Legislature(2011 - 2012)HOUSE FINANCE 519
04/04/2011 01:30 PM House FINANCE
| Audio | Topic |
|---|---|
| Start | |
| HB142 | |
| HB121 | |
| HB142 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| *+ | HB 142 | TELECONFERENCED | |
| + | HB 121 | TELECONFERENCED | |
| + | TELECONFERENCED |
HOUSE BILL NO. 142
"An Act relating to the creation of a rebuttable
presumption that the project licensed under the Alaska
Gasline Inducement Act is uneconomic because of
insufficient firm transportation commitments during
the first open season."
1:34:09 PM
TONY PALMER, VICE PRESIDENT, MAJOR PROJECTS DEVELOPMENT,
TRANSCANADA, discussed that TransCanada did not support HB
142 and that he would provide a status report on
TransCanada's project. He detailed that four years earlier
the legislature had passed the Alaska Gasline Inducement
Act (AGIA). In the fall of 2007 the legislature had issued
a Request for Proposal (RFP) for companies to apply for a
license to advance the pipeline project in Alaska.
TransCanada had been selected to receive the license in the
fall of 2008. He explained that TransCanada had provided a
work plan and project schedule as required. The documents
had outlined TransCanada's obligations, the commitments the
company would take on, and certain benefits provided to the
company under the license. He relayed that questions had
arisen regarding what information TransCanada had provided
to the state. He explained that the company had provided a
significant amount of information on a regular basis. The
company had biweekly calls with the administration,
monitors conducted onsite progress reviews with the project
team on a monthly basis, and the administration published
detailed semi-annual progress reports that were available
to the public. He emphasized that a substantial amount of
information about the project had been made public
throughout the entire process.
Representative Doogan wondered whether "biweekly" meant
twice a week or every two weeks. Mr. Palmer replied that
the calls occurred every two weeks.
1:40:04 PM
Mr. Palmer addressed a PowerPoint presentation titled
"Alaska Pipeline Project" [APP]. He read from Page 3 titled
"Alaska Gasline Inducement Act":
The purpose of the chapter [AS 43.90.010] is to
encourage expedited construction of a natural gas
pipeline that:
· Facilitates commercialization of North Slope gas
resources in the state
· Promotes exploration and development of oil and
gas resources on the North Slope in the state
· Maximizes benefits to the people of the state
from the development of oil and gas resources in
the state
· Encourages oil and gas lessees and other persons
to commit to ship natural gas from the North
Slope to a gas pipeline system for transportation
to markets in this state or elsewhere
Mr. Palmer discussed that AGIA required pre-construction
work to proceed while commercial agreements were negotiated
(Page 4). He elaborated that despite the company's open
season the prior summer it would continue to advance
towards filing with FERC [Federal Energy Regulatory
Commission] in the fall of 2012. The timeline meant that
ongoing work was required prior to the conclusion of the
open season. The alternative would have been to pace the
construction in proportion to commercial progress, which
would have meant a delay in the work and the schedule
resulting in later revenues for the state; therefore,
TransCanada had filed an aggressive schedule and had met
the statutory target dates and was on track to meet its
FERC application date in the fall of 2012. The company had
contemplated having firm transportation commitments,
project financing, and regulatory approval for the project
in 2016. He addressed the "AGIA Commitments" that the
company had undertaken (Page 5). He explained that
ExxonMobil, the company's partner on the project, had a
"distinct firewall" between the partnership with
TransCanada, the advancement of the pipeline project, and
its producer entity that would be the potential shipper on
the project. He discussed that TransCanada had effective
communication with the state AGIA team and had taken on
opportunities for in-state gas access. The company was
committed to indicating a number of "off-take" points on
the project and had conducted an in-state gas study on the
potential demand of gas in the state. TransCanada had
received multiple bids when it held the first open season
in the history of the North Slope.
1:44:56 PM
Mr. Palmer relayed that in recognition that world gas
markets were becoming more competitive, TransCanada had
improved its offer to customers by $500 million per year
for every year that the project was in service relative to
the approved terms of the license. The company had lowered
its rate of return and had deferred the recovery of certain
components of its depreciation in order to make the project
more competitive. TransCanada was working towards an
October 2012 filing and had advanced initiatives to
maximize the use of Alaskan businesses and workers. He
communicated that to date the state had met its commitments
to TransCanada and ExxonMobil. TransCanada believed that
because of AGIA that an Alaskan gas pipeline project had
advanced further than ever before and was positioned for
ongoing progress.
