SENATE BILL NO. 271 "An Act amending the purpose of the Alaska Natural Gas Development Authority to include planning, developing, constructing, managing, or operating an economically viable gas pipeline project from the North Slope of Alaska by a route that parallels the Trans Alaska Pipeline System or the Alaska Highway; authorizing evaluation of opportunities for private sector involvement in the project; amending requirements related to the Authority's preparation of a development plan; and providing for an effective date." This was the first hearing for this bill in the Senate Finance Committee. Co-Chair Wilken stated this bill, sponsored by Senator Ogan, "expands the responsibility of the Alaska Natural Gas Development Authority to include the review of the economic viability of a gas pipeline that parallels the Trans Alaska Pipeline." SENATOR SCOTT OGAN testified that he introduced this legislation after spending time last summer with Senator Dyson at various meetings in Canada. Senator Ogan stated that in his capacity as chair of the Energy Conference, he traveled through Western Canada to lobby the province of British Columbia to join the Conference. He relayed that he learned that the Trans Canada pipeline would have adequate capacity to transport natural gas were a pipeline constructed in Alaska to the Canadian border. AT EASE 9:07 AM / 9:07 AM Senator Ogan opined that Alaska "must have all possible tools in the toolbox" in its efforts to develop natural gas resources. He reminded of ongoing negotiations between the Murkowski Administration and Mid America Group. He was unsure of the status of these negotiations, but understood an agreement would be reached for stranded gas development. Senator Ogan indicated this legislation would allow consideration of constructing a tax-free natural gas pipeline in Alaska to the Canadian border. He preferred that the private sector undertake this project, but in the event it does not, he said this legislation would provide an opportunity for the State to undertake the project. Senator Ogan asserted that a primary focus of the Energy Council is determining how the US would deal with the upcoming energy shortage. He commented on the inability to obtain a permit to construct a nuclear power site and the near impossibility to obtain a permit to operate a coal burning facility. He reported that the supply of natural gas available in the Lower 48 is unable to meet demand and subsequently the costs have increased. As a result of these factors, he expressed this is the appropriate time for Alaska to pursue development of natural gas resources for distribution to other states. Senator Ogan warned that if Alaska does not take advantage of this opportunity immediately, entities from other countries would. He cited that by the year 2020, the US would import between 11 and 24 percent of its liquefied natural gas from other countries. He noted this estimate includes an assumed 4.5 billion cubic feet of natural gas produced in Alaska. He told of "offshore" facilities under construction, some of which are undertaken by producers also operating in Alaska. Senator Ogan spoke of producers' preference to ship natural gas from tidewaters because the expense of approximately $2.5 billion is less than the proposed $7 or $8 billion project in Alaska. However, he did not deem this to threat the ability to construct a natural gas pipeline in Alaska. Senator Ogan informed that a shared effort is the only feasible way to finance a natural gas pipeline in Alaska. Senator Ogan pointed out this bill would extend the termination date of the Alaska Natural Gas Development Authority until January 1, 2005. He also noted the addition of subsection (12) to the uncodified law enacted in Section 5(a), 2002 General Election Ballot Measure 3, contained in Section 4 of the bill to read as follows. (12) an evaluation of the opportunities for private sector involvement in the planning, development, construction, management, and operation of the gas transmission pipeline project. Senator Ogan had understood the omission of this language in the original ballot initiative was an oversight. He commented to his "comfort" in adding this language. He asserted, "Usually government is good at fixing things until they're broke." He asserted construction of a pipeline is not an appropriate role for government and that private industry should finance such a project. However, he remarked that involvement of government could garner better financial terms for private entities. He surmised that Trans Canada, Mid America Group, or a producer could take advantage of these financing opportunities. Co-Chair Green asked if the extension of the termination date to January 1, 2005 would be adequate. She understood concerns regarding time constraints. Senator Ogan agreed this is an "aggressive date". He noted current law provides that the Authority is terminated one year following the first meeting of the Board of Directors, which occurred in June 2003. However, he stressed the immediate need to secure a commitment to construct a pipeline. He again warned that if not done in Alaska, natural gas supplies for the U.S. would come from elsewhere. Co-Chair Green requested a map showing the current proposed route of a natural gas pipeline and how a pipeline route, as proposed in this legislation would differ. Senator Ogan did not have maps with him, but described the proposed route paralleling the Alaska-Canada Highway from Delta to the Canadian border. Co-Chair Green requested maps be provided to her. Senator Olson asked if the proposed pipeline to the Canadian border would be tax-free and asked for clarification. Senator Ogan affirmed. He explained that if the government owned the pipeline, through, the Alaska Natural Gas Development Authority, as a quasi-public private corporation, the pipeline would be tax exempt. He compared the Authority to the Alaska Rail Road Corporation, in that its assets are not taxable. He qualified that an agreement with affected communities for payment in lieu of taxes would be necessary. He noted such arrangements are expected for the current proposed pipeline route. He