO Box 110400                                                                                                                   
Juneau, AK  99811-0400                                                                                                          
POSITION  STATEMENT:   Presented  information  related to  public                                                             
comments on the draft Gas Pipeline Contract.                                                                                    
                                                                                                                                
DAN DICKINSON, CPA                                                                                                              
Consultant to the Governor                                                                                                      
Office of the Governor                                                                                                          
PO Box 110001                                                                                                                   
Juneau, AK  998811-0001                                                                                                         
POSITION  STATEMENT:   Presented  information  related to  public                                                             
comments on the draft Gas Pipeline Contract.                                                                                    
                                                                                                                                
ACTION NARRATIVE                                                                                                              
                                                                                                                                
CHAIR THOMAS WAGONER  called the joint meeting of  the Senate and                                                             
House  Resources  Standing Committees  to  order  at 1:04:52  PM.                                                             
Present at  the call  to order were  Senators Bert  Stedman, Lyda                                                               
Green,   Fred   Dyson,  Kim   Elton   and   Thomas  Wagoner   and                                                               
Representatives  Harry Crawford,  Kurt  Olson, Gabrielle  LeDoux,                                                               
Ralph Samuels, Jay Ramras, and Paul Seaton.                                                                                     
                                                                                                                                
                                                                                                                                
  ^Administration Presentation - Public Comments on the Draft                                                               
                  Alaska Gas Pipeline Contract                                                                              
                                                                                                                                
CHAIR THOMAS WAGONER announced the  purpose of the meeting is for                                                               
the  administration  to  present  public comments  on  the  draft                                                               
Alaska Gas Pipeline Contract.                                                                                                   
                                                                                                                                
1:06:50 PM                                                                                                                    
JIM  CLARK,  Chief  Negotiator   on  the  Gas  Pipeline  Project,                                                               
informed the committee that the  administration had two documents                                                               
to present  to the legislature.  The first is the  public comment                                                               
overview  that  contains  over  2,100 comments  and  it  will  be                                                               
presented  today.  The  second document  is  the  Interim  Fiscal                                                               
Interest  Finding,  which  includes   the  information  from  the                                                               
public,   the   administration's   responses,  and   the   expert                                                               
information  that  was  gathered  in  the  process  of  preparing                                                               
responses to the  public. That document ought to  be finished and                                                               
ready for presentation in the next several weeks.                                                                               
                                                                                                                                
COMMISSIONER BILL  CORBUS, Department of Revenue  (DOR), recapped                                                               
the  public process  that  began on  May 10  when  the draft  Gas                                                               
Pipeline Contract  and Preliminary  Fiscal Interest  Finding were                                                               
released. The public process, which  was extended to 75 days, was                                                               
broken  into three  phases: phase  one  consisted of  11 days  of                                                               
presentations to  the legislature that were  broadcast statewide;                                                               
phase two was the nine  public hearings that were held throughout                                                               
the  state; and  phase three  included seven  public forums  that                                                               
included a question and answer format.                                                                                          
                                                                                                                                
During  the process  the administration  had an  outreach program                                                               
where  administration members  visited  70 different  communities                                                               
and discussed  the issue  with anyone willing  to listen.  At the                                                               
same   time   comments  were   accepted   by   mail,  email   and                                                               
telephonically.  Also, the  Senate Special  Committee on  Natural                                                               
Gas Development  and the House Resources  Standing Committee held                                                               
extensive  hearings on  the subject.  He noted  that much  of the                                                               
legislative  process  was mixed  with  the  PPT legislation.  The                                                               
public process closed on July  24 and Northern Economics prepared                                                               
the  document before  the committee  under the  direction of  the                                                               
Department of Revenue.                                                                                                          
                                                                                                                                
The document  includes three attachments: attachment  one indexes                                                               
all  the comments  that were  submitted; attachment  two includes                                                               
specific responses the  state made to legislators  and others who                                                               
submitted  detailed  comments  on  the contract  and  the  fiscal                                                               
interest  finding; attachment  three is  a presentation  on basin                                                               
control. The public  process document will be an  appendix to the                                                               
interim  fiscal interest  finding, which  is due  for release  in                                                               
November.  It consists  of five  sections: introduction,  comment                                                               
analysis, response  to public comments, detailed  analysis of the                                                               
public comments, and conclusion.                                                                                                
                                                                                                                                
COMMISSIONER CORBUS  said 2,169  comments were  cataloged. Forty-                                                               
nine  were  discarded  so  a  total  of  2,120  submissions  were                                                               
analyzed.  The difference  between respondents  who wanted  a gas                                                               
pipeline  and those  who were  addressing the  contract was  very                                                               
clear,  but  it's  noteworthy  that  sixty-five  percent  of  the                                                               
respondents  favored the  contract,  twenty-nine percent  opposed                                                               
the contract, and six percent maintained a neutral position.                                                                    
                                                                                                                                
1:17:02 PM                                                                                                                    
The  comments  were summarized  into  fourteen  general areas  of                                                               
concern that are found in Table  12 on page 25. The general areas                                                               
of  concern  were further  broken  down  into specific  areas  of                                                               
concern. They are found in Table 5  on page 13. Some of the 2,120                                                               
comments addressed  more than one  area of concern so  there were                                                               
actually  4,285  statements  of concern.  Section  2  contains  a                                                               
demographic analysis  of all comments including  the community of                                                               
origin and the timing of the submission.                                                                                        
                                                                                                                                
Table 13, on page 25, is  a summary of the most frequent comments                                                               
including:  fiscal   certainty,  PPT  legislation,   Alaska  hire                                                               
provision,   Alaska   Gas   Port  Authority   alternative,   work                                                               
commitments, legislative  process, in-state demand,  market risk,                                                               
and general  project timeline.  About one  third of  the comments                                                               
related to those topics.                                                                                                        
                                                                                                                                
1:19:40 PM                                                                                                                    
COMMISSIONER  CORBUS said  Section 3  is largely  devoted to  the                                                               
responses that  were made to  the public comments. He  noted that                                                               
every  comment received  a response  such that  365 sub  areas of                                                               
concern  were addressed  and account  for three  quarters of  the                                                               
document.                                                                                                                       
                                                                                                                                
Section 4  analyzes the  comments in entirety.  Table 15  on page                                                               
180 is  a matrix of the  comments by group and  contract article.                                                               
The top row  indicates the categories of responders  and the left                                                               
column indicates the different issues.                                                                                          
                                                                                                                                
1:23:06 PM                                                                                                                    
COMMISSIONER  CORBUS  summarized  that  nothing came  up  in  the                                                               
public process to  change the administration's mind  that the gas                                                               
is  stranded.   Sixty-five  percent   of  the  people   who  made                                                               
submissions  supported the  view  that the  original contract  is                                                               
good for Alaska  and the state should  expeditiously proceed with                                                               
a gas pipeline and transition to a gas-based economy.                                                                           
                                                                                                                                
1:24:13 PM                                                                                                                    
REPRESENTATIVE  RALPH  SAMUELS  mentioned the  general  commented                                                               
letters that Trans  Canada sent the administration  and said he'd                                                               
like  confirmation  that  those   comments  weren't  included  as                                                               
specific submissions.                                                                                                           
                                                                                                                                
COMMISSIONER CORBUS replied that  entity did submit comments. The                                                               
administration did not interpret them  to require a response, but                                                               
they would be covered in the interim fiscal interest finding.                                                                   
                                                                                                                                
1:25:23 PM                                                                                                                    
SENATOR  FRED DYSON  said he  was struggling  to comprehend  that                                                               
65 percent of the respondents approved  of the contract. He asked                                                               
if that is what he intended to communicate.                                                                                     
                                                                                                                                
COMMISSIONER CORBUS replied in most cases yes.                                                                                  
                                                                                                                                
MR. CLARK added a lot of  comments suggested changes and fixes so                                                               
there was a mix.                                                                                                                
                                                                                                                                
SENATOR DYSON responded that was his assumption.                                                                                
                                                                                                                                
1:26:53 PM                                                                                                                    
MR.  CLARK said  his point  is that  there was  a combination  of                                                               
responses. There  were a lot  of very thoughtful comments  and it                                                               
was  obvious that  people spent  a  great deal  of time  thinking                                                               
about the  subject. For the most  part they suggested that  a few                                                               
changes ought to  be made, which is similar to  the comments that                                                               
came from the legislature.                                                                                                      
                                                                                                                                
SENATOR DYSON  asked how  the responses were  sorted into  pro or                                                               
con categories.                                                                                                                 
                                                                                                                                
COMMISSIONER CORBUS asked Mr. Hartley to respond.                                                                               
                                                                                                                                
CHAIR  WAGONER   recognized  that  Representative   Bill  Thomas,                                                               
Representative  Bill Stoltze  and Representative  Carl Gatto  had                                                               
joined the meeting.                                                                                                             
                                                                                                                                
MARCUS  HARTLEY, Northern  Economics,  Anchorage, explained  that                                                               
categorizing  the   responses  includes   a  certain   amount  of                                                               
interpretation. Usually when a submission  was catalogued as pro,                                                               
it was  because the  response was  clearly favorable  even though                                                               
some changes  may have been  recommended. Other  submitters said,                                                               
"This is  a good  idea, but  I don't  like certain  issues." That                                                               
type  response  was  catalogued  as  neutral.  If  the  submitter                                                               
suggested  another  alternative or  said  that  the approach  was                                                               
wrong, that  comment was cataloged as  con. He said it  was clear                                                               
that the  majority of respondents  were in favor of  the contract                                                               
as written.                                                                                                                     
                                                                                                                                
SENATOR DYSON  asked if he said  that more than fifty  percent of                                                               
the submitters said don't change the contract at all.                                                                           
                                                                                                                                
MR. HARTLEY  responded he  wouldn't say that.  He would  say that                                                               
more than half  were very much in favor of  the contract, but not                                                               
without changes.                                                                                                                
                                                                                                                                
SENATOR DYSON said that's the point.                                                                                            
                                                                                                                                
MR. HARTLEY  continued to say  he couldn't identify  the specific                                                               
percentage that suggested one particular change or another.                                                                     
                                                                                                                                
1:32:17 PM                                                                                                                    
MR. CLARK added  that he didn't want to leave  the committee with                                                               
the impression  that the administration concluded  that it should                                                               
proceed without some changes to  the contract. He emphasized that                                                               
they reviewed and seriously evaluated  all public and legislative                                                               
comments.                                                                                                                       
                                                                                                                                