Representative Gara wondered whether TransCanada had made a
reduction to the profit margin that it could make on the
transportation of natural gas set by FERC.
Mr. Palmer replied that the company had made a commitment
to the State of Alaska that included a variable rate of
return that would have been a 14 percent rate of return. He
communicated that TransCanada had lowered the rate of
return to 12 percent in its open season application, which
required FERC approval.
Representative Gara thought that a reduced rate of return
would decrease the tariff amount and would ultimately
reduce the price of gas to consumers. Mr. Palmer responded
that it would reduce tariffs and would improve economics
for the customers.
1:48:02 PM
Vice-chair Fairclough wondered whether there had been more
than two bids received in the first open season on the
North Slope. Mr. Palmer responded in the affirmative.
Mr. Palmer relayed that TransCanada's license application
had identified 2014 as the end of the project development
phase, which provided up to six years for the acquisition
of firm transportation commitments (Page 6). He noted that
until a committee meeting earlier in the day that HB 142
had required TransCanada to have firm commitments by the
upcoming summer. He detailed that the decision to proceed
and final investment decision regarding the project was
expected to be made at the end of the development phase. At
that time the company would know whether it had regulatory
approval, firm transportation commitments, and financing,
all of which were required for a successful project. The
project's scope, magnitude, and financial risk required
multiple years to complete the work that was necessary for
shippers to make the decision to commit $100 billion in
transportation commitments. He stressed that the
legislature's approval of the license had ratified the
timeline. He acknowledged that TransCanada had projects
with shorter schedules; however, none of the other projects
were as complex or challenging as the one at hand.
Mr. Palmer read from Page 7 titled: "HB 142 Appears to
Violate AGIA License Agreement":
APP is opposed to HB 142:
· Effectively amends key provisions of AGIA License
Agreement
· Raises uncertainty of the state's support for
AGIA at a critical time
· Undercuts efforts to achieve alignment of all
parties necessary for successful project
HB 142 unilaterally would change the contract between
the state and the AGIA Licensee:
· AGIA presumes that the project is economic unless
the Licensee agrees or arbitrators rule that it
is not
o HB 142 reverses that key presumption
· AGIA mandates a viable work plan and timeline for
developing the project, but does not mandate a
specific deadline for securing firm
transportation commitments
o HB 142 imposes an arbitrary and non-viable
work plan and timeline by establishing a
specific deadline for firm transportation
commitments
Mr. Palmer explained that the company was in negotiation
with potential customers and that the bill presented
uncertainty that could harm the negotiations. He had heard
earlier in the day that the firm transportation commitment
requirement would be changed to require precedent
agreements by the upcoming summer. The bill also required
the company to have financing for the project; however, he
did not believe that anyone would seek financing for the
project three years in advance and that it was not possible
to secure financing without firm transportation agreements.
1:52:56 PM
Mr. Palmer continued to read reasons that TransCanada was
opposed to the legislation (Page 7):
· AGIA contains a defined process for joint
State/Licensee determination of whether the Project
is economic
o HB 142 alters that process by directing
commissioners to take action that is reserved
to their discretion under AGIA
Representative Hawker disagreed with some of the remarks
made by Mr. Palmer. He asked Mr. Palmer to point to a
specific area in the bill in which commissioners were
required to take action that was reserved to them under
AGIA.
Mr. Palmer replied that HB 142 directed the commissioners
to inform the legislature before August 1 whether they had
been told by July 15, 2011 if transportation commitments
had been disclosed and whether there were sufficient firm
transportation agreements to support the development of the
project. He relayed that the provision was not currently in
the AGIA statute.
Representative Hawker wondered how the progress report that
commissioners were to provide to the legislature would
require commissioners to take action reserved to their
discretion under AGIA. He wondered how the provision
violated AGIA. Mr. Palmer replied that the bill stated that
the project would be presumed uneconomic if TransCanada had
not provided evidence of firm transportation commitments by
July 15.
Representative Hawker wondered where the language mandated
the administration to execute actions reserved to its
discretion. He stressed that the rebuttable presumption
created a hypothetical that the legislature wanted a
response from the administration.
