02/15/2008 03:30 PM Senate RESOURCES
| Audio | Topic |
|---|---|
| Start | |
| SB248 | |
| Aenergia, Llc | |
| Adjourn |
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
| + | TELECONFERENCED | ||
| += | SB 248 | TELECONFERENCED | |
ALASKA STATE LEGISLATURE
SENATE RESOURCES STANDING COMMITTEE
February 15, 2008
3:33 p.m.
MEMBERS PRESENT
Senator Charlie Huggins, Chair
Senator Bert Stedman, Vice Chair
Senator Lyda Green
Senator Lesil McGuire
Senator Gary Stevens
Senator Bill Wielechowski
Senator Thomas Wagoner
MEMBERS ABSENT
All members present
OTHER LEGISLATORS PRESENT
Senator Joe Thomas
Representative Jay Ramras
COMMITTEE CALENDAR
SENATE BILL NO. 248
"An Act relating to the salmon product development tax credit;
providing for an effective date by amending an effective date in
sec. 7, ch. 57, SLA 2003, as amended by sec. 4, ch. 3, SLA 2006;
and providing for an effective date."
MOVED SB 248 OUT OF COMMITTEE
Presentation: AGIA Applicant AEnergia
PREVIOUS COMMITTEE ACTION
BILL: SB 248
SHORT TITLE: SALMON PRODUCT DEVELOPMENT TAX CREDIT
SPONSOR(s): SENATOR(s) HOFFMAN
01/25/08 (S) READ THE FIRST TIME - REFERRALS
01/25/08 (S) RES, FIN
02/13/08 (S) RES AT 3:30 PM BUTROVICH 205
02/13/08 (S) Scheduled But Not Heard
02/15/08 (S) RES AT 3:30 PM BUTROVICH 205
WITNESS REGISTER
TIM GRUSSENDORF, Staff to Senator Lyman Hoffman
Alaska State Legislature
State Capitol
Juneau, AK
POSITION STATEMENT: Presented SB 248 on behalf of Senator
Hoffman, sponsor.
MARY McDOWELL, Vice President
Pacific Seafood Processors Association
POSITION STATEMENT: Supported SB 248 and answered questions.
TOM SUNDERLAND, Marketing Director
Ocean Beauty Seafoods LLC
POSITION STATEMENT: Supported SB 248.
TIM COTTONGIM, Fish Group Manager
Tax Division
Department of Revenue
Juneau, AK
POSITION STATEMENT: Testified on matters relating to SB 248.
ANDREW L. TABER, Principal Partner
AEnergia, LLC
West Sacramento, CA
POSITION STATEMENT: Gave PowerPoint presentation on AEnergia's
AGIA application and answered questions.
WILLIAM J. BURKHARD, Principal Partner
AEnergia, LLC
West Sacramento, CA
POSITION STATEMENT: Gave PowerPoint presentation on AEnergia's
AGIA application and answered questions.
ACTION NARRATIVE
CHAIR CHARLIE HUGGINS called the Senate Resources Standing
Committee meeting to order at 3:33:44 PM. Present at the call
to order were Senators Green, Stevens, Wagoner, and Chair
Huggins; Senators Stedman and Wielechowski arrived within a few
minutes, and Senator McGuire joined the meeting in progress.
Also in attendance were Senator Joe Thomas and Representative
Jay Ramras.
SB 248-SALMON PRODUCT DEVELOPMENT TAX CREDIT
3:34:29 PM
CHAIR HUGGINS announced SB 248 to be up for consideration.
TIM GRUSSENDORF, Staff to Senator Lyman Hoffman, Alaska State
Legislature, presented SB 248 on behalf of Senator Hoffman,
sponsor. He indicated the salmon product development tax credit
was enacted in 2003 to allow processors to claim up to
50 percent of the cost of qualified investments from the
fisheries business tax. To qualify, projects must be new,
predominantly for salmon, and involve value-added products. The
credit encourages and accelerates development and production of
value-added salmon products, giving an economic incentive to
invest in technology and equipment. The current bill makes two
changes. The first extends the sunset date three years, to
December 31, 2011.
3:36:22 PM
SENATOR WIELECHOWSKI joined the meeting.
MR. GRUSSENDORF discussed the second change. He said after some
processors had invested in equipment, they found it didn't
qualify once the Department of Revenue (DOR) reviewed the
project and application. Thus Section 2 says folks can present
their project to DOR, which will review it; if it's approved,
DOR is bound to that decision as long as the processor follows
the intent and the project that was submitted.
CHAIR HUGGINS noted the credit is binding. He asked: If a
project is deemed not appropriate, is that decision not binding?
MR. GRUSSENDORF replied that's how he understands it, but
someone from DOR could speak to that.
CHAIR HUGGINS asked whether that is a big deal, based on past
experience.
MR. GRUSSENDORF noted packets contain a sheet from DOR's Tax
Division showing credits denied at audit. He didn't know how
often it had happened, but indicated the bill lets the
processors know better whether their investments will qualify.
CHAIR HUGGINS observed that $2.5 million was denied in 2004.
MR. GRUSSENDORF clarified that it was upon audit.
CHAIR HUGGINS asked whether there is concern in the other
direction, since there must be some rationale for denying it
during an audit.
3:38:22 PM
MR. GRUSSENDORF surmised some processors had called in,
explained the project over the phone, and then been told it
sounded like a project that would qualify; then it wasn't done
exactly as discussed or there was miscommunication. So now
there'll be a process under which a determination is made as to
whether the project fits within the scope of the credit.