Today the purpose  is to report what the  public said. Discussion                                                               
might  touch on  the administration's  reaction to  the comments,                                                               
but the Interim Fiscal Interest  Finding is where discussion will                                                               
take  place regarding  proposals  for making  changes to  address                                                               
issues  that   the  public  and   the  legislature   raised.  The                                                               
administration has certainly taken  this process seriously and is                                                               
not resting on the notion that  people have given the green light                                                               
to go forward with the contract as-is, he said.                                                                                 
                                                                                                                                
1:35:32 PM                                                                                                                    
SENATOR DYSON asked when the  legislature could expect to see the                                                               
changes the administration  recommends as a result  of the entire                                                               
process.                                                                                                                        
                                                                                                                                
MR.  CLARK  responded all  public  and  legislative comments  are                                                               
reflected in  this document. He  noted that  the administration's                                                               
thinking  has  matured  in  the  process  of  responding  to  the                                                               
questions  and  he  would  urge committee  members  to  read  the                                                               
document.  Well thought  out first-rate  comments were  submitted                                                               
and the administration tried to respond with first-rate answers.                                                                
                                                                                                                                
SENATOR DYSON  again asked when  the legislature could  expect to                                                               
see proposed changes to the contract.                                                                                           
                                                                                                                                
MR. CLARK responded  in the Interim Fiscal  Interest Finding that                                                               
will be presented to the committees in November.                                                                                
                                                                                                                                
SENATOR  DYSON asked  if the  administration  had discussed  that                                                               
with the producers.                                                                                                             
                                                                                                                                
MR. CLARK replied  there has been contact, but  the producers are                                                               
reluctant to negotiate with an outgoing administration.                                                                         
                                                                                                                                
1:39:18 PM                                                                                                                    
REPRESENTATIVE   GABRIELLE  LEDOUX   said  she   was  trying   to                                                               
understand  the concept  of comment  interpretation. She  posed a                                                               
hypothetical response that included  a positive comment about the                                                               
contract   along  with   several  suggestions   to  make   rather                                                               
significant  changes.  She  asked  if such  a  comment  would  be                                                               
interpreted as favorable or negative.                                                                                           
                                                                                                                                
MR. HARTLEY summarized  that the comment is  positive with regard                                                               
to the  contract, but  it also  includes suggestions  for several                                                               
large changes  so that sort  of response would be  categorized as                                                               
neutral.  He mentioned  an actual  comment that  said do  it even                                                               
though  the contract  could  be improved.  That  sort of  comment                                                               
would be interpreted as in favor of the contract.                                                                               
                                                                                                                                
REPRESENTATIVE  LEDOUX noted  that it's  polite to  say something                                                               
positive  initially,  which  caused  her  to  question  how  many                                                               
negative points a person would need  to detail for the comment to                                                               
be interpreted as negative.                                                                                                     
                                                                                                                                
MR. HARTLEY  responded it is  an interpretation, but  they looked                                                               
for tone  and tried  to weigh all  the factors  before concluding                                                               
that the  person did or  did not favor  the contract. We  feel we                                                               
did a good job in categorizing, he said.                                                                                        
                                                                                                                                
1:43:49 PM                                                                                                                    
SENATOR KIM  ELTON said the  initial report said that  65 percent                                                               
of the  people who testified were  in favor of the  contract, but                                                               
he suspects that  there was more nuance. He asked  Mr. Hartley to                                                               
assign percentages to the pro, con, and neutral categories.                                                                     
                                                                                                                                
MR.  HARTLEY replied  that would  be difficult  since he  did not                                                               
look at  it from that  perspective, but he is  comfortable saying                                                               
that a majority of the people  who commented said they would like                                                               
to see the contract go forward.  He clarified that doesn't mean a                                                               
majority of  Alaskans; it means  a majority of those  who elected                                                               
to comment on the contract.                                                                                                     
                                                                                                                                
SENATOR ELTON said he was trying  to put this into the context of                                                               
the  initial report,  which  is  that 65  percent  of the  people                                                               
favored  the contract.  Now  it  sounds more  nuanced  so he  was                                                               
trying to figure  out just how nuanced it might  be. He tended to                                                               
agree with Representative LeDoux that people like to be polite.                                                                 
                                                                                                                                
1:47:00 PM                                                                                                                    
MR. CLARK  said there were  many thoughtful submissions,  but the                                                               
comments were predominantly in favor  of moving forward with this                                                               
contract  with  changes.  Even  if  you  count  all  the  neutral                                                               
comments as negative, it would still be  2 to 1 in favor of going                                                               
ahead with the  contract with some changes  so the administration                                                               
is moving in that direction.                                                                                                    
                                                                                                                                
1:48:08 PM                                                                                                                    
REPRESENTATIVE  PAUL   SEATON  asked  how  a   comment  would  be                                                               
cataloged  if someone  wanted  the pipeline  to  go forward,  but                                                               
didn't comment on the contract specifically.                                                                                    
                                                                                                                                
MR. HARTLEY  explained that  if the  comment said  "the pipeline"                                                               
that was  interpreted to mean the  one that is the  object of the                                                               
fiscal interest statement.  If the person said a  gas pipeline is                                                               
good and it  ought to go to certain places  then that comment was                                                               
absolutely not counted as favorable for this contract.                                                                          
                                                                                                                                
1:49:01 PM                                                                                                                    
STEVE PORTER,  Deputy Commissioner, Department of  Revenue (DOR),                                                               
provided context for the  relationship between the administration                                                               
and  Northern Economics.  He explained  that  the contractor  was                                                               
asked  to   capture  the   information  and   the  administration                                                               
maintained  a hands-off  approach  so it  did  not influence  the                                                               
outcome one  way or  the other.  He said  it's important  to know                                                               
that  two-thirds of  the comments  basically said,  "We like  the                                                               
contract; we think it ought to  go forward or we don't." Page 24,                                                               
section  2.3.2, contains  a summary  of the  comments by  area of                                                               
concern  and issue  and it  says  two thirds  of the  submissions                                                               
dealt with general comments on  the contract. The actual comments                                                               
are  on the  website so  it's possible  to get  a flavor  for the                                                               
comments that were submitted, he said.                                                                                          
                                                                                                                                
1:50:33 PM                                                                                                                    
REPRESENTATIVE   RALPH  SAMUELS   commented   the  most   telling                                                               
statistic is 2,000.  Of 600,000 Alaskans just  2,000 commented on                                                               
this  incredibly important  issue that  will affect  all Alaskans                                                               
for generations to come.                                                                                                        
                                                                                                                                
SENATOR DYSON  said he was looking  for the number of  people who                                                               
favored the contract as written,  but it's also important to know                                                               
what the "deal-breakers" might be.                                                                                              
                                                                                                                                
MR. CLARK  responded the thoughtful comments  from various groups                                                               
were very supportive of this  contract, but there were also ideas                                                               
about  making it  better. Legislators  have said  about the  same                                                               
thing,  which  is  to  go  forward  but  make  some  changes.  He                                                               
expressed the  view that that is  what is happening and  that the                                                               
legislature is  fairly well aligned with  the administration. The                                                               
problem is that  the producers agreed with the  contract that was                                                               
dated May  24. As  a consequence  of the  public process  and the                                                               
legislative process,  changes are being made.  The producers have                                                               
not responded  to the additional  ideas and changes  because they                                                               
are waiting  to deal with  the next administration.  He suggested                                                               
that getting alignment  there is the challenge  for Alaska moving                                                               
forward.                                                                                                                        
                                                                                                                                
1:55:26 PM                                                                                                                    
REPRESENTATIVE  CARL  GATTO   referenced  Representative  Samuels                                                               
comment and said Alaskans are  depending on their representatives                                                               
so  he wants  to  make sure  that the  legislature  plays a  very                                                               
significant role.  He said he is  very proud of what  came out of                                                               
the House  Resources committee  on PPT  and it  closely resembled                                                               
the final  product. The legislature  should be  heavily involved,                                                               
he reiterated.                                                                                                                  
                                                                                                                                
1:57:09 PM                                                                                                                    
SENATOR  BERT  STEDMAN correlated  the  public  comments and  the                                                               
issues the  Senate Special Committee  on Natural  Gas Development                                                               
addressed when amending the Stranded  Gas Development Act (SGDA).                                                               
He noted  that legislation  did not move  from the  committee and                                                               
asked if  it's fair to conclude  that 60 percent of  the comments                                                               
would  fall in  line with  the SGDA  amendments. That  means move                                                               
forward after the changes are made.                                                                                             
                                                                                                                                
MR. CLARK said that's spot on and  page 24 has a breakdown of the                                                               
concerns that  were most  frequently expressed.  Fiscal certainty                                                               
is the number  one concern and that's what  the legislature said.                                                               
Other concerns were  PPT and Alaska hire. Again he  said there is                                                               
quite an alignment between the  concerns the public expressed and                                                               
the concerns the legislature expressed.                                                                                         
                                                                                                                                
REPRESENTATIVE KURT OLSON  asked if the governor  intends to sign                                                               
a gas pipeline contract before leaving office in December.                                                                      
                                                                                                                                
MR. CLARK replied  not that he knew. The  administration is going                                                               
through the  legislative process  here today  and after  that the                                                               
Interim Fiscal Interest Finding will be presented.                                                                              
                                                                                                                                
CHAIR WAGONER described the process as a work in progress.                                                                      
                                                                                                                                
MR. CLARK agreed.                                                                                                               
                                                                                                                                
2:00:23 PM                                                                                                                    
REPRESENTATIVE GATTO referenced page  24 and asked what "In-State                                                               
Demand (124)" means.                                                                                                            
                                                                                                                                
COMMISSIONER CORBUS answered  that covers a wide  range of issues                                                               
for in-state use of gas.                                                                                                        
                                                                                                                                
2:01:57 PM Recess 2:10:43 PM                                                                                                
                                                                                                                                
MR. CLARK told the committee that  Mr. Levine, who did the actual                                                               
counting,  was  available  to  provide   an  explanation  of  the                                                               
process.                                                                                                                        
                                                                                                                                
CHAIR WAGONER said it might clarify some things.                                                                                
                                                                                                                                
BEN   LEVINE,  URS   Corporation,   sub-contractor  to   Northern                                                               
Economics, explained  that he developed  the database  to analyze                                                               
the comments. He  read every comment and flagged it  pro, con, or                                                               
neutral and in  general it was obvious that  a particular comment                                                               
was  generally   for  or  generally  against   the  contract.  He                                                               
referenced Representative LeDoux's  hypothetical comment and said                                                               
he would  have categorized that  comment as con. Perhaps  just 10                                                               
percent  of the  comments  fell in  the middle  where  he had  to                                                               
struggle to decide  whether it was pro or con.  A lot of comments                                                               
were positive with reservations, he said.                                                                                       
                                                                                                                                