Mr. Palmer answered that to have the State of Alaska make a
statement to the public that the project was uneconomic
because TransCanada did not have firm transportation
commitments three years prior to the beginning of the
project was in contravention with the AGIA statute. He
cited language in the bill that "nothing in this section
precludes an agreement between the commissioners and the
licensee that the project is uneconomic," and explained
that it was never contemplated that the project was
uneconomic unless a "high-bar test" was applied per the
statute. He explained that the high-bar test was meant to
hold TransCanada and the state to their obligations. He
emphasized that that two and a half years after the company
received the license that there would be a rebuttable
presumption that the project was uneconomic due to a lack
of transportation commitments.
Representative Hawker wondered where a duty was imposed on
TransCanada in the legislation to provide firm
transportation commitments or a precedent agreement as was
written on Page 7 of the presentation. He reiterated that
the bill only established a dialogue between the
legislature and the administration if the commitments had
not occurred by July 15. He communicated that that there
was nothing in the legislation that violated the terms of
AGIA.
1:58:54 PM
Mr. Palmer responded that TransCanada had met its
obligation to continue to advance the project under AGIA.
He relayed that the company had never contemplated that the
state would propose legislation that would deem the project
uneconomic if firm transportation commitments had not been
made by the summer of 2011. He stated that it had always
been at the discretion of the commissioners and TransCanada
to take the approach if either party believed the project
was uneconomic. He believed that the bill appeared to
provide guidance to commissioners that had never been
discussed. He stated that if HB 142 passed and the
legislature had a sense that the project was presumed
uneconomic that it would be incumbent on the commissioners
to consider the presumption. The commissioners would be
required to walk through the terms of AGIA. He opined that
any party interested in entering a contract with the
legislature would look at the legislation as potentially
impacting its future.
Representative Hawker wondered whether Mr. Palmer disagreed
with legislative legal counsel that had testified to the
opposite earlier in the day. He thought that TransCanada
was offering an opinion and not a fact.
Mr. Palmer responded that he was not present to provide the
company's legal opinion. He was present to discuss what he
believed the bill would do from the perspective of a
businessman. TransCanada would examine the law to determine
its legal view if the legislation passed.
2:03:11 PM
Representative Gara asked whether the state would
jeopardize its chance of finding another partner on the
pipeline project if it breached the current contract with
TransCanada. He discussed that the project would be the
largest pipeline project in North American history. He
believed that the new date of July 15 for firm
transportation commitments changed the presumption that did
not exist in the original law and breached the contract the
state had signed. He recalled that legal counsel Don
Bullock had initially said it was not a breach, but he had
later said that it would be something for the courts to
decide.
Mr. Palmer responded that any business person would look to
the State of Alaska as the counter party to determine
whether it had honored its contracts. He believed that any
company that conducted due diligence on a counterparty
would examine the certainty of the counterparty and would
see whether that counterparty had changed the rules after
signing a contract in the past. It was something that the
company took very seriously and they were happy that the
state had taken the component very seriously up to that
point as well. He assured the committee that a change in
the rules made by the state would impact all future gasline
projects that involved working with a third party.
Representative Gara wondered whether the current timeline
for the project and firm commitments was normal for a
project of its size. He was concerned that the bill
jeopardized current and future gasline projects.
Mr. Palmer replied that it was not in a company's best
interest to have a longer than necessary development period
and the company had carefully examined the timeline when it
had submitted its application for the project. TransCanada
believed that the 2014 timeline was realistic and in
alignment with obtaining regulatory approval and financing
for the project. The project was extremely complex, large,
and challenging and the company had pursued it for more
than thirty years as had the state. TransCanada would meet
its obligations, but the success of the project relied on
the advancement of components from other involved parties.
2:09:31 PM
Representative Wilson wondered whether TransCanada had ever
changed the scope of a project based on the occurrence of
new developments. She did not think that the conversation
would have occurred if there an abundance of gas had not
been discovered in the Lower 48. Mr. Palmer replied that
the company had changed the scope of its projects based on
marketplace events.
Representative Wilson wondered whether the legislature
should not have concern about how the discovery of a
significant amount of gas in the Lower 48 may impact the
economic viability of the current project.
Mr. Palmer answered that TransCanada and its potential
customers regularly examined the decision to continue
forward with a project and it had the right to stop the
project if it determined the project was uneconomic. The
company was aware of what had occurred in the shale market
and of the change in some gas price forecasts. Assuming
TransCanada's transportation costs were accurate, the EIA
[U.S. Energy Information Administration] had forecasted
potential returns of $2.00 in the first five years of
service beginning in 2021. He explained that some forecasts
were less and some were over $3.00. He stated that it was
up to the customers to determine whether prices were
adequate. He had followed gas price forecasting for more
than 25 years and there was a very strong correlation
between the price forecast and the current price of gas.