CHAIR HUGGINS asked about page 2 of the analysis, which says the
credits only reduce fisheries business tax to the state and do
not impact revenues shared with municipalities.
MR. GRUSSENDORF answered that he believes some of the fisheries
tax goes back to the communities where the fish was landed. The
other part goes to the state, and this credit only applies to
that part. He deferred to DOR for details.
3:39:49 PM
MARY McDOWELL, Vice President, Pacific Seafood Processors
Association (PSPA), listed PSPA's member companies that are
salmon processors, many with shore plants around the state. She
said those companies make good use of this tax credit to advance
the program's goals and purposes, including: developing and
expanding new and value-added salmon products, helping Alaska's
salmon products keep pace with evolving consumer demands, and
keeping Alaska's fisheries competitive in world markets. She
highlighted letters from companies regarding how they've used
the credit to make improvements and how much sooner they've been
able to accomplish these developments because of it.
MS. McDOWELL said the legislature constructed the tax credit
tightly to accomplish specific goals; it has been successful,
but momentum must be maintained. Skyrocketing energy costs eat
up profits and hamper the ability to reinvest and advance new
product forms. She pointed out that most processors operate in
rural areas where energy costs are highest and yet the need for
the kind of economic activity generated by the seafood industry
is highest as well.
MS. McDOWELL told members that adding value to salmon products
right away and keeping products competitive provides benefits to
fishermen, communities, processors, and the state coffers. The
state needs to encourage economic diversification, prepare for
the future, ensure Alaskan products are competitive, and make
the best use of natural resources. Adding value to raw products
is an important part, and this tax credit facilitates those
goals. She opined that this pays for itself because adding
value in Alaska increases the raw fish tax, which comes back to
the state. She encouraged support for SB 248.
3:43:43 PM
SENATOR STEDMAN asked about machines that the processors are
buying for value-added products.
MS. McDOWELL answered that many do boneless, skinless fillets
for cans or else filleting and freezing. And one company does
prepackaged meals, for instance. Some secondary products
otherwise are done outside of Alaska. Even filleting and
packaging the fish within Alaska, rather than sending out headed
and gutted fish, increases the in-state value tremendously.
SENATOR STEVENS recalled that this idea came out of the Joint
Legislative Salmon Task Force. Noting it seems very successful,
he surmised the big change over the past four or five years
relates to the market. Most salmon used to go to Japan, but now
it finds markets in the U.S. and Europe. He asked Ms. McDowell
to comment.
3:45:57 PM
SENATOR McGUIRE joined the meeting.
MS. McDOWELL agreed that where the fish go is changing, partly
because of excellent marketing; a good reputation; and increased
consumer demand for a pure, natural product, a sustainably
managed product, and value-added products. Together, those are
making a big difference, she added, stressing the forward
momentum that needs to be maintained.
SENATOR WAGONER returned to Senator Stedman's question, saying
in his district a lot of fish are bled on the boat, iced,
brought in, and filleted by hand. But then a machine is used to
pick the pin bone. He said he knows of five or six processors
that have gone clear to the pin bone stage, which probably
doubles or triples the price and value of their product. He
opined that this is a highly rewarding bill that should be given
the utmost consideration. He added that he has no conflict
because he no longer is a commercial salmon fisherman.
MS. McDOWELL added that doing these processes in the communities
reduces transportation costs and saves energy because of being
able to get rid of the waste out there and ship a more finished
product. It also creates more jobs in the state.
CHAIR HUGGINS asked how the fish are shipped and where the labor
comes from for the plants.
MS. McDOWELL replied there is a huge variety for shipping;
things are shipped fresh, flown out, frozen in blocks or
portions, and so on. With respect to labor, there are thousands
of jobs. Some go to Alaskans, but there are complaints about
nonresident hiring. The industry is working hard to move
Alaskans into skilled labor positions, and there is recruitment
in rural Alaska for the processing lines. She indicated PSPA
works closely with the labor department on all those issues.
3:49:07 PM
TOM SUNDERLAND, Marketing Director, Ocean Beauty Seafoods LLC
("Ocean Beauty"), supported SB 248, noting Ocean Beauty is an
Alaska corporation, 50 percent owned by the Bristol Bay Economic
Development Corporation; it operates seven shore-based plants
around the state, with salmon as the primary product.
MR. SUNDERLAND said Ocean Beauty believes this tax credit has
done exactly as intended. Salmon prices have increased, and
this has allowed modernization of old facilities, speeding the
process or encouraging it where it wouldn't have happened
otherwise. This keeps jobs in Alaska and moves more value-added
production into Alaska, rather than just sending headed and
gutted fish overseas or to Seattle for reprocessing; this also
creates a higher quality product.
MR. SUNDERLAND explained that putting the machinery in the
plants allows greater product variation, minimizing boom-and-
bust cycles in the industry related to changes in demand, the
market, customers, or currency issues. Ocean Beauty has
invested a lot in filleting equipment and skinless/boneless
canning equipment. He opined that net revenues to the state
from this tax have increased during the time that the credit has
been in place, due to the increase in the value of salmon.
MR. SUNDERLAND also said Ocean Beauty believes this credit
should be continued because of the amount of time it takes to
implement changes. Even if it were financially feasible to make
changes all at once, the company couldn't do so because of
technical hurdles and the effort and manpower required. Ocean
Beauty also takes a lot of time to develop new sales
relationships that allow selling new forms of product.
MR. SUNDERLAND reported that Ocean Beauty has used this credit
to upgrades its plants at Excursion Inlet, Kodiak, and Alitak.
