Legislature(2005 - 2006)

2006-05-31 House Journal

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2006-05-31                     House Journal                      Page 4103
HB 2003                                                                                           
HOUSE BILL NO. 2003 by the House Rules Committee by request of                                      
the Governor, entitled:                                                                             
     "An Act establishing the Alaska Natural Gas Pipeline Corporation                               
     to finance, own, and manage the state's interest in the Alaska                                 
     North Slope natural gas pipeline project and relating to that                                  
     corporation and to subsidiary entities of that corporation; relating                           
     to owner entities of the Alaska North Slope natural gas pipeline                               
     project, including provisions concerning Alaska North Slope                                    
     natural gas pipeline project indemnities; establishing the gas                                 
     pipeline project cash reserves fund in the corporation and                                     
     establishing the Alaska natural gas pipeline construction loan fund                            
     in the Department of Revenue; making conforming amendments;                                    
     and providing for an effective date."                                                          
was read the first time and referred to the Judiciary and Finance                                   
The following fiscal note(s) apply:                                                                 
1.  Zero, Dept. of Natural Resources                                                                
2.  Fiscal, Dept. of Revenue                                                                        

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The Governor's transmittal letter dated May 31, 2006, follows:                                      
"Dear Speaker Harris:                                                                               
Under the authority of art. III, sec. 18, of the Alaska Constitution, I am                          
transmitting a bill that would establish the Alaska Natural Gas Pipeline                            
Corporation (Alaska Pipe) to finance, own, and manage an interest in                                
the Alaska North Slope natural gas pipeline project (project) on behalf                             
of the state.                                                                                       
Under the proposed Alaska Stranded Gas Fiscal Contract developed in                                 
accordance with the Alaska Stranded Gas Development Act (SGDA)                                      
(AS 43.82), the state proposes to acquire a 20 percent equity interest in                           
the project with the remainder financed by affiliates of ExxonMobil                                 
Alaska, Incorporated, ConocoPhillips Alaska, Incorporated, and BP                                   
Exploration Alaska, Incorporated, the qualified sponsors of the                                     
project.  The project would include a number of segments, including a                               
large diameter pipeline from the Alaska North Slope to Alberta,                                     
Canada (with the possibility of an extension to the Lower 48), a gas                                
treatment plant, and various gas transmission lines.  The state and the                             
qualified sponsors or their affiliates would establish limited liability                            
companies (LLCs) or other appropriate entities to own each of the                                   
various segments of the project.  Alaska Pipe would finance, own, and                               
manage a proportionate membership interest in these owner entities.                                 
Section 1 of the bill proposes that the Legislature make various                                    
findings that describe the critical importance of this project to the                               
people of this state and to the nation, that explain why it is in the                               
state's interest to participate in the project as an equity owner, and that                         
identify the benefits that would accrue to the state from the successful                            
development of the state's enormous gas resources.  These latter                                    
benefits include increases in tax and royalty revenue, stimulation of oil                           
and gas exploration on the Alaska North Slope, and creation of jobs                                 
and opportunities for greater in-state access to natural gas.  It is hoped                          
that these benefits will provide a sound basis for long-term growth of                              
the state's economy.                                                                                
Section 2 of the bill adds a new chapter to AS 41 that establishes                                  
Alaska Pipe as a "public corporation and instrumentality of the State                               
of Alaska" within the Department of Revenue (AS 41.42).  The                                        

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corporation is structured to operate as an entity that is exempt from                               
federal income taxation.  AS 41.42 states the purposes and powers of                                
the corporation, and otherwise provides terms that govern the                                       
administration of Alaska Pipe.  Many of these provisions are similar to                             
those of Alaska's other public corporations, including the Alaska                                   
Permanent Fund Corporation and the Alaska Railroad Corporation.                                     
However, other provisions are tailored to the unique role Alaska Pipe                               
is expected to play in facilitating this truly historic project.                                    
The board of Alaska Pipe will be comprised of the commissioner of                                   
the Department of Revenue and the commissioner of the Department                                    
of Transportation and Public Facilities, as well as five public                                     
members.  AS 41.42.020(a).  The public members must have                                            
experience and recognized competence in either finance, investments,                                
business management, or the oil or gas industries.  AS 41.42.020(a).                                
Public members would serve six-year terms and may only be removed                                   
for cause.  AS 41.42.020(c); AS 41.42.045.  This combination of                                     
required expertise, extended terms, and restrictions on removal are                                 
intended to help assure that Alaska Pipe is well managed and can                                    
effectively represent the state's interest in the complex commercial                                
environment in which it will have to operate.                                                       
AS 41.42.210 provides Alaska Pipe with a broad spectrum of                                          
corporate powers that are necessary, or may be necessary, to carry out                              
its mission.  The corporation is authorized to finance and acquire an                               
ownership interest in the project in the United States or Canada, to                                
issue bonds, to borrow money, and to negotiate with the United States                               
government to secure federal loan guarantees, if appropriate.  The                                  
corporation is authorized to pledge its revenue and assets to secure the                            
payment of bonds or other obligations, and to enter into agreements                                 
necessary to establish entities, e.g., LLCs, that will own portions of the                          
AS 41.42.220 would authorize Alaska Pipe to incorporate subsidiaries                                
to carry out the purposes of AS 41.42.  These entities would likely be                              
for-profit corporations organized under the law of Alaska or of another                             
state, or under the applicable laws of Canada.  At this time, it is                                 
contemplated that at least one Canadian corporation would be                                        
established to hold Alaska Pipe's interest in a Canadian limited                                    
liability partnership that would build and own the Canadian segment                                 