One important factor that producers and customers
considered prior to committing gas to a project was what
they believed the gas price would be. An important factor
that did not involve TransCanada was related to how much of
the price would go to the producers account and how much
would go to the state's account. He believed that the state
and the producers were aware that the issue needed
resolution. Factors that needed resolution and that
potential customers examined when determining whether to
commit their gas were gas price, fiscal, Pt. Thompson
ownership, and the project financing terms. The federal
government had put forward legislation that proposed loan
guarantees for the project; however, there were currently
no interest rate or repayment plan regulations for the
guarantee. The company remained hopeful that the state and
producers would resolve the issues, the federal government
would establish regulations and improve a federal loan
guarantee, and that customers would believe that gas prices
would be high enough to make the project a success. He
emphasized that AGIA stipulated that the project was
economic and that TransCanada also believed in the
project's economic viability.
2:16:04 PM
Representative Wilson wondered whether it was possible that
the current issues may not be resolved and that the same
discussion would still be taking place in four to five
years. She was concerned that Alaska was the number one
group that needed the gas and while the state was hoping to
sell gas to the Lower 48 its residents were leaving because
of their lack of access to gas. She clarified her
understanding that TransCanada had not done anything wrong,
but that the market place had changed and the Lower 48 may
not have been as dependent on Alaska for gas.
Mr. Palmer replied it was possible that in two or three
years the project would not succeed. He emphasized that the
project would not succeed if it was stopped presently. He
elaborated that unfortunately the future would always be
uncertain until there were customers that had made firm
transportation commitments, regulatory approval had been
obtained, and financing was secured. He explained that the
factors were always required for a project to succeed.
Representative Wilson remarked that she was hopeful that
the Interior would always have access to diesel even if a
large gasline was not successful. Mr. Palmer believed that
any project, including an in-state gasline would face some
of the same challenges that a big gasline had. He listed
necessary factors for an instate gasline: fiscal resolution
in order for producers to commit their gas; the third party
hired to construct the line would need to have an
arrangement with the state and to know that the state would
to stick to the deal on a long-term basis; a 70 percent
debt loan would require proof of instate customers in order
to obtain financing; and, the state would need to convince
the equity sponsors to commit their equity to the project.
Vice-chair Fairclough asked whether the company was still
on schedule for the construction of the project in 2020.
Mr. Palmer replied in the affirmative. He reiterated that
there were a number of factors that needed to take place in
order to achieve the current timeline.
Vice-chair Fairclough wondered whether precedent agreements
had been in place for the project with the FERC agreement.
Mr. Palmer asked Vice-chair Fairclough to clarify the
question.
Vice-chair Fairclough asked why precedent agreements had
not been reached on the pipeline in the FERC agreement.
Mr. Palmer responded that when TransCanada had made its
open season filing it had specified that the open season
would be held from the end of April through the end of
July. The company then indicated that its goal was to
complete the negotiation of the project conditions by the
end of 2010. He relayed that TransCanada had not met the
goal, but that it had not been a statutory obligation under
AGIA. The company had not met the target date for a number
of reasons including: customers had requested changes to
the commercial arrangements, which the company was working
on; and, customers had stipulated that there must be
advancements in particular areas such as fiscal
arrangements and Pt. Thompson ownership.
2:22:44 PM
Vice-chair Fairclough wondered whether the discussion
regarding changes in Alaska's fiscal policy helped or hurt
AGIA in firming up transportation commitments. She referred
to Mr. Palmer's statement that one of the customers'
requested changes could be related to Pt. Thompson. She
shared that the House had passed legislation to reduce oil
taxation policy. Mr. Palmer replied that customers on the
gas side of the business were looking to know what the gas
taxes would be for the gas they committed to the project.
He relayed that the company was not privy to additional
detail on the subject.
Representative Hawker wondered whether the company's
responsibilities or the administration's responsibilities
under AGIA were altered by the legislation. He communicated
that he appreciated Mr. Palmer's willingness to discuss
project economics; however, the bill was about the
administration's accountability to the legislature. Mr.