There are continuing upgrades at the Kodiak plant and major
upgrades at Naknek. But that leaves three plants untouched that
they haven't been able to get to. While the plan is to upgrade
them all, it cannot be done all at once.
MR. SUNDERLAND said this program leads to not only job creation,
but very good jobs. In 2007, for example, Ocean Beauty used a
State Training Employment Program (STEP) grant to bring over
trainers from Baader's headquarters in Germany to help Kodiak
workers become technicians on some highly complex and advanced
machines. He closed by saying Ocean Beauty believes this credit
is good for the industry and the state as a whole.
3:53:27 PM
MR. SUNDERLAND, in response to Senator Green, explained that
Baader in Germany has sophisticated machinery used primarily for
filleting. The expertise to operate and maintain these machines
is extraordinary. To get the best training possible, Ocean
Beauty flew Baader's own trainers to Kodiak, thereby creating
some excellent jobs, some of the highest paying in the whole
seafood industry.
SENATOR STEVENS agreed this results in highly skilled, highly
paid American employees in the fish plants.
SENATOR GREEN expressed surprise that STEP money could be used
that way.
CHAIR HUGGINS inquired about DOR's position on the bill.
3:55:16 PM
TIM COTTONGIM, Fish Group Manager, Tax Division, Department of
Revenue, came forward with Dan Stickel, DOR economist.
Mr. Cottongim said DOR has empirical evidence supporting the
testimony regarding to an increase in 1) the amount of salmon
tax collected, 2) the amount of fillet production, and 3) the
ex-vessel value of salmon during the period this tax credit has
been in place. Thus DOR sees a benefit to this credit program.
However, he'd not had the opportunity to talk with the governor
about the administration's position on the bill.
CHAIR HUGGINS asked what it means that DOR auditing had
disallowed $2.5 million in credits.
MR. COTTONGIM replied he believes it means DOR can do a better
job of educating customers as to what qualifies and what
doesn't. He suggested DOR is challenged to do that if this
program continues, which is one reason for wanting to include an
outreach program in the future.
3:57:03 PM
MR. COTTONGIM, in response to Chair Huggins, explained that
50 percent of all taxes collected from fisheries business is
dedicated to the communities; that portion isn't affected. This
tax credit is taken from the state's 50 percent.
CHAIR HUGGINS asked whether that's how it has always been and
whether Mr. Cottongim is satisfied with that.
MR. COTTONGIM replied yes to both. In response to Senator
Stedman, he specified that organized cities and boroughs that
have processing within their boundaries receive a share of the
taxes collected from processing activities in that area.
SENATOR STEDMAN recalled that this tax started in 1914.
MR. COTTONGIM concurred.
SENATOR STEVENS remarked that one big improvement to a nearly
perfect bill from five years ago is the addition of the
preliminary determination as to whether something will qualify
for the tax credit. He asked whether DOR feels comfortable that
it can make this determination.
MR. COTTONGIM answered that DOR knows it will be challenging to
ensure all the criteria are met in advance. Processors must
understand there'll be caveats and requirements to fulfill.
Surmising there'll be bumps in the road, he mentioned give and
take, outreach programs, and regulations that will afford DOR an
opportunity to better work with the industry and educate
everyone, in order to avoid as much conflict as possible.
Furthermore, if preapproval is denied, a company can claim the
credit with its tax return and go through the appeals process.
Thus DOR believes there will be sufficient checks and balances
so companies can correct any errors that DOR has made.
4:00:48 PM
MR. COTTONGIM, in further response, explained that it would be
the normal administrative appeals process, going through an
informal appeal within the division, and then could go outside
DOR after that, to the Office of Administrative Hearings.
SENATOR STEVENS said it's short of a legal process, then.
MR. COTTONGIM agreed.
CHAIR HUGGINS noted the preliminary decision appears to be
binding, without caveats or qualifiers.
SENATOR STEDMAN moved to report SB 248 from committee with
individual recommendations and accompanying fiscal notes. There
being no objection, SB 248 was moved out of the Senate Resources
Standing Committee.
The committee took an at-ease from 4:02:06 PM at 4:04:50 PM.
^AEnergia, LLC
Presentation: AGIA Applicant AEnergia
4:04:52 PM
CHAIR HUGGINS announced the committee would hear a presentation
from AEnergia, LLC, which had submitted an application under the
Alaska Gasline Inducement Act (AGIA).
ANDREW L. TABER, Principal Partner, and WILLIAM J. BURKHARD,
Principal Partner, AEnergia, LLC, introduced themselves.
MR. TABER offered introductory comments.
MR. BURKHARD began the PowerPoint presentation, which was
accompanied by a handout. Showing a slide labeled "30+ Year
Team Commitment," he recalled coming to Alaska to work on the
Trans-Alaska Pipeline System (TAPS) in 1979, working on geology,
geotechnical engineering, and engineering until 1982. The team
he was working with did environmental engineering, geotechnical
engineering, geology, hydrology, climatology, thermal modeling,
and a few other earth sciences. After this began to resurface
in 2000, he gathered the team to try to recapture the earth
sciences portion of the pipeline. They completed about half the
earth sciences and engineering that would be required.
MR. BURKHARD noted about that time he partnered with Andrew
Taber, president and chief executive officer (CEO) of one of
California's oldest geotechnical firms. In 2001, as a loose
team, they approached the original gas line consortium about the
earth sciences portion, but the consortium didn't last. They
talked with potential prime contractors and the producers: BP,
ConocoPhillips, and ExxonMobil. They also talked with the
Department of Natural Resources (DNR) and the Joint Pipeline
Office (JPO) about work on the review side for sciences and
engineering. After the AGIA process was put in place, they put
in an application to pursue working on the pipeline.