After  the initial  coding,  each submission  was  looked at  and                                                               
broken down  into individual  comments and  given an  issue code.                                                               
Those were further broken down  into statements of concern. Issue                                                               
codes were  neutral. For  example, fiscal  certainty is  an issue                                                               
code and is  neither for nor against a provision;  it is simply a                                                               
topic. In the next step,  Northern Economics looked at the fiscal                                                               
certainty comments  and broke those  into specific  statements of                                                               
concern - very  specific portions of the  fiscal certainty issue.                                                               
Some of those  comments were positive and some  were negative. An                                                               
analysis on positive  and negative statements of  concern was not                                                               
done.                                                                                                                           
                                                                                                                                
SENATOR DYSON asked how many  of the comments were interpreted to                                                               
say,  "Go forward  with  this contract  as  written, without  any                                                               
modifications."                                                                                                                 
                                                                                                                                
MR. LEVINE replied 65 percent of  the comments were coded pro and                                                               
about  70 percent  of those  said, "Do  it." and  probably dozens                                                               
said, "Don't do it."                                                                                                            
                                                                                                                                
2:16:14 PM                                                                                                                    
REPRESENTATIVE OLSON asked  if there was any  indication how many                                                               
respondents had actually read the material.                                                                                     
                                                                                                                                
MR. LEVINE replied  some of them had obviously  read the material                                                               
while others  had not. You  don't know  when some says,  "Do it."                                                               
But then he wasn't there to judge that, he said.                                                                                
                                                                                                                                
REPRESENTATIVE  OLSON  remarked  copies   of  the  contract  were                                                               
available in  his office, but  few people took advantage  of that                                                               
and he assumes that would hold true in other districts.                                                                         
                                                                                                                                
SENATOR WAGONER asked Mr. Clark to continue.                                                                                    
                                                                                                                                
MR.  CLARK asked  Mr. Griffin  to  discuss the  issues that  were                                                               
raised on in-state demand and use of gas.                                                                                       
                                                                                                                                
KEN   GRIFFIN,  Deputy   Commissioner,   Department  of   Natural                                                               
Resources,   explained   that   the   title   "In-State   Demand"                                                               
encompasses anything that might fall  under the broad umbrella of                                                               
in-state  demand. It  might  include  people expressing  concerns                                                               
about  whether Chicago  prices will  be charged  for gas  that is                                                               
taken  off  in Fairbanks.  Other  comments  may not  actually  be                                                               
addressing  the gas  line.  Rather, the  comments  may simply  be                                                               
addressing  the  need  for  gas  in  Southcentral  or  expressing                                                               
concern  about what  getting  gas to  Southcentral  might do  for                                                               
Southeast or Kodiak or Bethel.                                                                                                  
                                                                                                                                
MR.  CLARK  asked Mr.  Marks  and  Mr.  Williams to  address  the                                                               
impacts of delay.                                                                                                               
                                                                                                                                
MICHAEL WILLIAMS,  Chief Economist, Department of  Revenue (DOR),                                                               
said his comments  relate to the impacts of  delaying natural gas                                                               
development. He  reviewed three major  points: fiscal  impacts to                                                               
the  state, the  loss  to the  Alaska economy,  and  the loss  of                                                               
potential market share for Alaska natural gas.                                                                                  
                                                                                                                                
Fiscal Impacts  to the  State: Beginning in  2016 the  state will                                                               
receive  about $1  billion per  year  depending on  the price  of                                                               
natural gas. Because  oil production is declining,  it's simply a                                                               
matter of time  before the state runs a  deficit. The Preliminary                                                               
Fiscal  Interest Finding  analysis indicates  that will  occur in                                                               
2009  and  the  Constitutional   Budget  Reserve  (CBR)  will  be                                                               
depleted in  2014. He  emphasized the  need for  diversifying the                                                               
revenue base.                                                                                                                   
                                                                                                                                
Loss  to the  State Economy  with  a Focus  on Employment:  About                                                               
11,000 pipeline related construction  jobs will be available each                                                               
of the roughly five years  that construction occurs. With project                                                               
delays, those jobs are pushed  into the future. The assumption is                                                               
that the  state will spend most  of the money that  accrues to it                                                               
from natural gas  sales and those expenditures  are recycled into                                                               
products  and  services.  The   impact  from  state  expenditures                                                               
amounts  to about  22,000  jobs per  year over  the  life of  the                                                               
project  or  some  35  years. Clearly,  the  impacts  from  state                                                               
expenditures  dominate   what  is  received   from  construction.                                                               
Delaying one  year reduces  construction employment  beginning in                                                               
2011 and reduces the additional impacts beginning in 2017.                                                                      
                                                                                                                                
Loss of  Potential Market Share  for Alaska Natural Gas:  This is                                                               
the most important point. If the  project is delayed there may be                                                               
no demand  for Alaska's  natural gas.  First, there  is currently                                                               
demand for  Alaska natural gas  in North America and  probably it                                                               
will be for electric generation.  Second, the recent high natural                                                               
gas  prices  combined with  the  interruption  of supply  due  to                                                               
hurricanes  has  caused utilities  to  explore  coal and  nuclear                                                               
options. The  U.S. petrochemical industry is  the largest natural                                                               
gas consumer  in the country,  but it  is not competitive  in the                                                               
world market. That is an indication  that it will not be a source                                                               
of demand for Alaska natural gas.                                                                                               
                                                                                                                                
Clearly,  Mr. Williams  said,  timing is  important.  If the  gas                                                               
isn't  developed  soon,  other  industries  will  seek  alternate                                                               
sources  of energy.  For example,  Agrium has  announced that  it                                                               
plans to  close for part of  the year due to  interrupted natural                                                               
gas supplies  and that it  is investigating coal  gasification in                                                               
conjunction  with  a local  utility.  If  Agrium and  other  U.S.                                                               
companies  decide  to  make capital  investments  in  coal,  that                                                               
decision  will  not  be  reversed   to  return  to  natural  gas.                                                               
Additional  impacts related  to  delay include  reduction to  the                                                               
Permanent Fund and reduced net present value of the project.                                                                    
                                                                                                                                
MR. WILLIAMS summarized  that delaying the gas  pipeline could be                                                               
devastating  to the  state  economy.  There would  be  a loss  of                                                               
revenue  to  state  government,  a  loss of  jobs  to  the  state                                                               
economy, a potential  loss of market share such  that the project                                                               
may  never go  forward. He  noted that  a summary  of the  public                                                               
comments and the responses are found on pages 65 and 66.                                                                        
                                                                                                                                
CHAIR WAGONER  asked Mr. Williams  to provide Ms. Jackson  with a                                                               
copy of his presentation.                                                                                                       
                                                                                                                                
MR. WILLIAMS said he would do so.                                                                                               
                                                                                                                                
REPRESENTATIVE  LEDOUX  asked  when  the gas  pipeline  would  be                                                               
completed if the contract was signed tomorrow.                                                                                  
                                                                                                                                
MR. WILLIAMS replied the first gas would flow in 10 years.                                                                      
                                                                                                                                
REPRESENTATIVE LEDOUX said  in that case, why is there  a rush to                                                               
                                                                                                                                
sign the  contract before December  4as  opposed to  several days                                                               
after that date.                                                                                                                
                                                                                                                                
MR. WILLIAMS clarified  he is not tied to a  specific date; he is                                                               
talking about  uncertainty and the  perception of whether  or not                                                               
Alaska  gas  is going  to  market.  That uncertainty  is  causing                                                               
utilities to look at other options.                                                                                             
                                                                                                                                
REPRESENTATIVE LEDOUX  again asked what difference  it would make                                                               
if  the contract  were signed  before  December 4  as opposed  to                                                               
early January or February.                                                                                                      
                                                                                                                                
MR.  WILLIAMS replied  his perception  is that  utilities realize                                                               
there  are problems  with getting  Alaska gas;  he isn't  talking                                                               
about a specific date or  signing a particular contract. The idea                                                               
he is  trying to convey is  that the market is  uncertain whether                                                               
Alaska gas is coming forward or not.                                                                                            
                                                                                                                                
REPRESENTATIVE SAMUELS  referenced the mention of  $1 billion per                                                               
year and asked what the price of gas would be.                                                                                  
                                                                                                                                
MR.  WILLIAMS replied  he  would need  to  check the  Preliminary                                                               
Fiscal  Interest Finding  to be  certain, but  he believes  $5.50                                                               
MMBtu was used for the calculations.                                                                                            
                                                                                                                                
REPRESENTATIVE SAMUELS pointed out that  a delay does not benefit                                                               
anybody  and  the message  that  needs  to  be  sent to  the  oil                                                               
companies is that  from this day forward their  net present value                                                               
drops too so be careful.                                                                                                        
                                                                                                                                
23105                                                                                                                           
MR. CLARK said that is  the essential message and the fundamental                                                               
reason  for moving  forward with  dispatch.  The particular  date                                                               
doesn't really  matter; what does  matter is that  the transition                                                               
from an  oil-based regime to  a gas-based regime is  managed such                                                               
that there is not a revenue  gap. Regardless of when the contract                                                               
is  signed, there  will be  the  8-10 year  lead-time before  gas                                                               
flows.  But the  longer the  gap  before the  process begins  the                                                               
greater the  revenue dip as  oil revenues decline.  The challenge                                                               
before the  legislature and the  new administration is  to manage                                                               
the  transition so  there  isn't  an issue  of  how  to fill  the                                                               
revenue gap.                                                                                                                    
                                                                                                                                
2:32:44 PM                                                                                                                    
REPRESENTATIVE HARRY  CRAWFORD said  he and probably  everyone at                                                               
the table  feels the  urgency, but this  contract has  a built-in                                                               
four-year  gap to  get  to  project sanction  and  the window  of                                                               
opportunity  could  be  closed  before a  decision  is  made.  He                                                               
suggested that if  the contract isn't signed within  the next few                                                               
months then there ought to be a new contract.                                                                                   
                                                                                                                                