Palmer responded that from his perspective as a businessman
that the passage of the bill would amend provisions of the
license, would raise uncertainty of the state's support for
AGIA at a critical time, and would undercut efforts to
achieve the alignment of all parties that was necessary for
a successful project. He noted that he was not qualified to
provide a legal opinion.
Representative Hawker wondered whether the bill legally
altered the relationship between the state and the
TransCanada/ExxonMobil project. He wondered whether the
committee could get a legal opinion from the companies. Mr.
Palmer responded that TransCanada was not in a position to
provide their legal opinion on a piece of legislation. The
company would deal with facts and not a hypothetical
circumstance.
Representative Hawker believed that the bill was a fact and
that it was important to hear from TransCanada on whether
it believed its legal responsibilities would be altered as
a result of the bill.
Vice-chair Fairclough noted that a press release had been
issued by TransCanada on the subject.
2:27:50 PM
Mr. Palmer read from Page 8 titled "AGIA Reimbursement
Process":
AGIA reimbursement process working as intended and
funding qualified activities
Qualified activities:
· Pursuing firm transportation commitments
· Securing financing
· Obtaining a Certificate of Public Convenience and
Necessity from FERC
· Satisfying a requirement of an agency with
jurisdiction over the project
All expenditures submitted for reimbursement subject
to a due diligence review and audit
State reimbursement:
· As of 3Q of 2010: $50M reimbursed (additional
assessments pending)
· Forecasted reimbursement FY 2011: $125M
· Governor's proposed budget FY 2012: $160M
AGIA funding supporting real work to advance an Alaska
natural gas pipeline; TC [TransCanada] and EM
[ExxonMobil] committing their own funds in combination
with the state
Mr. Palmer clarified that the actual state reimbursement
that the company had received as of the end of March 2011
was $50 million and not the $136 million that had been
cited earlier in the day. He stressed that TransCanada and
ExxonMobil had spent $240 million on the project to date.
Vice-chair Fairclough wondered how much of TransCanada's
commitment was available for reimbursement under the terms.
Mr. Palmer responded that TransCanada had received $50
million and should receive a total of $100 million for
money incurred through the end of March 2011.
Vice-chair Fairclough asked whether the $100 million would
be paid towards the money that the sponsors had spent. Mr.
Palmer replied that after the sponsors received the total
payment of $100 million that they would have $140 million
remaining out of pocket.
Mr. Palmer read Page 9 titled "Path to Success":
Project exceptionally large, complex and important
2010 very productive for APP:
· Conducted first open season in North Slope
history
· Making good progress on multiple fronts
· Diligently conducting the work needed to advance
the project
· AGIA working as intended and commitments being
met
To succeed we must:
· Attract customers
· Obtain regulatory approvals
· Achieve project financing
· Secure and maintain the support and active
engagement of all key parties
Representative Hawker referred to a TransCanada press
release and the Annual U.S. Congressional Report on the
gasline progress that had stated that bids for significant
volumes of gas had been received. He wondered whether the
bids had contained sufficient volumes of gas that would
enable the company to advance the project. Mr. Palmer
replied that TransCanada was bound by confidentiality
agreements and could not divulge the actual volume. He
added that the company was still working to resolve the
conditions and that it was important for other parties to
do the same to have success on the project.
Representative Hawker asked whether the legislature and the
State of Alaska should not be concerned about whether
TransCanada had received sufficient commitments in its
initial open season. Mr. Palmer understood that Alaskans
and other bidders all wanted to know what the volumes were;
however, that was not the practice in the pipeline
industry. The company could not reveal the number of
commitments until they were secured in precedent
agreements. He noted that the confidentiality clause was
laid out in FERC rules.
Representative Hawker clarified that he was interested in
the magnitude of commitments and whether TransCanada had
received sufficient commitments to declare a successful
open season. He wondered whether TransCanada still believed
that the project had the potential to be as extremely
profitable as the legislature had been told three years
earlier during AGIA discussions. Mr. Palmer did not believe
that the cited testimony was his own.
Representative Hawker believed the testimony had been from
the administration. He wondered whether Mr. Palmer thought
that "the administration's assertion three years ago that
this project was wildly profitable under all
circumstances," was an accurate statement.
Mr. Palmer replied that he did not have a comment about the
administration's testimony. He relayed that TransCanada had
been careful in its testimony three years earlier and had
utilized the EIA gas price forecast as it had been
directed. He relayed that different parties would have
different responses when asked if the project was "wildly"
profitable or economic. Factors included how a party viewed
gas prices going forward, the arrangement with the State of
Alaska regarding gas taxes, the availability of Pt.