4:10:29 PM
MR. TABER explained that AGIA looked like a highly advanced
opportunity for creative planning; in fact, creativity was
requested. But their application was considered incomplete. He
showed a slide labeled "Questions," with the following points:
- Why does equity in building and operating a pipeline
have to be so complicated?
- If the fundamental effort for all project
operational plans is to organize commodities (which
are available to anyone with the license), then
shouldn't focus be placed on creating the best plan
to meet the spirit of AGIA?
- Why does the license appear to be a prize for
corporate profit when in reality it is the state's
transfer of authority to a group to maximize the
benefit to Alaskans?
- If the authors of AGIA asked for creative ideas, why
did the completeness review process not appear to
embrace creativity?
MR. TABER highlighted the complexity, with tariffs, rolled-in
rates and so on. He also said they could see that things like
design of the pipeline and construction would be done by the
same folks no matter who the licensee was; many things,
including the money, are simply a commodity. Reporting that
just by applying they've had folks from Wall Street and other
sources offer to come up with money for them, he surmised the
money is there for a project.
MR. TABER emphasized that they can get the commodities; the
license can empower a group to negotiate for those.
Furthermore, he said, this doesn't have to be motivated by
profit and stockholders, where a corporation "wins" with a great
profit margin for the foreseeable future.
4:14:23 PM
MR. TABER turned to creativity, saying in the areas their
application was considered incomplete, their ideas were about
making a paradigm shift - a different approach from how the AGIA
process was set up. They'd felt their application was complete
and creative.
CHAIR HUGGINS asked: If they were to do it again, how would
they do it differently?
MR. TABER noted they'd learned a lot in the process. He
indicated their application was clear that this would require a
paradigm shift and was out of the box. They might emphasize
that creativity more.
MR. BURKHARD suggested a slide labeled "AEnergia 'Shortcomings'"
might answer this. It had the following points:
- Failed to propose a project plan that transports gas
to market
- Failed to propose a specific route, especially
through Canada
- Failed to make Canadian connections, e.g. right-of-
way and clearance
- No commitment to expand the pipeline on a
commercially viable basis
- North Slope GTP must be FERC certified
- No demonstration of readiness, financial resources
or technical abilities to perform the required AGIA
tasks.
MR. TABER noted the slide was pretty much verbatim from the
letter they'd received that said their application was
incomplete. He emphasized their sense that they could have been
clearer on the creativity aspect, seeing it as a tremendous
opportunity to do things differently. But the details of the
AGIA application showed a traditional pipeline approach.
4:17:48 PM
CHAIR HUGGINS asked whether they'd had face-to-face or
telephonic communication with the administration for clarity on
any aspects of AGIA while going through the application process.
MR. BURKHARD replied no. They did receive a phone call from the
governor and the commissioners right afterward, informing them
it didn't fulfill the completeness aspect.
MR. TABER added that during the process it was just what was
posted and available to the public.
MR. BURKHARD recalled that DNR Deputy Commissioner Dick LeFebvre
couldn't talk to them once the AGIA bill passed, though they'd
talked to him right before that. There was a zone where they
couldn't communicate with the administration once it passed.
MR. TABER observed that it related to not giving anyone a
competitive advantage. Some friends in the state government
were in a similar position.
4:18:57 PM
MR. TABER indicated they'd hoped AGIA would provide an
opportunity, rather than the same old pipeline. He drew
attention to a slide labeled "Paradigm Shifts" with the
following points:
- From a "steel" driven project to an earth science
and engineering driven project
- From a producer driven project to a state induced
project
- From a single entity builder to a collaborative team
- From a proprietary "closed" project to an open
process
- From a "for-maximum-profit" project to a "public
service" project
- From a pipeline to infrastructure system
- From the inherent "power" of a large corporation to
the "power" of being the licensee
MR. BURKHARD elaborated. Noting steel-driven projects are done
in the Lower 48 all the time, he said Alaska is much more
environmentally sensitive than most places there. For instance,
in Alaska a one-degree operational temperature change could mean
disaster related to permafrost or frost heave. Such issues are
vital to the success of this project.
MR. BURKHARD highlighted their experience from the last time.
He specified that the paradigm shift is to lead this project by
the earth sciences and engineering. Also, they've noticed it's
not steel types of issues that run costs up; environmental
issues can double or triple a project. So they believe this
paradigm shift is appropriate in Alaska.
MR. TABER added this would save money because ultimately it
would drive the project; the shift is deciding that from the
start. He turned to the second point, saying the producers are
the ones with the gas, at least now. Historically, that drives
a project. However, the state is inducing the pipeline to be
built, and they see a public-private partnership, an opportunity
whereby the state could cooperate and collaborate with producers
and actually create a gas highway to get gas to market.
MR. BURKHARD noted later they would address other side benefits
to having the state more in the driver's seat.
4:22:09 PM
MR. TABER turned to the third point, saying traditionally there
is a single-entity type of builder, though it could be a group
like Alyeska. The shift is to think of it as a collaborative
team. He asked: If there's a public-private partnership, why
not collaborate with a number of people, for instance, having
TransCanada do part and the Valdez folks do part? Why not pull
all that together under the umbrella of the AGIA license?
MR. BURKHARD emphasized "collaborative" versus "cooperative,"
noting this also would be addressed later.