MR. CLARK responded part of  the lead-time includes four years to                                                               
determine whether  there is a  project. That means  going through                                                               
the  permitting process,  the design-engineering  phase, and  the                                                               
FERC process. Large projects are  built in a series of sequential                                                               
steps  and  the  contract  is  one of  those  steps.  The  Fiscal                                                               
Interest Finding  deals with  the project  in its  entirety while                                                               
the contract  deals with  management of the  fiscal terms  of the                                                               
project. The  urgency is to  get the  process started and  if the                                                               
project  is  economic,  then  go   forward.  He  emphasized  that                                                               
economics can't be judged without going through the process.                                                                    
                                                                                                                                
2:35:42 PM                                                                                                                    
REPRESENTATIVE CRAWFORD commented it  seems as though the project                                                               
has been  studied over and  over and  he would suggest  that it's                                                               
time  to  "put  up  or  shut  up."  If  the  state  can't  get  a                                                               
commitment, then it  should not give an exclusive  right to build                                                               
a pipeline.                                                                                                                     
                                                                                                                                
MR. CLARK  responded he  is not  aware of  any permits  that have                                                               
been issued for this project and  other than the 2001 study he is                                                               
not aware of any design engineering specific to this project.                                                                   
                                                                                                                                
REPRESENTATIVE SAMUELS clarified that  FERC has indicated that it                                                               
would be  six years to project  sanction and four years  to build                                                               
so that's the ten year window.                                                                                                  
                                                                                                                                
BOB  LOEFFLER,  Morrison &  Foerster,  Counsel  to the  Governor,                                                               
agreed  with Representative  Samuels about  the timeline.  Ground                                                               
cannot  be broken  without  a  FERC permit  and  by statute  that                                                               
process is  20 months. The  open season process, which  entails a                                                               
lot  of detailed  engineering,  takes  at least  a  year. As  the                                                               
engineering  and regulatory  process  goes  along, the  financial                                                               
community enters the picture, but  won't lend any money until the                                                               
certificate is  issued. That  could take  another year  so you're                                                               
right on the time-line, he said.                                                                                                
                                                                                                                                
REPRESENTATIVE  SAMUELS  said  that  goes  back  to  the  impacts                                                               
related to a delay,  but in any event it will  take ten years and                                                               
it can't be speeded up.                                                                                                         
                                                                                                                                
MR LOEFFLER agreed  and mentioned that he went  through the first                                                               
failed attempt.                                                                                                                 
                                                                                                                                
REPRESENTATIVE   SEATON  asked   about   the   validity  of   the                                                               
commitments to start  the Alaska line after McKinsey  in light of                                                               
the fact that McKinsey Valley has been held up.                                                                                 
                                                                                                                                
MR. LOEFFLER replied it has been  rumored in the press, but he is                                                               
unaware of any such commitment and it is not in the contract.                                                                   
                                                                                                                                
MR.  CLARK   affirmed  the  administration   has  made   no  such                                                               
commitment.                                                                                                                     
                                                                                                                                
2:40:43 PM                                                                                                                    
MR.  PORTER  noted  that  he   has  been  working  with  the  LLC                                                               
agreement, which is the gas  pipeline agreement, and he wanted to                                                               
reemphasize what Representative Samuels  said. The critical issue                                                               
is not whether you commit to  build today or four years from now;                                                               
the critical issue is to move  forward so it can happen ten years                                                               
from now.                                                                                                                       
                                                                                                                                
SENATOR DYSON asked Mr. Loeffler  to comment on the potential for                                                               
the federal  government citing national interest  and taking over                                                               
management of the project if  the state doesn't take decisive and                                                               
timely action.                                                                                                                  
                                                                                                                                
MR. LOEFFLER replied  that sort of thing happens in  times of war                                                               
and national emergency.  He doesn't see it at this  point, but it                                                               
can't be ruled out.                                                                                                             
                                                                                                                                
SENATOR DYSON  said if did it  happen, what would be  the revenue                                                               
impact to the state.                                                                                                            
                                                                                                                                
MR. LOEFFLER offered  the view that the  federal government isn't                                                               
entirely benevolent  toward Alaska. The federal  government would                                                               
take its share and, in some sense, Alaska would be a loser.                                                                     
                                                                                                                                
SENATOR DYSON  asked for clarification that  Alaska wouldn't lose                                                               
out entirely.                                                                                                                   
                                                                                                                                
MR. LOEFFLER responded it wouldn't be a total loser.                                                                            
                                                                                                                                
REPRESENTATIVE  GATTO  asked  if   the  six-year  FERC  timeframe                                                               
depends on the  diameter of the pipe and if  a smaller pipe could                                                               
be put in first to shorten the timeline.                                                                                        
                                                                                                                                
MR. LOEFFLER replied  the regulatory process would  take the same                                                               
time  regardless  of  pipe  size  and putting  is  a  small  pipe                                                               
followed by  a larger  pipe would likely  be problematic  and not                                                               
make a material difference in time.                                                                                             
                                                                                                                                
REPRESENTATIVE CRAWFORD  said he  does not dispute  the timeline,                                                               
but he does not want to spend five  or six years just to have the                                                               
oil  companies  say they  don't  have  a  project. He  wants  the                                                               
companies to commit today to move  ahead with the project at that                                                               
point.                                                                                                                          
                                                                                                                                
2:47:05 PM                                                                                                                    
MR.  LOEFFLER  said project  sanction  wasn't  invented for  this                                                               
contract;  it's  the  point  that  a  company  commits  its  full                                                               
financial resources  to do  a project. It's  not possible  to say                                                               
what the cost of long-term debt or  the cost of steel will be six                                                               
years from now  just as it's not possible to  say what conditions                                                               
FERC  will put  on  the tariff.  The  state could  hypothetically                                                               
write a  commitment to say the  company will go ahead  if certain                                                               
conditions are met. You can't do better than that, he said.                                                                     
                                                                                                                                
REPRESENTATIVE MIKE KELLY questioned whether  it might be wise to                                                               
conduct a  professional survey to  perfect the knowledge  of what                                                               
the public said.                                                                                                                
                                                                                                                                
2:50:16 PM                                                                                                                    
CHAIR  WAGONER  said 2,100  is  not  a  large percentage  of  the                                                               
population,  but  he is  comfortable  that  those who  wanted  to                                                               
testify have done so.                                                                                                           
                                                                                                                                
REPRESENTATIVE  KELLY  said he  didn't  disagree,  but there  are                                                               
648,000 people  who haven't weighed in  and if there is  a better                                                               
way to  find out what they  want then he questioned  not pursuing                                                               
that information.                                                                                                               
                                                                                                                                
SENATOR  STEDMAN asked  if Congress  asked FERC  to look  at what                                                               
process would  be created  if the federal  government were  to go                                                               
forward and take control.                                                                                                       
                                                                                                                                
MR. LOEFFLER said yes, a  requirement in the October 2004 federal                                                               
statute says  if an application is  not made at a  certain point,                                                               
the  federal  government would  study  alternatives.  He said  he                                                               
believes that has started.                                                                                                      
                                                                                                                                
2:52:25 PM                                                                                                                    
SENATOR STEDMAN  said the other issue  on a timeline is  the loan                                                               
guaranty for 80 percent backing.                                                                                                
                                                                                                                                
MR. LOEFFLER  responded that  has a longer  time limit;  but it's                                                               
hard  to tell  what will  happen  if the  leadership in  Congress                                                               
changes.                                                                                                                        
                                                                                                                                
REPRESENTATIVE SEATON  asked if the process  would be accelerated                                                               
if the producers decided to inject  gas into oil and transport it                                                               
on the TAPS because that wouldn't require FERC approval.                                                                        
                                                                                                                                
MR. LOEFFLER  said it's an  interesting question  because advance                                                               
FERC approval is  not necessary to build an oil  pipeline. If the                                                               
owners could  build the  infrastructure for  gas to  liquids, the                                                               
only FERC involvement would be a new tariff case.                                                                               
                                                                                                                                
REPRESENTATIVE  SEATON  asked  whether  a  new  tariff  would  be                                                               
necessary if the gas liquids were  mixed with heavy oil such that                                                               
it was a single-phase liquid.                                                                                                   
                                                                                                                                
MR.  LOEFFLER said  yes and  no. There  would be  a much  greater                                                               
volume down  the TAPS  and the  carriers would  want to  keep the                                                               
tariff based  on a smaller volume  to earn more money.  The state                                                               
and others would say the tariff  ought to go down because there's                                                               
a greater volume over which to spread the cost.                                                                                 
                                                                                                                                
CHAIR WAGONER added, whether it's feasible  or not has to do with                                                               
why you would  mix a sought-after fuel with oil  and then have to                                                               
recondition it.                                                                                                                 
                                                                                                                                
REPRESENTATIVE SEATON  asked if it's  correct that a change  in a                                                               
tariff  proposal  would come  after  and  wouldn't necessitate  a                                                               
delay.                                                                                                                          
                                                                                                                                
MR.  LOEFFLER said  yes,  the  fight with  FERC  about the  right                                                               
tariff would come later.                                                                                                        
                                                                                                                                
25636                                                                                                                           
MR. WILLIAMS  agreed with  Chair Wagoner  that converting  gas to                                                               
liquid produces  a very clean  and light  fuel, but it  might not                                                               
make  economic  sense.  Second, he  cautioned  the  committee  to                                                               
remain cognizant  of outside events that  might determine whether                                                               
or not there is  a market for Alaska gas. Be  aware that there is                                                               
a renewed interest in coal and  nuclear energy so this window may                                                               
close if the debate goes on too long                                                                                            
                                                                                                                                
MR. CLARK  said Commissioner Corbus  would discuss the  key issue                                                               
of how  the document deals  with whether  the gas is  stranded or                                                               
not.                                                                                                                            
                                                                                                                                
COMMISSIONER  CORBUS directed  attention to  page 48  on stranded                                                               
gas and read the following from the report:                                                                                     
                                                                                                                                
     STRND_01(26 Comment)                                                                                                       
     Statement of  Concern: Statements on  the determination                                                                    
     of  stranded   ANS  gas,  including  (1)   the  gas  is                                                                    
     stranded, (2) the  gas is not stranded, (3)  the gas is                                                                    
     stranded only  until a contract  is signed and  (4) the                                                                    
     decision  to  declare  the gas  stranded  is  a  policy                                                                    
     decision rather than an empirical one.                                                                                     
                                                                                                                                