Thompson gas for the project, and the resolution of issues
between the pipeline company and potential customers.
2:38:26 PM
Mr. Palmer continued to answer a question from
Representative Hawker. He explained that the project would
be economic for a pipeline company if it could attract
credit worthy customers that were in a position to commit
their gas. He added that customers would decide separately
whether the project was economic for them.
Representative Hawker explained that the legislation sought
to ask the administration the questions that had been
illustrated by Mr. Palmer and to hold it accountable for
statements that it had made in the past.
Representative Doogan reminded the committee that the topic
had been voted on in the past and he encouraged new members
to go back and study the record.
Mr. Palmer continued on Page 10 titled "Progress: Use of
Alaska Resources," and explained that one of the
requirements under AGIA was that TransCanada use Alaska
resources. He relayed that the sponsors had completed the
milestone of one million work hours with no incidents.
There were approximately 115 TransCanada and ExxonMobil
employees working on the project across the continent. The
prior summer there had been 400 workers on the field and as
of the end of the first quarter 2011 a total of 40
companies and 470 Alaskans had worked on the project. He
highlighted that the sponsors continued to use Alaska
businesses and workers to advance the development of the
project.
2:42:14 PM
Mr. Palmer discussed Page 11 titled "Progress: Training
Alaskan Workers," that outlined the company's commitment to
the state to work on training Alaskans to work on the
project:
Working with the State of Alaska Department of Labor
and Workforce Development in their efforts to develop
and implement training programs for Alaskan workers:
· APP is active member of the Alaska Gas Pipeline
Training Plan Committee
o Participating with state, contractors, labor
organizations, University of Alaska and
others
o Implementing Alaska Gasline Strategic
Training Plan
· Initial focus: Identifying future APP workforce
needs and skills requirements
· Leading to development and implementation of
training plans
· APP donated large diameter pipe to Fairbanks
pipeline training school to aid in pipe handling
and welding training
Accomplishment: Taking the necessary steps to prepare
the Alaskan workforce for pipeline construction and
operations jobs
Mr. Palmer moved to Page 12 titled "Progress: Attracting
Customers":
APP's open season concluded on July 30, 2010
· Received conditional bids from major industry
players and other parties
· Conditions included proposed changes to APP's
commercial terms, as well as issues requiring
resolution between Shippers/Producers and the
State
APP has progressed negotiations with potential
Shippers following the close of the Open Season
· Good progress in addressing proposed amendments
to commercial terms
· APP continuing engagement with potential shippers
Mr. Palmer continued on Page 13 ("Progress: Attracting
Customers"):
The resolution of State and Shipper/Producer issues is
fundamental to progress APP and to underpin the
shippers' substantial investment
· Would be the largest privately financed
construction project in the history of North
America
· Issues will need to be concurrently advanced in
order to secure signed precedent agreements
Accomplishment: APP continuing to progress the
commercial process, but:
· Success will require all parties--including
Shippers/Producers, State, and APP--to actively
engage to realize a mutually beneficial outcome
2:45:06 PM
Mr. Palmer addressed Page 14 titled "Progress: Obtaining
Regulatory Approvals":
Advancing essential regulatory work for securing
permits:
· Aligning with regulators on path forward
· Completed extensive environmental field studies
in 2010 and initiating major program for 2011
o Archeology and cultural resources; wetlands
delineation; fish habitat surveys
· Actively engaging public along pipeline route:
o Met with 32 Alaska communities in 2010--
project updates and listening for their
issues; similar program in 2011
o Continuing communications with First Nations
in Yukon and British Columbia
· Progressing socioeconomic assessment
o Interviews with Alaskan community leaders on
potential impacts of large-diameter gas
pipeline
· Secured land access for field studies on public
land; progressing for private lands in 2011
Accomplishment: On schedule to complete the work
needed to submit FERC certificate application and
commence NPA compliance filings by Oct. 2012
Mr. Palmer added that there had been many more private
lands than had been expected. The company's due diligence
had found state records to be out of date and there were
many more private lands along the right-of-way, which meant
extra work and cost for the company.
Representative Guttenberg wondered whether Fairbanks had
been added to the list of communities where the sponsors
planned to hear commentary from residents. Mr. Palmer
responded that there was a meeting scheduled in Fairbanks
on April 26, 2011.