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of the mainline.  If authorized by Alaska Pipe, these subsidiaries                                  
would also be able to borrow money for the project or for their                                     
operations to the same extent as any other private corporation.                                     
The state's total equity contribution to the different project LLCs is                              
estimated to be $1.0 billion at this time.  The state currently plans to                            
finance this amount with a combination of appropriations directly or                                
indirectly to Alaska Pipe, and the issuance of revenue bonds by Alaska                              
Pipe.  Article 3 of AS 41.42 contains revenue bonding authority that is                             
fairly typical of other state public corporations, e.g., the Alaska                                 
Housing Finance Corporation and the Alaska Industrial Development                                   
and Export Authority.  Alaska Pipe would have the authority to issue                                
what the market refers to as "moral obligation" revenue bonds.  AS                                  
41.42.320.  Such bonds are supported by the establishment of a capital                              
reserves account, which provides an added measure of security for the                               
debt service on the bonds.  The Alaska Pipe board would annually                                    
notify the Legislature of the status of the capital reserve account.  AS                            
41.42.320(d).  If a deficiency is reported, the Legislature may                                     
appropriate money to restore the capital reserve account but it is not                              
compelled to do so.  This "moral obligation" approach can only be                                   
invoked if the corporation finds that it will enhance the marketability                             
of the bonds.                                                                                       
AS 41.42.340 specifies that any bonds issued by the corporation are                                 
not the indebtedness of the state, but are solely payable from the                                  
revenue and assets of the corporation.  The state does pledge to the                                
owners of the bonds that the state will not limit or alter the rights and                           
powers of the corporation and that it will not impair the rights and                                
remedies of bondholders until the bonds are fully paid.  AS 41.42.350.                              
Article 4 of AS 41.42 establishes a cash reserves fund, which initially                             
will be made up of any appropriations made to Alaska Pipe by the                                    
Legislature.  The money in the fund can be used to meet capital call                                
requirements and otherwise guarantee or secure debt incurred by the                                 
corporation.  AS 42.42.400.  The article also clarifies which laws of                               
general application to state agencies apply to this new public                                      
corporation.  For example, Alaska Pipe is exempted from the State                                   
Procurement Code under AS 41.42.430, its operating budget but not                                   
its capital budget is subject to the Executive Budget Act under AS                                  
41.42.410, and it is largely exempt from laws relating to public works,                             

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fiscal procedures, and management of public funds under AS                                          
Article 5 of AS 41.42 relates to financial statements, reporting                                    
requirements, and the applicability of the Public Records Act to the                                
corporation.  The corporation is required to provide quarterly and                                  
annual financial statements to the governor and the Legislative Budget                              
and Audit Committee.  AS 41.42.500.  The corporation can be audited                                 
by the committee.                                                                                   
In addition to the financial information, the corporation is to prepare                             
an annual report on the operations of the corporation.  AS 41.42.510.                               
Although the corporation is subject to the Public Records Act, AS                                   
41.42.520 provides broad exemptions from disclosure relating to                                     
proprietary and other commercial information.  These broader                                        
exemptions from public disclosure are modeled upon similar                                          
provisions in the Alaska Stranded Gas Development Act (AS 43.82).                                   
The open meetings laws of the state do not apply to the corporation.                                
AS 41.42.530.  However, the corporation is required to conduct at                                   
least one meeting a year in public.  AS 41.42.030.                                                  
Section 6 of the bill would establish the Alaska natural gas pipeline                               
construction loan fund in the Department of Revenue.  This fund                                     
would consist of money appropriated to it by the Legislature.  The                                  
Legislature may choose to finance all or part of Alaska Pipe's equity                               
obligations by loans from this fund.  The construction loan program                                 
would be administered by the commissioner of the Department of                                      
Revenue, who is given broad discretion to fashion appropriate terms                                 
and conditions of the loans.  Specifically, depending upon the final                                
ownership structure in Canada, our Canadian advisors have indicated                                 
that there may be tax advantages in Canada if any loans to Alaska                                   
Pipe's Canadian subsidiaries are made directly by the state and not                                 
through Alaska Pipe.                                                                                
Sections 12 and 13 of the bill establish a narrow exception to the rule                             
barring indemnification agreements covering a party's own negligence                                
or misconduct in construction contracts and precludes any potential                                 
application of the common law doctrine barring enforcement of                                       
indemnification agreements that might serve to increase the risk of                                 
negligence by a party that owes a duty to the public.  This exception                               

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would allow an entity that constructs, owns, or operates the project, or                            
any portion of the project, to indemnify an operator and the members                                
of a limited liability company, including Alaska Pipe, for losses                                   
caused by those parties' own negligence or misconduct.  Similar                                     
indemnities are made available to affiliated entities that either lend                              
employees to the operator to work on the project or that provide                                    
technical consulting services to the operator to facilitate the project.                            
The primary reason for such an approach is to hold down the costs                                   
charged by the operator to the owner entity and consequently the                                    
Section 7 of the bill clarifies that officers and employees of the                                  
corporation are in the exempt service.  Sections 8 and 9 of the bill                                
specify that the board members and staff of the corporation are public                              
officials for purposes of the financial disclosure laws.  Section 10 of                             
the bill provides that board members of Alaska Pipe will be subject to                              
the Alaska Ethics Act, except that board members of Alaska Pipe's                                   
subsidiaries are not subject to the Act unless they are also members of                             
the board of Alaska Pipe.                                                                           
I urge your support of this important legislation.                                                  
                                Sincerely yours,                                                    
                                Frank H. Murkowski