COMMISSIONER CORBUS  explained that  the definition  for stranded                                                               
comes from the Stranded Gas Development  Act and it's gas that is                                                               
not marketed  because of cost  and prevailing  market conditions.                                                               
Prevailing  is defined  as over  the  life of  the gas  pipeline,                                                               
which is  between 40  and 45  years. To  reach a  conclusion some                                                               
quantitative,  but mostly  qualitative  considerations are  made.                                                               
That  includes:  the  future predictability  of  the  price;  the                                                               
volatility  of  the  price;  the  magnitude  of  the  project  in                                                               
relation to  other opportunities available to  the investors; the                                                               
risk of cost overruns; and competition.                                                                                         
                                                                                                                                
The supply side of competition  includes: LNG, the Rocky Mountain                                                               
area, and the Gulf of Mexico.  The demand side is tempered by the                                                               
demand for clean  coal technology and the  renaissance of nuclear                                                               
power.                                                                                                                          
                                                                                                                                
3:02:12 PM                                                                                                                    
COMMISSIONER CORBUS  continued to say  that in November  2003 the                                                               
state made a preliminary numerical  analysis as to whether or not                                                               
the gas  was stranded. On November  1 the price of  gas was $3.63                                                               
MMBtu and  the conclusion  was that the  internal rate  of return                                                               
was 9.7  percent, which was  inadequate. The conclusion  then and                                                               
now is that the gas  is stranded. The numerical analysis supports                                                               
the  qualitative judgment.  He  noted that  Michael Williams  and                                                               
Roger Marks helped prepare the analysis.                                                                                        
                                                                                                                                
REPRESENTATIVE GATTO posed  worst-case hypothetical scenarios and                                                               
questioned what  would happen if  the gas pipeline  was partially                                                               
built  and  it  became  apparent  that  there  was  no  hope  for                                                               
financial payback.                                                                                                              
                                                                                                                                
30530                                                                                                                           
COMMISSIONER CORBUS replied that brings  up the question of risk.                                                               
During  open season  a few  years from  now, binding  commitments                                                               
will  be  made  to  reserve  capacity  on  the  gas  line.  Those                                                               
commitments must be  honored whether nuclear power  comes on line                                                               
or not, but it  is a worry that when open  season comes there may                                                               
not be a demand for the gas.                                                                                                    
                                                                                                                                
REPRESENTATIVE GATTO asked  what happens to the  investors in the                                                               
event of default.                                                                                                               
                                                                                                                                
MR. LOEFFLER  replied the  pipeline establishes  credit standards                                                               
just as a bank  does, so a company would have  to have the assets                                                               
to back  up the size of  the particular commitment. In  the event                                                               
of default, the capacity would become available to someone else.                                                                
                                                                                                                                
MR.  LOEFFLER made  the point  that the  commitments made  at the                                                               
open season  are conditional  upon the project  being built  at a                                                               
certain cost  for a  certain tariff. That  provides an  escape if                                                               
things blow  up. Also, the state  has an op-out provision  in the                                                               
LLC agreement such  that at project sanction if it  does not want                                                               
to  move  ahead with  its  pipeline  investment  - not  its  firm                                                               
transportation (FT)  investment, - it  can put its share  back to                                                               
the  other   pipeline  owners   and  receive   reimbursement  for                                                               
everything it spent  to that point. That's a way  of reducing the                                                               
state's exposure  and ending up with  the money that was  put in,                                                               
he said.                                                                                                                        
                                                                                                                                
MR.  CLARK  said  if  the  contract  is  signed  soon,  then  the                                                               
owner/marketers would figure out where  the gas is going. Compare                                                               
that  with  the situation  where  there's  a several  year  delay                                                               
before trying to put a  contract together. The market uncertainty                                                               
could  create  demand  destruction  that  Representative  Gatto's                                                               
horror   scenario  raised.   As  Representative   Crawford  said,                                                               
legislators recognize  the urgency  to get  a contract  signed so                                                               
reservations are made in the  market under the open season, which                                                               
is two or three years after the contract is signed.                                                                             
                                                                                                                                
MR. GRIFFIN  said the future  is uncertain in many  respects, but                                                               
once the  contract is signed  the process is very  systematic and                                                               
orderly. The world will see what  is happening and the market and                                                               
the state's competitors will respond  accordingly. The sooner the                                                               
state gets on deck the better, he emphasized.                                                                                   
                                                                                                                                
REPRESENTATIVE  SEATON asked  if  the  high transportation  costs                                                               
related to the gas being stranded  have to do with building a $20                                                               
billion  to $30  billion  pipeline or  the  operational costs  of                                                               
transporting the gas.                                                                                                           
                                                                                                                                
COMMISSIONER  CORBUS replied  the high  costs for  constructing a                                                               
pipeline translates to high tariffs so it's both.                                                                               
                                                                                                                                
3:12:39 PM                                                                                                                    
MR. CLARK said the project is  so monumentally large and has such                                                               
huge asymmetrical risks that smaller  less risky projects tend to                                                               
cycle in ahead of this one.                                                                                                     
                                                                                                                                
MR. MARKS  added he believes the  issue of project size  is under                                                               
appreciated. It's hard  to comprehend $20 billion  to $25 billion                                                               
so it  might help to consider  that it took about  $25 billion to                                                               
put the  first man on  the moon  and that the  insurance industry                                                               
estimates  that Hurricane  Katrina payouts  will amount  to about                                                               
$25 billion.  That's how  much has  to be  paid before  the first                                                               
molecule of gas  is sold, he said. If something  goes wrong prior                                                               
to that  point it could well  be a financial catastrophe  for the                                                               
company. In terms of financial  symmetry, John Maynard Keynes put                                                               
it very succinctly  when he said, "Markets  can remain irrational                                                               
longer than  you can remain  solvent." A company  could diversify                                                               
its risk  exposure if it  builds 25 $1 billion  projects compared                                                               
to one  $25 billion project.  That is  the prime reason  that the                                                               
administration believes the gas is stranded, he said.                                                                           
                                                                                                                                
CHAIR WAGONER asked  if he would agree that  the companies aren't                                                               
afraid of  the $25  billion construction  costs it's  the unknown                                                               
cost overruns that are frightening.                                                                                             
                                                                                                                                
MR. GRIFFIN said yes.                                                                                                           
                                                                                                                                
REPRESENTATIVE SEATON  asked whether the  gas would no  longer be                                                               
stranded if gas  to liquids technology was economic  and the TAPS                                                               
was used for transportation.                                                                                                    
                                                                                                                                
MR. CORBUS replied  he did not have an answer  because he did not                                                               
know about the feasibility of liquefying.                                                                                       
                                                                                                                                
REPRESENTATIVE  SEATON  said  a  concern   of  his  is  that  the                                                               
administration didn't analyze  and present gas to  liquids to the                                                               
legislature.  If  that  had  been done  it  probably  would  have                                                               
elicited more than  just the one public comment.  A 2001 analysis                                                               
that  was mentioned  in the  2006 report  said that  is the  best                                                               
alternative  of: going  through  Canada, LNG  through Valdez,  or                                                               
converting and  using the TAPS. It  would extend the life  of the                                                               
TAPS by  20 years and the  gas would be pumped  as a single-phase                                                               
liquid. TAPS  is not designed to  pump the heavy North  Slope oil                                                               
but  gasifying it  would work.  The  producers are  doing gas  to                                                               
liquid technology  now and have  planned projects of 8.1  Bcf per                                                               
day yielding 690,000 barrels of  liquids. The state's 6 Bcf would                                                               
yield about 520,000 barrels per day that would go into the TAPS.                                                                
                                                                                                                                
Another concern  is that after  the contract is signed  the state                                                               
won't have  any say  if the  LLC changes the  project from  a gas                                                               
line to gas  to liquids technology and injects  it. It's inherent                                                               
upon  the  legislature  to  look  at  liquefying  in  the  public                                                               
comments,  address  whether  or  not the  gas  is  stranded,  and                                                               
whether all the economic uses of gas are evaluated, he said.                                                                    
                                                                                                                                
MR. LOEFFLER  responded it wouldn't  be the  end of the  world if                                                               
North Slope gas left in a gas  to liquids form, but the down side                                                               
is there would be no in-state use of gas.                                                                                       
                                                                                                                                
MR. CLARK  said he didn't  want it  to appear as  though anything                                                               
was  withheld.  The  administration   pursued  the  stranded  gas                                                               
process that was developed in  2003. It analyzed the applications                                                               
it  had and  it didn't  have a  gas to  liquids application.  The                                                               
administration  isn't resisting  looking at  another idea,  it is                                                               
simply reporting on the comments received on the project.                                                                       
                                                                                                                                
CHAIR WAGONER commented this administration  doesn't have time to                                                               
look at another proposal.                                                                                                       
                                                                                                                                
MR. GRIFFIN explained that gas to  liquids (GTL) and LNG are very                                                               
different processes.  Gas to liquids essentially  makes diesel or                                                               
gasoline out of  gas in an expensive and  low efficiency process.                                                               
Then it  is mixed with  crude oil and  many of the  advantages of                                                               
the product  are lost.  The other problem  relates to  the market                                                               
issues of to  dumping a single narrow product on  the West Coast.                                                               
The projects  in Qatar  are LNG projects  similar to  Cook Inlet,                                                               
which  can't  be used  in  the  TAPS because  it's  incompatible.                                                               
That's why  the plan  was to  have a gas  pipeline to  Valdez and                                                               
then  manufacture  LNG there.  The  producers  have reviewed  and                                                               
dismissed LNG  and GTL projects  in the  past. Right now  we have                                                               
the Stranded Gas Act and the issue is how to move forward.                                                                      
                                                                                                                                
3:25:11 PM                                                                                                                    
CHAIR WAGONER reminded  everyone of the purpose and  topic of the                                                               
meeting today.                                                                                                                  
                                                                                                                                
MR.  GRIFFIN  said  the  administration   is  simply  laying  the                                                               
foundation  for  declaring  North  Slope gas  uneconomic.  He  is                                                               
considering whether  or not  to declare it  stranded -  not based                                                               
this contract, but based on the  fact that it is stranded, thus a                                                               
contract could go forward and be negotiated on that basis.                                                                      
                                                                                                                                
3:26:15 PM                                                                                                                    
SENATOR DYSON  asked if it  is true  that the governor  could not                                                               
sign  the contract  until small  but important  modifications are                                                               
made to the Stranded Gas Act.                                                                                                   
                                                                                                                                
COMMISSIONER CORBUS responded he would interpret it that way.                                                                   
                                                                                                                                
MR.  CLARK  agreed  and  noted  that all  the  Stranded  Gas  Act                                                               
amendments  the  administration  presented previously  and  those                                                               
that will be provided in  the Interim Fiscal Interest Finding are                                                               
those necessary to allow the  legislature to authorize oil fiscal                                                               
certainty in this contract, he said.                                                                                            
                                                                                                                                