MR. TABER discussed the shift from a proprietary closed project
to an open process. He said AGIA seems high on integrity,
transparency, and getting it done. For many privately financed
projects, by contrast, it seems there is more power if
information is kept from the public. They saw an opportunity to
turn it around and put everything out there.
MR. BURKHARD added that it gives the state the ability to embed
regulation and legislative intent into the design, rather than
post facto trying to regulate it.
4:24:07 PM
MR. TABER explained the shift from a "for maximum profit"
project - where everyone involved in each part of the process is
looking for maximum profit - to a public service project.
They'd tried to make their project simple and equitable, with
one simple, transparent equity ratio that applies equally to
everyone and is set before the project begins. The project
would be treated as a mission. Everyone would either lose or
win together. There would be no advantage in withholding
information. Instead, the advantage would be in making the
project go as well as possible.
MR. TABER turned to the shift from just a pipeline, saying there
are exciting infrastructure implications. For instance, there
could be an electric rail system powered by electricity
generated from gas. Things that are part of the building the
pipeline could contribute to Alaska's infrastructure and economy
for years to come, and it would be an incremental burden to the
cost of the pipeline.
MR. BURKHARD asked, for example: If it's going to cost a
certain amount to barge pipe from Seattle, why not apply that
same amount towards a railroad and then let another partner pick
up the difference? It would cost the project an identical
amount, but that money would go towards building infrastructure
within Alaska, rather than just being spent on services.
MR. TABER indicated they'd thought perhaps the $500 million
inducement from the state could be used in this way.
MR. BURKHARD, in response to Chair Huggins about the handout,
explained that there were extra slides in case of questions.
4:28:30 PM
MR. TABER discussed the shift from the power of large
corporations to that of being a licensee. He reiterated that
Wall Street money has been offered and said others would be
interested in investing. The license isn't just a license to
build, but is also the license to have the power of the
authority of the state to take action, he added.
MR. TABER turned to another shift, from project management to
critical mission management (CMM). A slide labeled "Critical
Mission Management" had the following points:
- CMM is well suited and adaptable to meet the
requirements due to project magnitude, time
constraints, large number of personnel resources,
large number of equipment resources, totality of
assets, and multiple funding sources to support the
Project, which would overwhelm the normal
equivalency of a typical administrative
organization.
- CMM initiates and empowers decisive, competent
action in real time for all subordinate functional
operational sections, then completes the
documentation and justification versus the
administrative necessity to document a problem and
have pre-approval for all actions from upper
management prior to any implementation.
- CMM has a command staff with direct subordinate
groups which function by passing down objectives
rather than by passing down directives, as in an
administrative organization.
- CMM incorporates operational decisions made at lower
levels where there is the highest level of
understanding to accomplish objectives versus the
well documented Peter Principle in administrative
organizations.
- CMM's organization structure is built from decades
of reinvention in the emergency services world,
aimed at continuous improvement in responsiveness,
safety, accountability and total performance.
- CMM utilizes the approach "Objective accomplishment
is everything" versus the administrative "pre-
approval and process is critical" organization.
- CMM provides a built-in structure which mitigates
and defuses risks as they occur versus the
acceptable risks of the standardization of
processes.
- CMM is designed for extreme adaptability, regardless
of what unusual or unknown circumstances may occur.
Team organization and functionality increases or
decreases with the demands of the objective at hand.
MR. TABER deferred to Mr. Burkhard, saying this is one of the
strengths he brings to the team.
4:29:44 PM
MR. BURKHARD explained that from 2001-2006 his responsibility
was to protect California's water supply. About 75 percent of
water that falls as rain there exits through the delta into the
bay, but 2/3 of California takes water from the delta for
industry, farming, and municipal use. His job was to protect
1,100 miles of levees in the delta against flood failure. About
60-70 areas there once were islands. But because it is
subsiding, the whole delta is like a lake with ring dikes
exposing the bottom. These islands are 20 feet below sea level.
MR. BURKHARD said with critical mission management they were on
call at all times. If there was a storm, potential flood, or
leak, they were on site for days, weeks, or months. He found a
real strength in the CMM concept and created a similar process
here. He highlighted the strength of this system that brings
everyone to the table, incorporating all levels of government
and private enterprise to protect the system.
MR. TABER indicated large projects lend themselves to being a
mission. There is a start, an end, and a goal. These tried-
and-true methods can be applied. Surmising that CMM will be the
next way to manage large projects, he expressed hope that
they'll have the chance to demonstrate this exciting concept.
He emphasized working harder on a plan - how to go about it -
than just the commodity.
MR. BURKHARD noted NASA uses something similar. If the
Hollywood portion of the movie Apollo 13 is removed, some of
this concept can be observed in action, a configuration of labor
and management to address critical issues.
4:33:58 PM
MR. TABER turned to the next paradigm shift. Discounting the
idea that the assets of a large corporation are needed to carry
off a large project, he said a lot of what a large organization
does is to coordinate commodities. The shift is seeing things
like money and engineering services as commodities in the
marketplace; what is required is an organization to purchase
them. He showed a slide labeled "Commodity vs. Specialty Item,"
with the following points:
- A commodity is that which is widely available from
multiple sources.
- A specialty item is that which the project
critically depends on for its successful design,
construction, and operation.
MR. BURKHARD showed the next slide, "Commodity vs. Specialty
Items," which had the following list relating to how these items
were approached in AEnergia's application:
ITEM STATUS
Public-Private Partnership Specialty Item
Earth Science and Engineering Specialty Item
Steel Pipe Commodity
"Steel" Design Commodity
Financing Commodity
He explained that the CMM method and public-private partnership
is a specialty item because it's not widely available, it's the
up-and-coming thing, and it's what AEnergia is good at. They
believe earth science and engineering is critical to minimize
environmental impacts and downtime for the project, so it's a
specialty item also. But the other items are commodities that
anyone applying through AGIA would contract for.