surmised the private sector would want to take advantage of this tax-exempt status. He furthered that the State would receive a higher return because royalties are calculated after tariffs and taxes are deducted from the transportation costs. He remarked that any efforts to reduce transportation costs would result in higher profit and earnings for the State. Senator Hoffman asked about the need to acquire right of way access to lands in which the pipeline would traverse. Senator Ogan replied that a significant portion of the land involved is Tetlin-owned and that possibly other lands owned by Doyon Limited located near Tok could be affected. He noted the need to acquire rights of way, but pointed out the myriad of landowners in other areas of the state. Co-Chair Wilken clarified that Senator Ogan's reference to natural gas supplied from "offshore" sources does not relate to operations in the Gulf of Mexico for example, but rather from countries other than the United States. Senator Ogan affirmed. Co-Chair Wilken referenced a report "Alaska Natural Gas Development Authority Benefits to Alaskans" issued in September 2003 [copy not provided]. He asked how the information in this report differs from the report required of the Alaska Natural Gas Development Authority by the ballot initiative of 2002 and referenced in Section 4 of this bill. Senator Ogan did not know. HAROLD HEINZE, Chief Executive Officer, Alaska Natural Gas Development Authority, testified via teleconference from Anchorage that the Authority's motives as a public corporation are to maximize benefits to Alaska. Therefore, he stated, the Authority is "willing to do or not do lots of things." He explained the Authority has "no particular interest" in participating in the gas development business unless "very identifiable benefits" to Alaskans are involved. He exampled that of all the rhetoric pertaining to development and transportation of Alaskan natural gas pipeline, the Authority is the only party addressing the issue of delivering gas to the Cook Inlet area. Regarding specific projects, he relayed that the Authority welcomes this legislation because it allows the Authority to contribute to the "State's overall team effort in the broadest sense and without any real restriction." He cautioned, however, that this legislation should not be construed as a directive to the Authority to pursue certain actions. He spoke of the Authority's "unique financing abilities" regarding taxes, debt, debt structure, interest rates and other variables that could potentially lower the financing costs of any project. He surmised this is an appropriate role for the Authority, if it would assist in progressing the project. Mr. Heinze stressed that the Authority never considered using State funds to finance any natural gas pipeline project and rather that funding should be from "the normal money sources that are available to the private sector." He explained that State involvement allows greater flexibility and lower interest rates for a private entity funding the project. He remarked that if the Authority does not "test" itself "against the normal market, we think the State could make a very bad mistake." Mr. Heinze reminded that the provisions of Ballot Measure 3, creating the Authority specifically provide for a natural gas pipeline from Prudhoe Bay to Valdez in the Prince William Sound with a spur line from Glennallen into the Cook Inlet area. He noted this bill broadens that perspective to allow the Authority to consider a pipeline route following the Alcan Highway to the Canadian border. He stressed the value of having this option to allow the Authority to choose a route in the best interest of Alaska. Mr. Heinze informed that a route following the Alyeska Trans Alaska Pipeline from Prudhoe Bay to Valdez has rights of way already acquired though the pipeline corridor. He noted that the Yukon Pacific Corporation has acquired right of ways from private landowners for this route, which the Authority would acquire for a natural gas pipeline. He also noted that under imminent domain laws, private-owned lands could be acquired at fair market value. He furthered that the portion of the route between Glennallen and the Cook Inlet is largely located on State-owned land and as an agency of State government the Authority could utilize these lands. Mr. Heinze compared this to the proposed route along the Alaska Canadian Highway, which would be located on a significant portion of private-owned land and State-owned land. He understood that no party has obtained rights of way for this route. He considered the right of way issues in Alaska relatively minor in comparison to lands in Canada located along the proposed route. He stated the Trans Canada organization would have to address First Nations and other landowner issues. Mr. Heinze spoke to the proposed extension of the termination date of the Authority. He noted the first meeting of the Board of Directors was held on June 16, 2003 and according to current statute, the Authority would expire one year from that date on June 13, 2004. He agreed that meeting this deadline would be challenging, but assured it could be accomplished "within a couple of months". He did not oppose an extension to the end of the year 2004, but informed that the Authority intends to complete its work by the end of the 2004 summer. Mr. Heinze reported that the Authority has not adopted a business structure and must first investigate whether it should be classified as a nonprofit organization, a corporation "with a very low profit objective, a utility, or another status. He remarked upon the "tremendous opportunity" the Authority had to become exempt from federal income tax, to issue tax-exempt bonds, and achieve favorable debt to equity ratios and low interest rates. He stressed the importance of all issues combined. He expressed the Authority's intent to hire a consulting firm to review and provide advice as to how to provide the lowest cost of service. Mr. Heinze addressed the issue of natural gas imported into the US. He asserted "major forces at work around world working very dynamically, looking at the United States as