MR. GRIFFIN  said Mr. Marks  would address  the key issue  of the                                                               
state taking gas in-kind.                                                                                                       
                                                                                                                                
3:28:32 PM                                                                                                                    
ROGER MARKS,  Economist, Department of Revenue,  related that the                                                               
key goal was  to improve the status quo fiscal  system to fit the                                                               
large, costly and uniquely risky  project. Modeling indicated the                                                               
project  had   a  low   rate  of  return   thus  the   focus  for                                                               
restructuring  the  fiscal system  was  to  improve the  rate  of                                                               
return.                                                                                                                         
                                                                                                                                
MR. MARKS explained  that the status quo fiscal  system takes tax                                                               
or royalty in-value,  which means the producers sell  the gas and                                                               
give the state  its proportion in cash. In that  system the state                                                               
gets about 20  percent of the gas  and pays for its  share of the                                                               
pipeline  over  time  through  tariff  deductions  on  taxes  and                                                               
royalties. Basically, the producers pay  up front for 100 percent                                                               
of the cost  of the pipeline and receive about  80 percent of the                                                               
gas.                                                                                                                            
                                                                                                                                
DOR determined  that if the  state were  to take its  gas in-kind                                                               
and  the commitment  to ship  the gas,  which is  financially the                                                               
same as  owning it, then  the producers  would pay 80  percent of                                                               
the cost  of the  pipeline up  front and the  state would  pay 20                                                               
percent.  That significantly  increases  the rate  of return  and                                                               
also addresses the  criticism that the contract  has no agreement                                                               
about in-state  gas sales. Twenty percent  of 4.5 Bcf per  day is                                                               
more  than  enough gas  to  cover  all the  anticipated  in-state                                                               
needs, he said.                                                                                                                 
                                                                                                                                
3:31:47 PM                                                                                                                    
MR. CLARK  said Mr. Loeffler  would address the issue  of project                                                               
description and pipeline route.                                                                                                 
                                                                                                                                
MR. LOEFFLER directed  attention to the statements  of concern on                                                               
pages 48  and 49.  The categories of  concern include  whether or                                                               
not the southern  route is locked in and whether  or not the size                                                               
of  the  pipeline  is  adequately described.  He  noted  that  he                                                               
previously testified  about why the provisions  are adequate, but                                                               
he  would  concede  that the  explanation  could  be  simplified.                                                               
Therefore  language will  be added  to further  clarify that  the                                                               
southern  route will  be  followed. Also,  a  new provision  will                                                               
require  legislative approval  to amend  the contract  in certain                                                               
ways. Examples are a change from  the southern route and a change                                                               
in  the  key  fiscal  terms.   Finally,  more  specific  language                                                               
relating  to the  project  description will  be  included as  the                                                               
public comments requested.                                                                                                      
                                                                                                                                
REPRESENTATIVE SEATON asked if  the administration would consider                                                               
including  language saying  that switching  to a  gas to  liquids                                                               
project is not possible.                                                                                                        
                                                                                                                                
MR.  LOEFFLER  responded he  doesn't  recall  any testimony  that                                                               
under the contract or the LLC  the project could be switched to a                                                               
gas  to  liquids  project.  He   asked  Mr.  Clark  to  give  the                                                               
administration's point of view.                                                                                                 
                                                                                                                                
3:34:29 PM                                                                                                                    
MR.  CLARK said  he would  agree  with what  Chair Wagoner  said,                                                               
which is that  the discussion today is not about  gas to liquids;                                                               
the topic  today is about  this project.  If the chair  wishes to                                                               
hold a  hearing on  gas to  liquids that would  be fine,  but not                                                               
today, he said.                                                                                                                 
                                                                                                                                
CHAIR WAGONER clarified  that he did not say he  wanted to hold a                                                               
gas to liquids hearing.                                                                                                         
                                                                                                                                
MR. CLARK  said what he means  is that the administration  is not                                                               
prepared to discuss that today.                                                                                                 
                                                                                                                                
CHAIR WAGONER  said he appreciates Mr.  Loeffler reiterating that                                                               
the over the top route isn't  an option. Not only is it precluded                                                               
by the state it's also precluded by federal law.                                                                                
                                                                                                                                
REPRESENTATIVE SEATON  clarified that he  wants to make  sure the                                                               
contract and the stranded gas amendments  will apply to a gas use                                                               
phase pipeline  and that the  project that goes  forward provides                                                               
economic  impetus   to  Alaska.  It   seems  that  this   is  the                                                               
appropriate place to put in that restriction, he said.                                                                          
                                                                                                                                
MR. LOEFFLER  responded the administration believes  the contract                                                               
already requires a gas pipeline.                                                                                                
                                                                                                                                
MR. CLARK added this clearly contemplates a gas contract.                                                                       
                                                                                                                                
REPRESENTATIVE SEATON  said he would appreciate  working with the                                                               
administration to clarify that.                                                                                                 
                                                                                                                                
3:37:46 PM                                                                                                                    
MR. CLARK asked Mr. Loeffler to address fiscal certainty.                                                                       
                                                                                                                                
MR.  LOEFFLER said  the administration  continues to  believe the                                                               
original   terms  of   fiscal   certainty   is  consistent   with                                                               
international practice  and consistent with what  the legislature                                                               
authorized  in   the  Stranded  Gas  Act.   Furthermore,  it  was                                                               
justified. He  noted that the  administration is  quite sensitive                                                               
to legislative  and public views  and is prepared to  shorten the                                                               
period  of fiscal  certainty.  For gas  that  means reducing  the                                                               
contract period  by 10 years. Oil  is more complex in  that there                                                               
would  be  no  fiscal  certainty until  project  sanction.  Also,                                                               
whatever  the scheme  of oil  fiscal  certainty is,  it would  be                                                               
frozen  as of  the end  of the  legislative session  in 2011.  He                                                               
reminded members  that in  the PPT  statute there  is opportunity                                                               
for the legislature to look at  how the PPT is functioning or the                                                               
FERC application date, whichever is  later. Then there would be a                                                               
14-year period from  project sanction after which  there would be                                                               
a small period for balancing.                                                                                                   
                                                                                                                                
He  emphasized that  the administration  has  not discussed  this                                                               
with the  companies, but  the idea  is to  shorten the  period of                                                               
fiscal certainty and start later for oil fiscal certainty.                                                                      
                                                                                                                                
CHAIR WAGONER  remarked he didn't  believe the  legislature would                                                               
wait  to review  whether PPT  is working  or not  until 2011.  In                                                               
fact, he asked the DOR to submit a quarterly report.                                                                            
                                                                                                                                
MR.  LOEFFLER  responded  that  date   was  taken  from  the  PPT                                                               
legislation.                                                                                                                    
                                                                                                                                
CHAIR  WAGONER agreed  the date  is in  the legislation,  but the                                                               
Finance Committee and the Legislative  Budget and Audit Committee                                                               
will be requesting a quarterly report.                                                                                          
                                                                                                                                
3:42:05 PM                                                                                                                    
REPRESENTATIVE  SEATON said  when the  House Resources  Committee                                                               
looked at  that issue the  agreement related to  project sanction                                                               
and then 12  or 14 years. Fiscal balancing beyond  that point was                                                               
specifically deleted.                                                                                                           
                                                                                                                                
3:42:38 PM                                                                                                                    
DAN  DICKENSON,   CPA,  Consultant  to  the   Governor,  directed                                                               
attention to page  107 and reported that 142  comments dealt with                                                               
fiscal  certainty so  it received  a great  deal of  focus. There                                                               
were  more comments  on what  was inappropriate  than there  were                                                               
positive suggestions  so part  of the challenge  is to  find what                                                               
works.                                                                                                                          
                                                                                                                                
MR.  CLARK  asked Mr.  Loeffler  to  address  the issue  of  work                                                               
commitments.                                                                                                                    
                                                                                                                                
MR. LOEFFLER said  the administration looked at  the comments and                                                               
feels that  the original work  commitment clause is  sensible and                                                               
could  work.  Comments  on  the   issue  included:  there  is  no                                                               
timetable, no  one will understand  how this applies, why  is the                                                               
prudent  operator standard  used,  and why  aren't there  penalty                                                               
clauses.                                                                                                                        
                                                                                                                                
MR. LOEFFLER explained that the  diligence standard requires that                                                               
the project  be advanced  as diligently as  is prudent  under the                                                               
circumstances.  It  contains  a   lot  of  the  prudent  operator                                                               
standard, which was addressed in  the Preliminary Fiscal Interest                                                               
Finding.  Prudent behavior  considers what  is reasonable  in the                                                               
circumstances. What  people miss  is that it's  not applied  in a                                                               
vacuum. As  of May 10  companies provided a project  summary that                                                               
includes  scheduling dates  that  will be  incorporated into  the                                                               
contract.  Basically, the  contract requires  the planning  phase                                                               
that leads to the pre-filing phase  that leads to the open season                                                               
phase  that  leads to  the  FERC  application process.  All  that                                                               
activity is known measurable and understandable.                                                                                
                                                                                                                                
MR. LOEFFLER  mentioned the presentations by  Independent Project                                                               
Analysis, Inc. (IPA) and noted  that the problems associated with                                                               
schedule  driven   projects  provide   a  powerful   lesson.  The                                                               
administration  believes that  the balance  that was  struck with                                                               
the work commitments  in the original contract was  right. At the                                                               
same  time there  was testimony  about considering  some sort  of                                                               
letter  of  credit scheme.  That  is  that  if activity  had  not                                                               
progressed  some  measurable point  in  time,  the company  would                                                               
forfeit a large  sum of money. So it's sort  of a penalty scheme.                                                               
That  seems to  run  counter  to the  teaching  of  IPA, but  the                                                               
administration would  be willing to discuss  that concept because                                                               
it appears to  satisfy a number of public  concerns. He clarified                                                               
just one of  the three companies put forward  this suggestion. It                                                               
would be an alternative approach, he said.                                                                                      
                                                                                                                                
3:48:40 PM                                                                                                                    
MR. CLARK asked Mr. Loeffler to address dispute resolutions.                                                                    
                                                                                                                                