4:36:32 PM
MR. TABER drew attention to a slide labeled "AEnergia Plan,"
which had the following points:
- Traditional "Alcan" route with Valdez LNG port
(partner)
- Kenai Peninsula (partner)
- Two parts:
- Alaska Natural Gas Pipeline, LLP (ANGL)
- Gas marking cooperative
- Nexus of all authorities and stakeholders
- Critical mission management
- OSTER
- Royalty in Kind
MR. TABER said AEnergia is open, collaborative, and partnership-
oriented. Part of this depends on how much gas there really
will be. Highlighting the traditional Alcan route, he said
AEnergia would love to partner with the Valdez or Kenai folks
and have that be part of the plan. There is no reason not to.
4:37:26 PM
MR. BURKHARD added AEnergia feels that limiting the gas route
from Alaska to the Lower 48 through just one leg has
complications. If they partner with folks who want to build a
liquefied natural gas (LNG) plant in Valdez and increase the
distribution system, he believes that would be best for the
state. They'd also like to partner with the folks who want to
build the distribution system in the Kenai. That's what the
state is looking for, he said, and that is the maximum benefit.
MR. BURKHARD said as the state matures in its gas exploration,
who knows where it will lead or how much gas will be found. He
surmised the more legs, the better. It distributes the risk and
responsibilities, and it makes as complete an infrastructure as
possible within Alaska for gas.
MR. TABER noted AEnergia would like to partner with a Canadian
component as well.
MR. BURKHARD pointed out that an LNG port is being completed in
Coos Bay or North Bend, Oregon, as is one in Mexico. California
consumes quite a bit of gas, but its laws don't allow for a
cost-effective LNG port into that market; thus those were
established in Oregon and Mexico. He suggested this project
should take advantage of the infrastructure elsewhere to open up
more markets. It appears the Rockies also divide the gas-
distribution system in the U.S., he said, without a lot of good
communication between Central and Eastern U.S. and the West.
This would open up the Western gas market to Alaskan gas.
4:39:26 PM
MR. TABER explained that the proposal was to create two new
companies owned by the group that produces the gas, the state,
and the other stakeholders, in accordance with the equity
determined at the start of the project, the one they'd suggested
in their application. There'd be one company created to build a
pipeline, operate it, and maintain it, and it would be a cash-
neutral, not-for-profit company.
MR. BURKHARD noted distribution would be addressed shortly,
using the acronym OSTER - one simple, transparent equity ratio.
If there was a profit made on the pipe, the pipeline would be
owned at the same ratio as the gas within the pipe; in a sense,
the company would just pay itself through tariffs. The idea is
to have one company whose responsibility is simply to get the
gas from the ground to the market; its charges to the other
company that markets the gas would be at cost.
MR. BURKHARD said it would be cost-neutral, a public service
pipeline system that gets gas efficiently and cost-effectively
from the North Slope to market. And when the revenues flow
back, the most would flow back to the gas owners within Alaska.
4:41:30 PM
MR. TABER showed a slide labeled "Nexus" that read:
- The gathering of authority groups with (necessarily)
divergent stakes to establish common ground
objectives
- The roundtable for a mutually beneficial
collaboration
- Implements what already exists
- Sets objectives by the hierarchy of stake
- Objective setting within a stake requires authority
in that stake
- Objectives, once set, are immediately implemented
- Protected by a veil of delegation
MR. TABER explained that this is how it would be organized. The
idea of a nexus is that folks who have anything to do with the
pipeline come together and set objectives for the pipeline
process in accordance with their stake; if they have no stake,
they have no say. The nexus is where the decision making
happens. The power hierarchy is according to stake.
MR. BURKHARD said that stake is based on authority. All
authority is delegated. The nexus is the idea of bringing all
authority together and then producing objectives for the mission
from that. It's always in hierarchy, just as law is above need
in the legal hierarchy. The nexus is these authorities.
MR. TABER added they'd set objectives to be carried out by CMM
team, the "arms and legs on the ground," which AEnergia also
would run.
MR. BURKHARD explained that a veil of delegation protects the
nexus from implementation problems and protects the
implementation folks from the problems of setting objectives.
It works well. For example, the problems in the Apollo space
program were attributed to NASA; it never went above that level
because there was an effective veil of delegation. He suggested
that an authority body needs this protection if it is setting
objectives that another group will carry out.
4:44:52 PM
MR. TABER showed a slide labeled "OSTER" that read:
- One
- Simple
- Transparent
- Equity
- Ratio
He highlighted this as a key idea that AEnergia considers to be
within the desire of AGIA.
MR. BURKHARD explained that if one aspect of OSTER is lost, all
are. It's one ratio, applied universally for the project. One
can see how much Alaska will get and how much the producers will
get. There'll be no other taxes. It is all lumped into one
ratio, not graduated, so everyone knows the rules. It's a form
of fiscal guarantee to the producers, set from the beginning.
The process by which moneys are garnered is transparent, with no
backroom or special deals. If something is out of whack, it's
monetized back into equity. It's simply a ratio.
4:47:40 PM
MR. BURKHARD reported that the first cut, what they'd thought
might be considered fair, was 74 percent for the producers,
25 percent for the state, and 1 percent for AEnergia as the
controlling percentage during project design and construction;
then that 1 percent would probably also be used and distributed
to ensure that other entities are on the same page.