a place to move their gas to." He stressed the importance of reaching a decision regarding Alaska natural gas expediently. He agreed with Senator Ogan that if efforts to develop and transport the resource from Alaska were delayed, Alaska would be "left out of the game." Mr. Heinze summarized that the Authority operates in the best interest of Alaska, and would benefit from the ability to consider all options. Co-Chair Wilken again referenced the report " Alaska Natural Gas Development Authority Benefits to Alaskans" and restated his question about comparison of this report to the report required in Section 4 of this bill. Mr. Heinze replied the existing report is a compilation of a "fairly large number " of Alaska consulting firms and reflects an attempt to identify actions relevant for advancing the project. He informed that since the report was issued, the Authority has received only minimal funding and the recommendations of the report would require approximately $2.5 million to implement. Therefore, he informed, most of the recommended efforts have not been undertaken. He noted that a benefit analysis that provides a testing model should be finalized by the end of the month. He predicted that all other aspects specified in the development plan, including a revenue sharing plan with municipal governments, would be addressed by the upcoming summer. He assured the Authority has a "fairly good understanding" of possible projects and costs. He summarized the report issued in September represents efforts the Authority would have preferred be done, although funding and time have been inadequate to undertaken them all. Senator Olson asked the impact of this legislation on the existing tax structures of the North Slope Borough, the Fairbanks North Star Borough and other local governments. Senator Ogan responded that if the Authority constructed a pipeline were constructed from Prudhoe Bay to the Canadian border, the pipeline would be tax-free. He noted the same status was envisioned for a Prudhoe Bay to Valdez route and would require negotiation to address local government concerns. He listed examples of increased costs to local governments with the location of a pipeline in the community from: school enrollment, wear and tear on local roadways and emergency services. Mr. Heinze remarked that in recognition of the increased costs, the Authority is directed by the provisions of Ballot Measure 3, as shown in Section 4 of the bill, to include a revenue sharing plan with municipal governments in the development plan. He spoke of intentions to recognize that despite exemption from taxation, the Authority would be "morally obligated" to identify ways for local governments to address the increased expenses and also to share in the revenue generated. Senator Olson surmised that this legislation has not been "accepted with enthusiasm" by the North Slope Borough or the Fairbanks North Star Borough. Mr. Heinze replied that this bill does nothing to change the Authority's tax status established in Ballot Measure 3. He qualified that this bill "raises eyebrows" to this realization. He emphasized that he has been forthright in expressing to local government a willingness to identify ways to offset the impacts a pipeline would have on the communities. Senator Ogan stressed that the State has an "overwhelming" interest in having an independent entity constructing the pipeline because both producer and the State would share equal interest in maintaining low tariffs. He remarked that a natural gas pipeline would also benefit the State because it would encourage development in other areas of the North Slope, such as the Foothills region. He elaborated on the benefits to the State and to the North Star Borough in the development of the Foothills resources. He understood that Senator Olson has concerns with this legislation, but Senator Ogan argued that revenues from the development of the Foothills region would outweigh the tax exemption of the pipeline. Senator Hoffman surmised this legislation should therefore include a requirement of the Authority to include a plan for payment in lieu of taxes for local governments. Co-Chair Wilken asked if subsection 5(a)(5) of Ballot Measure 3, contained in Section 4 of the bill would suffice. This language stipulates that the Authority must include a plan for revenue sharing it its development plan. Senator Hoffman opined that this language is not specific enough to assure that payment in lieu of taxes would be addressed. Senator Ogan was unsure. He stated that the impact on local governments must be considered and deferred to the Senate Finance Committee as the appropriate entity to address the matter. Mr. Heinze line 9, recalled that the ballot initiative was drafted to model the Alaska Gasline Port Authority already in existence. He defined the Alaska Gasline Port Authority as a consortium of three local governments formed with the intent to export natural gas from the North Slope, using a tax-exempt method and a revenue sharing plan. Senator Bunde pointed out the stipulation that the Alaska Natural Gas Development Authority "must include" a revenue sharing plan with municipal governments in its development plan. He surmised this affords flexibility. Co-Chair Green offered a motion to report the bill from Committee with individual recommendations and previous fiscal note. There was no objection and SB 271 MOVED from Committee with zero fiscal note #1 from the Department of Revenue. Co-Chair Wilken directed attention to information distributed to members from the Department of Labor and Workforce Development responding to issues that were raised during hearings the previous week. Senator Bunde commented that the largest portion of Alaska's population is between the ages of 35 and 50, which he characterized as the "working ages". He furthered that given no changes to current trends the smallest portion of Alaska's population would be aged 30 to 50 by the year 2015. He opined this should be understood when considering efforts to create jobs and implement an income tax. He pointed out that the smallest population age group would be required to contribute the most.