MR. LOEFFLER said some people  have questioned using arbitration,                                                               
but  every  royalty agreement  the  state  has entered  into  has                                                               
provided for  arbitration to deal  with royalty  reopener issues.                                                               
That works  much better than  fighting out royalty tax  issues in                                                               
the  courts. Another  point is  that if  this contract  succeeds,                                                               
there won't  be tax and royalty  disputes as in the  past because                                                               
the gas is  taken in-kind under the royalty statutes  and the tax                                                               
payments are  taken in  a fixed formula  under the  tax statutes.                                                               
It's a novel change to get a tax payment in gas, he said.                                                                       
                                                                                                                                
A  number  of comments  related  to  the Alaska  Arbitration  Act                                                               
versus Uniform Arbitration Act, the  number of strikes in certain                                                               
circumstances, and  discovery limitations.  A package  of changes                                                               
was put  together to  address each  of those.  The administration                                                               
proposes going  to the Alaska  Arbitration Act and that  an award                                                               
would be  enforceable only by appropriation  from the legislature                                                               
- not  in court. Strike  provisions were clarified so  that there                                                               
would be no discovery limitation in any dispute.                                                                                
                                                                                                                                
MR. CLARK asked Mr. Loeffler to address the expansion process.                                                                  
                                                                                                                                
MR.  LOEFFLER said  the three  ways for  expansion are  voluntary                                                               
expansion, state  initiated expansion under the  fiscal contract,                                                               
and  the FERC  power  of expansion.  Most, but  not  all, of  the                                                               
explorers prefer  the new FERC  power to order expansion  and the                                                               
voluntary expansion provisions of  the LLC. Because of criticism,                                                               
the  administration   is  ready  to  drop   the  state  initiated                                                               
expansion in favor  of the voluntary expansion  provisions of the                                                               
LLC. Any  member, including  the state, can  put in  an expansion                                                               
proposal  to the  LLC. The  proposal  is evaluated,  put out  for                                                               
study, and  then voted on.  Whether the  pricing is rolled  in or                                                               
incremental  is a  decision  that  is made  later  on. Also,  any                                                               
affected shipper that is outside  the LLC membership can approach                                                               
the LLC  and propose an expansion  if it thinks it  would succeed                                                               
at the  FERC. So  there are really  two different  options within                                                               
the voluntary expansion.                                                                                                        
                                                                                                                                
MR. LOEFFLER  expressed enthusiasm with  the new FERC  powers and                                                               
the ruling on  rolled in pricing as a  presumption. He reiterated                                                               
that the administration  listened when the people  said the state                                                               
initiated expansion  might complicate the choice  and that either                                                               
the voluntary or the FERC powers might be better.                                                                               
                                                                                                                                
MR. CLARK  said Alaska hire received  considerable public comment                                                               
and Commissioner O'Claray would talk about that.                                                                                
                                                                                                                                
3:55:40 PM                                                                                                                    
GREG O'CLARAY,  Commissioner, Department  of Labor  and Workforce                                                               
Development (DOLWD),  reported that  the 174 comments  related to                                                               
Alaska hire primarily  suggested that the language  is not strong                                                               
enough.  The  administration  decided  that the  easiest  way  to                                                               
constitutionally  guarantee  Alaska  hire   was  to  promote  the                                                               
adoption  and negotiation  of  project  labor agreement  covering                                                               
this particular  project. That would include  recommendations for                                                               
hiring  halls in  rural areas  to promote  rural access  to these                                                               
jobs. The  negotiations would  begin as soon  as the  contract is                                                               
approved.                                                                                                                       
                                                                                                                                
The  administration   continues  to   maintain  that   a  trained                                                               
available workforce  is the key  to maximizing Alaskan  access to                                                               
these jobs.  The state's financial  commitment of $35  million to                                                               
$45 million  would be a  combination of  step grants. That  is in                                                               
addition to  the federal  funds that will  be available  once the                                                               
project is  under way. The  legislature has already moved  in the                                                               
direction of  a trained Alaska  workforce in construction  so the                                                               
state is well  on its way to achieving its  goals. Also, there is                                                               
a proposal about how to  incorporate the reference to the project                                                               
labor agreements in the contract.                                                                                               
                                                                                                                                
3:57:57 PM                                                                                                                    
MR. CLARK  mentioned that  the Special  Committee on  Natural Gas                                                               
Development dealt  with that subject. He  said Commissioner Menge                                                               
would  address the  issue of  process  in Canada  and whether  it                                                               
would cause delays.                                                                                                             
                                                                                                                                
3:58:25 PM                                                                                                                    
MICHAEL  MENGE,  Commissioner,  Department of  Natural  Resources                                                               
(DNR),  said the  administration believes  the existing  Canadian                                                               
process  is designed  to handle  all the  complexities associated                                                               
with permitting  a pipeline through Canada.  Canadian counsel was                                                               
hired and did  a tremendous amount of research and  it boils down                                                               
to the  fact that the  Canadian government  will act in  the best                                                               
interest  of the  Canadian citizens.  In  doing so  it will  have                                                               
acted in the  best interest of the project as  well as Alaska and                                                               
U.S. consumers.                                                                                                                 
                                                                                                                                
CHAIR   WAGONER   related   that  he's   had   discussions   with                                                               
authoritative  and  knowledgeable  Canadians  and  it  sounds  as                                                               
though  there's a  battle brewing  regarding which  province will                                                               
pull the liquids off and  manufacture product with the liquids in                                                               
Canada. But  unless the liquids  are kept in Alaska,  it's beyond                                                               
the state's control.                                                                                                            
                                                                                                                                
COMMISSIONER MENGE  agreed and  said his belief  is that  it will                                                               
all turn  on whether  or not the  affected governments  decide to                                                               
subsidize the  production of  a product  because that  would skew                                                               
the  economics. If  straight economics  rules, the  highest value                                                               
obtained  will be  the  process  that is  embraced.  The rest  is                                                               
simply saber rattling.                                                                                                          
                                                                                                                                
CHAIR WAGONER said he didn't  discuss subsidies; he discussed the                                                               
cost of  shipping and  market location and  he was  simply noting                                                               
there will be some problems.                                                                                                    
                                                                                                                                
REPRESENTATIVE  SAMUELS  said  he  would  agree  that  Canada  is                                                               
benefited if the  project moves forward. The problem  he has with                                                               
Canada is  that the producers  aren't dealing with Canada  at the                                                               
same time  they are  dealing with Alaska.  He suggested  that the                                                               
potential for delay  would come in the  contractual agreements in                                                               
the private  sector. He said he  was really talking to  "the guys                                                               
in the back of the room."                                                                                                       
                                                                                                                                
COMMISSIONER  MENGE remarked  that  the  committee members  could                                                               
certainly appreciate that the Canadian  government doesn't have a                                                               
strong  majority  and  so  asking  it  to  make  a  controversial                                                               
decision when  there isn't  a whiff  of gas  is asking  too much.                                                               
That  being  said   he  stated  the  belief   that  the  Canadian                                                               
government will make  decisions once a decision has  been made on                                                               
this side of the boarder.                                                                                                       
                                                                                                                                
MR. CLARK  asked Mr. Griffin to  address the question of  PPT and                                                               
whether oil ought to be included in the contract.                                                                               
                                                                                                                                
4:05:20 PM                                                                                                                    
MR.  GRIFFIN  corrected a  previous  statement  and said  several                                                               
major  gas to  liquids plants  are under  development notably  in                                                               
Qatar.                                                                                                                          
                                                                                                                                
MR.   GRIFFIN  explained   that  oil   and  gas   businesses  are                                                               
fundamentally integrated in that  when exploration is undertaken,                                                               
there's generally  some chance of  finding oil in the  ground and                                                               
some chance of  finding gas. When the values of  both options are                                                               
added, the total  value of the exploration  project is increased.                                                               
Imagine, he  said, if  one arm  has zero value  due to  no market                                                               
then the  value of the  exploration project  changes dramatically                                                               
such that  it's more  likely that the  explorer will  decide that                                                               
the  project  isn't worth  undertaking.  That  is basically  what                                                               
brought the companies to the  table to negotiate fiscal certainty                                                               
that extends  to oil. When  the state looked  at the idea  it was                                                               
clear that it  had to be considered under a  more appropriate tax                                                               
system than  ELF, that is  PPT. Extending fiscal  stability helps                                                               
encourage  exploration in  both sectors  and minimizes  risks for                                                               
this project and projects to come.                                                                                              
                                                                                                                                
REPRESENTATIVE SAMUELSON  commented he would agree  to an extent,                                                               
but for this  project there is little to no  exploration risk for                                                               
a number of years because the gas reserves are known to exist.                                                                  
                                                                                                                                
4:08:46 PM                                                                                                                    
MR.  GRIFFIN  directed  attention  to page  99,  which  addresses                                                               
capacity  management  and access.  He  explained  that the  state                                                               
doesn't control  development decisions, production  decisions, or                                                               
exploration  decisions  upstream,  which is  different  than  the                                                               
producers.  In light  of  this, the  state  negotiated for  three                                                               
principles. First,  guarantee that the  state can get its  gas to                                                               
market when  it is produced  just like the producers.  Second, if                                                               
the  pipeline   is  not   full,  the  state   will  not   bear  a                                                               
disproportionate  risk of  empty capacity.  Third, the  state has                                                               
access to gas and capacity rights for in-state use.                                                                             
                                                                                                                                
Various  comments suggested  the state  reserve capacity  for the                                                               
explorers or  for in-state shippers,  but both  suggestions would                                                               
shift  cost risk  to the  state  and are  inconsistent with  FERC                                                               
requirements  for  managing   capacity  by  regulation.  However,                                                               
provisions  of the  capacity management  article assure  that in-                                                               
state  capacity  is  reserved   separately  from  the  full  haul                                                               
capacity to Alberta,  or wherever, and that  shippers can reserve                                                               
that capacity and make sure there is gas dedicated to state use.                                                                
                                                                                                                                
The suggestion of posting unused  state capacity also falls under                                                               
FERC regulations for  fixed capacity commitments and  in his view                                                               
the  state  has   a  capacity  management  article   that  has  a                                                               
reasonable  chance  of  receiving  FERC  approval.  If  it  isn't                                                               
acceptable, then  FERC will offer recommendations.  In any event,                                                               
FERC provides explorers  equal access to gas  through its process                                                               
and it's not something that can be dealt with contractually.                                                                    
                                                                                                                                
He  recapped  that  the  contract  and  the  capacity  management                                                               
article do a  good job of meeting these needs  while not shifting                                                               
undue risk burden on the state.                                                                                                 
                                                                                                                                
4:13:01 PM                                                                                                                    
REPRESENTATIVE  SEATON  asked  if  that  means  that  the  entire                                                               
contract  would  fall  if  FERC   doesn't  approve  the  capacity                                                               
management article.                                                                                                             
                                                                                                                                