MR. BURKHARD told members the nexus isn't seen often. It's
collaborative. Collaboration is when a group of people don't
give up rights in order to work together. They find agreement
using their own methods and rules. By contrast, cooperation
requires acting in unison and giving up rights by the entities,
especially at different levels of government. The collaborative
nexus is gathering authorities into groups, with necessarily
divergent stakes, to establish common ground for the objectives.
MR. BURKHARD explained that if agreement cannot be reached at
one level, there's always a higher level of objective where it
can be. Whatever agreement is reached is then turned over to
science and engineering to implement; that's through the veil of
delegation. Designed to head off problems beforehand, it's a
proactive approach to leadership. It differs from a board of
directors because there's only objective-setting authority
within one's own stake. This process keeps everything in order.
He paraphrased a slide labeled "Advantages of a Nexus," which
had the following points:
- Transparency of processes
- "Clean hands" by all participants (comfortable one
degree of separation from other participants and
from the issues and decisions and from the
implementation)
- Reduction of litigation risk
- Effective objective (and decision) tracking with
documentation
- Progressive and adaptive project controls
- Minimal legal agreements because no authority is
given up
MR. BURKHARD added that if folks are meeting and setting
objectives, it is documented.
4:51:07 PM
MR. TABER showed a slide labeled "Economics 'Bottom Line,'"
which had the following points:
AEnergia's plan maximizes benefits to Alaskans because
it provides:
- Maximum revenue because the project is a public
service pipeline operated at-cost
- A project with no ROI so it saves Alaskans and the
producers +/- 15% of the project cost per annum
- Incentive for North Slope production development
because of the lower cost shipping
- Reduced risk because of the multiple routes to the
48-state market
- Distributed risk among partners thereby reducing
risk
- Active and participatory direction by the State of
Alaska
- Lower cost project because it removes the advantage
of running up design and construction costs
- Controlled environmental impact because it is earth
science driven not profit driven
MR. TABER elaborated, noting this is how they believe complete
AGIA applications will be evaluated. As for how AEnergia's plan
maximizes economic benefits, the companies created would operate
on a break-even basis; there'd be no added-in rates or new,
surprising tariffs. It would be transparent.
MR. TABER said since money would be simply a commodity, there'd
be no ongoing return on investment (ROI). The cost of money
would be paid back, but nobody would receive money in perpetuity
because of owning the pipe. If the ratio is 25 percent for the
state, that's 25 percent of more money than there'd usually be;
there isn't 14-15 percent added as a tariff to the pipeline
owner. It's part of the public-private partnership.
MR. TABER acknowledged that the incentive for North Slope
production development because of lower-cost shipping is a can
of worms that must be dealt with. AEnergia is saying that if
there's a pipeline and things can be shipped at cost, new
shippers become part of the ownership and the state's share
stays the same.
MR. TABER said the volume of gas would rise with new shippers.
Shippers who participated in the original deal would have the
advantage of getting depreciation on the pipeline. Those that
came later would pay the same amount to have their gas shipped
and it would be at cost, but they wouldn't get a shot at
depreciation. There are further issues, he noted.
4:54:07 PM
MR. BURKHARD pointed out that expansion should have been
addressed a couple of slides ago. He said there are J-curves on
the design. There is a lot of information that AEnergia wasn't
able to gather to do its own J-curves, but they'd considered
expansion as part of the process. There will be an optimum
amount of expansion. The plan is to calculate it with
sufficient prebuild so a certain amount of expansion happens at
the same cost.
MR. TABER added there's a range, shown by the J-curve, not one
precise amount. If they build for the higher end of the range,
there is a lot of capacity within that.
MR. BURKHARD noted that relates to further compression.
4:55:06 PM
MR. TABER returned to the current slide, highlighting reduction
of risk because of the multiple routes to the Lower 48 market.
He said although they're unsure how the Canadian portion will
go, it doesn't hurt to have another market for the gas; this
provides another option.
MR. TABER spoke about distribution of risk among partners,
saying they believe AEnergia's plan can pull the key players
together using the collaborative approach. Others can come
together in the nexus, set objectives, and build or do their
part. Also, there'd be participation and direction by the State
of Alaska, according to its stake, which would be great.
MR. TABER noted there'd be a lower project cost because of
removing the advantage of running up design and construction
costs. Citing his engineering experience, he said on large
projects often there is redesign, which somebody gets paid for.
MR. TABER said there are two ways this works better. First,
everyone is headed the same way, and the "OSTER" ratio doesn't
change for anybody, whether something stupid or smart happens.
Second, the CMM team controls who does the work. If somebody
isn't doing it right or there needs to be a redesign, a person
can be fired. There's flexibility to pick the best people for
the job, with an opportunity to negotiate prices.
4:57:56 PM
CHAIR HUGGINS welcomed Senator Joe Thomas and Representative Jay
Ramras, noting they'd been present for some time.
MR. TABER highlighted the controlled environmental impact
because this is driven by earth science. He said AEnergia has
the best, folks who've worked in Alaska before and are ready to
work this spring. Noting in Alaska a year can be lost simply by
starting too late, he said they could be on the ground quickly.
MR. TABER showed the next slide, "Benefits to State," with the
following points:
- At cost market delivery system for the gas delivers
higher net returns.
- State has a direct and integral role in setting
project objectives.
- Open and participatory process assures all
legislative intent and regulation is adhered to.
- The project becomes the "people's" project not a
corporate project generating goodwill.
- At cost market delivery system for the gas
encourages North Slope development.