MR. GRIFFIN said  no, but the state will need  to explain to FERC                                                               
how it is  different from the other shippers and  how the state's                                                               
capacity  management provisions  provide an  equal playing  field                                                               
that FERC regulations are intended  to provide. History has shown                                                               
that  if FERC  doesn't  approve the  state's capacity  management                                                               
article, it will explain why not and offer recommendations.                                                                     
                                                                                                                                
REPRESENTATIVE  SEATON asked  if  the FERC  portion is  severable                                                               
such that the rest of the contract would stand.                                                                                 
                                                                                                                                
MR. LOEFFLER said  if the capacity management  article falls, the                                                               
contract remains.  An additional  clause says the  companies will                                                               
work with  the state in good  faith to develop a  substitute that                                                               
conforms to FERC that achieves the same purpose.                                                                                
                                                                                                                                
4:15:15 PM                                                                                                                    
MR. GRIFFIN  highlighted in-state  use issues  found on  pages 87                                                               
and 91. He  explained that the concerns include:  getting gas off                                                               
the pipeline for  in-state use, what it will cost,  and where the                                                               
gas  may  be needed.  To  begin  with  the Natural  Gas  Pipeline                                                               
Act (NGPA)  contains provisions  requiring reasonable  access for                                                               
gas  use in  state,  so the  contract  contains eight  provisions                                                               
specific to  that. First the  pipeline must go through  Alaska so                                                               
that the gas  gets into the center of the  state. The pipeline is                                                               
about 20 percent longer so it  will cost more. Second, there is a                                                               
timetable  for studying  in-state gas  needs. Third,  there is  a                                                               
requirement to study in-state  liquids opportunities. Fourth, the                                                               
mainline  project must  construct  and pay  for off-take  points.                                                               
Potential  tie-in  points  include the  Yukon  River,  Fairbanks,                                                               
Delta,  and perhaps  one  near the  Canadian  border. Fifth,  the                                                               
contract requires  mileage sensitive rates and  segmented service                                                               
so  the state  won't underwrite  shipping gas  to Canada  and the                                                               
Lower-48.  Sixth, in-state  capacity  is offered  and is  awarded                                                               
separately  from full-haul  capacity so  the state  won't compete                                                               
with  shippers that  want to  go  to Alberta,  for example.  That                                                               
portion of  the pipeline will  be sized for in-state  service and                                                               
that increment  will be there  for Alaskans. Seventh, there  is a                                                               
commitment to cooperate with the  entities that will take gas off                                                               
for in-state  use. Eighth, the  contract assures  the opportunity                                                               
to develop  a true natural  gas market  so all parties,  not just                                                               
the state, can sell gas in Alaska.                                                                                              
                                                                                                                                
CHAIR WAGONER asked Mr. Griffin if  he got the sense that quite a                                                               
few people  feel the  state should provide  in-state gas  at less                                                               
than market value.                                                                                                              
                                                                                                                                
MR.  GRIFFIN acknowledged  there  were several  comments to  that                                                               
effect,  but  there is  a  constitutional  requirement to  manage                                                               
resources for  the benefit of  all Alaskans. Discussion  did take                                                               
place about  a policy  to round out  statewide needs  and balance                                                               
the  benefits in  different areas.  That isn't  addressed further                                                               
because  in-state  gas  use  is  an Alaskan  issue  and  not  the                                                               
producer's call.                                                                                                                
                                                                                                                                
MR.  GRIFFIN said  the issue  of  in-state use  falls into  three                                                               
broad categories.  First are the  needs for gas  in Southcentral.                                                               
Second  is  the opportunity  for  power  and  gas supplies  at  a                                                               
reasonable  cost in  the  Fairbanks North  Star  area. Third  are                                                               
reasonably priced  energy supplies  for other Interior  areas. He                                                               
noted  that  a fourth  category  might  be the  in-state  liquids                                                               
industry.                                                                                                                       
                                                                                                                                
Near term  needs fall  into two  general areas.  The first  is to                                                               
identify  and encourage  development  of in-state  infrastructure                                                               
for gas storage issues, for  power generation issues, and for gas                                                               
distribution  issues. Second,  other  state entities  as well  as                                                               
public corporations need to be  involved in building the in-state                                                               
infrastructure  to  dovetail  with  this project  when  it  comes                                                               
together.                                                                                                                       
                                                                                                                                
MR. CLARK asked him to discuss the state marketing its own gas.                                                                 
Some of the  concerns that were raised stem from  the belief that                                                               
getting gas in value is free, but that isn't really the case.                                                                   
4:23:02 PM                                                                                                                    
MR. GRIFFIN  said he already  touched on market  uncertainty. The                                                               
second issue  is the state marketing  its own gas and  that issue                                                               
is the result of the decision to  take gas in kind. He noted that                                                               
some concerns about this stem from  the belief that taking gas in                                                               
value  is  free. He  mentioned  the  past royalty  oil  valuation                                                               
disputes  and   said  that  isn't  entirely   true.  Because  gas                                                               
marketing is much more complicated  than oil marketing, valuation                                                               
controversies  would be  much more  extensive for  gas than  they                                                               
were for oil.                                                                                                                   
                                                                                                                                
The marketing  issues are that  the state will be  competing with                                                               
very  agile marketers  in a  very expensive  environment. Another                                                               
issue is  uncertainty because for gas  the state has to  make the                                                               
sale to get paid. To address  these issues the state has to build                                                               
an organization and  the opportunity. It can do that  in a number                                                               
of ways  ranging from selling  at spot  in Alberta or  Chicago to                                                               
having an  intensive marketing  organization that  uses financial                                                               
tools to manage risk and gain  return. Also the state could go it                                                               
alone or  enter into a  joint venture arrangement  with companies                                                               
that range  from financial institutions to  astute gas marketers.                                                               
Right now DNR is working to develop marketing alternatives.                                                                     
                                                                                                                                
MR. GRIFFIN  asserted that the  administration did a good  job of                                                               
conservatively looking at the costs  of marketing the gas once it                                                               
is taken in kind.                                                                                                               
                                                                                                                                
4:27:38 PM                                                                                                                    
MR. CLARK  said he'd  like Mr. Dickenson  to discuss  payments in                                                               
lieu of taxes (PILT) and the impacts on communities.                                                                            
                                                                                                                                
MR.  DICKENSON explained  that a  Fairbanks  company conducted  a                                                               
study  that concluded  that the  impacts  on the  state, in  2004                                                               
dollars,  would  be  roughly  $121.6  million.  That  number  was                                                               
rounded up  to $125 million  and considerable  comment questioned                                                               
why the numbers didn't jib and  what would happen if the pipeline                                                               
were delayed.  Other comments said  the money should  go directly                                                               
to the impacted communities rather  than through the legislature.                                                               
That  isn't possible,  but more  than  likely the  recommendation                                                               
will be  to start with that  2004 dollar amount and  then reflect                                                               
inflationary  increases  if  there  are  delays.  The  issue  did                                                               
receive a  surprising number of  public comments and  a technical                                                               
fix might be preferable to what was in the contract, he said.                                                                   
                                                                                                                                
Comments on the  tax issues included: why not more  quid pro quo,                                                               
why  are  taxes  occurring,  and  why are  the  tax  benefits  or                                                               
detriments occurring early in the  process rather than at project                                                               
sanction.  He  noted that  Mr.  Loeffler  discussed the  PPT  and                                                               
allowing  a couple  years to  evaluate  the tax  since it's  new.                                                               
Similar periods might  be created for other  oil-based taxes such                                                               
as the income tax or the property taxes on TAPS for example.                                                                    
                                                                                                                                
MR. CLARK asked  him to address the questions  that were received                                                               
regarding payments in lieu of taxes.                                                                                            
                                                                                                                                
MR. DICKENSON said a lot of  the comments focused on the question                                                               
of the  tradeoff. Some entities  around the state  questioned who                                                               
would  benefit from  this.  He noted  that the  idea  was to  not                                                               
change  the status  quo very  much and  to that  end a  number of                                                               
mechanisms were  imported. Clearly  the folks along  the pipeline                                                               
corridor where the  work will occur are going  to experience both                                                               
the positive and negative effects,  but it's important to look at                                                               
the   big   picture.   He  referenced   Commissioner   O'Claray's                                                               
discussion about  outreach programs, but  in terms of  creating a                                                               
structured answer through  the PILT he said the  state would need                                                               
to educate  the public  in this  area rather  than the  other way                                                               
around.                                                                                                                         
                                                                                                                                
4:32:36 PM                                                                                                                    
MR. CLARK  added Mr.  Dickenson and  his crew  redid part  of the                                                               
contract on three  different occasions to try and  make PILT work                                                               
so  the  administration has  certainly  invested  a lot  of  time                                                               
trying to  figure this out.  He suggested the  ultimate construct                                                               
is pretty good and they do  meet the requirements of the Stranded                                                               
Gas Act.                                                                                                                        
                                                                                                                                
MR.  DICKENSON pointed  out  that the  legislature  would be  the                                                               
final determinant  about where the  impact payments would  go and                                                               
for the  other PILT  there is  a formula  so the  legislature can                                                               
speak to what mil rates are permitted.                                                                                          
                                                                                                                                
The administration  met the concerns  of the Stranded Gas  Act in                                                               
terms  of back  loading,  stability, and  transparency. Also  the                                                               
legislature the right  to control those in  terms of distribution                                                               
within the state.                                                                                                               
                                                                                                                                
MR.  CLARK concluded  the presentation  and said  there was  good                                                               
response  from  the  public  and  thoughtful  response  from  the                                                               
legislature  and  he  believes  the  document  reflects  how  the                                                               
administration's thinking has matured on these issues.                                                                          
                                                                                                                                
CHAIR WAGONER  asked if the  administration would be  prepared to                                                               
present answers  to the  questions that  were raised  sometime in                                                               
November.                                                                                                                       
                                                                                                                                
COMMISSIONER  CORBUS drew  attention to  Table 15,  on page  180,                                                               
that contains comments by group and article.                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON  asked that the administration  be prepared                                                               
to  address: the  comment about  Qatar, gas  to liquids,  and the                                                               
availability of feedstock  from comment 0724. He  also asked that                                                               
consideration be given to the three studies he submitted.                                                                       
                                                                                                                                
There being no further business to come before the committee,                                                                   
Chair Wagoner adjourned the meeting at 4:36:24 PM.                                                                            
                                                                                                                                

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