MR. TABER said while the bottom line boils down to money, some
of the benefits are different from simple economics.
4:59:04 PM
MR. BURKHARD opined that an open process like this will generate
goodwill, that such a public service project will go over well
in Alaska, and that Alaska needs this pipeline. He emphasized
that this at-cost delivery system encourages North Slope
development because the threshold for making the project viable
is now a bit lower. It has higher net returns, other than the
OSTER ratio.
MR. BURKHARD characterized this as fiscal certainty from the
state because costs of operation are known and all costs are
concatenated into the ratio. Noting the producers would be
asked to underwrite the outsourcing of the financing or the
financing directly, he said if the producers choose to
participate they can receive depreciation for the project worth
billions. With a limited liability partnership (LLP),
depreciation can be assigned. That's what AEnergia is asking
the producers to do as a partner. If they participate, they'll
have a greater opportunity to set the design and construction
objectives for the project because they'll have a greater stake.
MR. BURKHARD read the following points from the next slide,
"Benefits to Alaskans":
- At cost market delivery system for the gas delivers
higher net returns into the permanent fund.
- Since the state has a direct and integral role in
setting project objectives the impacts of the
project are controlled.
- The project becomes the "people's" project not a
corporate project.
5:01:00 PM
MR. BURKHARD turned to the next slide, "Benefits to North Slope
Exploration," with the following points:
- At cost market delivery system for the gas means a
lower cost threshold for new gas project success.
- Expandability insures capacity for new projects.
- New gas owners participate in directing the delivery
system.
- A "people's" project (vs. a corporate project)
reduced the threat of public enmity.
MR. BURKHARD said it's not totally about getting the gas to
market. It's about whether the producers are locking new folks
out of this pipeline. With the OSTER ratio, if the producers
participate they'll get 74 percent. The other 26 percent
becomes undefined because obviously the state doesn't have gas.
That gets opened up to others through an open season.
5:01:39 PM
MR. TABER added that the producers haven't come forward saying
they'd like to support AEnergia on its AGIA application.
However, AEnergia suggests that would be a good play for them.
They could then participate in the AGIA process, which would
help them steer the direction this could go. The financing and
so on can be done without them, but this encourages their
participation. He said AEnergia sees no reason for the
producers to not want to be part of this. If the pipeline is
built, the economics will be fair.
MR. TABER offered conclusions. He said AEnergia's plan provides
maximum benefits to Alaskans, providing a maximum financial
return to present and future North Slope resource owners. It
allows market forces to work with commodities, which reduce the
cost. It creates an organization wherein the good of one is the
good of all, with everybody trying to accomplish the mission.
MR. TABER also said it gives the State of Alaska a commanding
role in the design and construction, since its license gives
someone the authority to make the pipeline happen. In
AEnergia's case, it taps into experience and uses folks with
expertise. And, finally, it provides a tremendous boost to the
infrastructure of Alaska as well as jobs and new skills. He
cited examples from elsewhere.
MR. TABER expressed appreciation for the openness, transparency,
and request for creativity in AGIA, but emphasized that they see
this as an opportunity to turn the ideas into reality. Somehow
this pipeline must be built. AEnergia's desire is to be part of
that process and to provide solid ideas that can be built on.
5:05:40 PM
MR. BURKHARD added that AEnergia's effort in this application
has been to turn the AGIA process into an opportunity for
Alaska.
SENATOR WAGONER noted they'd talked earlier about a previous
attempt to construct a line. Recently there was a question -
now settled - about TransCanada's ability to do the project
because it might have an $8.9 billion liability. He asked: If
AEnergia did this project, how would that affect their ability,
or would they be using any information garnered through the
previous process?
MR. BURKHARD affirmed that they'd try to tap into that old data.
He said the information is available, but probably at a price.
It was purchased with Northwest's money, and the last he'd heard
it was in the hands of Duke Energy after it got a stake in the
old consortium. He mentioned perhaps 7,000 bore holes that are
critical for this project, since otherwise they'd have to drill
them. Also, he said the State of Alaska has done quite a bit of
exploration since then, including an aerial electromagnetic
survey of the pipeline.
MR. BURKHARD added that a lot of the data would have to be
pulled together, but some AEnergia folks have already worked on
the alignment; he had some of the data in his satchel. AEnergia
would pick up where it had left off, obtain that information,
and continue. One big change would be the Geographic
Information System (GIS). A lot of that data is available for
earth sciences. The environmental data would have to be updated
quite a bit. But much of the other data hasn't changed.
5:08:21 PM
CHAIR HUGGINS asked them to share their thoughts on moving
through the maze of ideas. He listed potential projects under
consideration relating to gas and LNG.
MR. BURKHARD noted each one is separate. He asked why these
can't all be pulled together and evaluated for the maximum
benefit to Alaska. He said there will be a mix of these
processes and systems that makes the most sense, which is the
most robust and profitable for the state. That's what they
should go with.
MR. TABER added this is why AEnergia spent so much time on the
nexus, which is critical. There has to be a way to get
everybody together.
MR. BURKHARD reiterated the concept of going to the highest
level of agreement, setting the objective there, and running
with it. He said there is a default position that works, and
this is a bulletproof way to move forward, getting the earth
sciences and environmental work out of the way so the steel
design and feed can begin with good input.
CHAIR HUGGINS remarked that this is a way to get innovation into
the process. Thanking Mr. Taber and Mr. Burkhard for testifying
and applying under AGIA, he wished them luck.
There being no further business to come before the committee,
Chair Huggins adjourned the Senate Resources Standing Committee
meeting at 5:11:47 PM.
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