Mr. Palmer detailed that the sponsors had conducted the
range of work needed to secure financing for the project:
"Progress: Financing the Project" (Page 15):
· Developed preliminary finance plan, with input
from leading financial institutions, for open
season rate design
· On-going discussions with U.S. Department of
Energy on use of Federal Loan Guarantees (FLGs)
o Successful use of FLGs means lower financing
cost for the project
o Reduces rates to shippers; enhances economic
value to all stakeholders
· Collaborating with Senate Committee on Energy and
Natural
· Resources on amendments to 2004 statute
authorizing FLGs for AK gas pipeline project
o If passed by Congress, will increase FLGs
from $18B to $30B, and allow access to
Federal Financing Bank
Accomplishments: Developed preliminary finance plan
that supports open season negotiations through reduced
rates and enhanced value to all stakeholders;
positioned for further financing enhancements
Mr. Palmer noted that the sponsors had spoken with 13
domestic and international financial institutions in order
to advance discussions regarding a finance plan.
2:49:34 PM
Mr. Palmer pointed to Page 16 titled "Progress: Pipeline
Engineering & Technology":
Progressing pipeline engineering and technology work
in the lab and in the field:
· Advancing the project design
o Geotechnical design; hydraulic and
geothermal modeling; geo-hazard assessment;
materials engineering; pipeline design;
facilities engineering; construction and
logistics planning
· Conducting engineering field work in Alaska,
Yukon and British Columbia
o LiDAR [Light Detection and Ranging] and
aerial photo; routing; fault delineation;
watercourse crossing reconnaissance;
borehole and bulk soil sampling; borrow site
reconnaissance
· Permafrost studies--includes research program
with University of Alaska
Mr. Palmer stressed that all of the factors outlined on
Page 16 were critical to an accurate assessment of work
needed to ensure the advancement of a project.
Mr. Palmer read from Page 17 titled "Progress: Pipeline
Engineering & Technology":
Conducting full-scale testing of project pipe
(48"/X80)
· Objective is to validate models used to predict
pipe tensile and compressive strain capacity
· Test program is designed to simulate strains
caused by frost heave and thaw settlement
· Testing facility will be fully operational by May
2011
· Several mills providing pipe to be tested
Accomplishment: Conducting ongoing series of studies
and planning to advance design of pipeline facilities
in alignment with commercial and regulatory schedules
Mr. Palmer noted that the project pipe was standard size
and that all items listed on Page 17 were necessary for
project advancement.
Mr. Palmer directed attention to Page 18 titled "Progress:
Gas Treatment Plant":
· Optimization and development studies underway
in all areas of work
o Process planning; engineering; regulatory
requirements; project execution
o Studies have identified cost savings and
improvements in plant lay-out
· Conducting on-site evaluations of major North
American and Asian fabrication facilities to
review capabilities and further refine
construction planning
Accomplishment: Completed latest phase of studies
and planning to advance design of GTP [gas treatment
plant] facilities-in alignment with commercial and
regulatory schedules
Mr. Palmer communicated that the companies continued to do
the work listed in the presentation as the items were
necessary for any pipeline project.
Mr. Palmer concluded the presentation with Page 19 titled
"Next Steps":
All APP teams conducting the work needed to:
· Attract customers
o APP working diligently to resolve remaining
issues
o Essential that issues outside of APP's
control also be resolved
· Obtain regulatory approvals
o APP will submit FERC and major NPA filings
in 2012
· Achieve project financing
Project can only advance with support and active
engagement of all key parties
· Shippers/Producers
· State of Alaska
· U.S. and Canadian governments
· Communities along the pipeline route
Each party has a vital role in ensuring the effective
commercialization of Alaska's natural gas resources
2:53:30 PM
Representative Gara wondered how the AGIA requirements on
debt/equity ratio helped to keep transportation costs as
low as possible in order for the project to be economic for
producers. Mr. Palmer replied that the AGIA statute had a
very high debt requirement relative to other pipeline
projects and directed an applicant to have a minimum of 70
percent debt and 30 percent equity. He detailed that once
the project was through construction and service that
ExxonMobil had committed to 75 percent debt. He explained
that from a customer's standpoint that debt was preferable
as it was a much cheaper form of financing. Debt costs
could be five percent to seven percent and taxes were paid
on return on equity that was twelve percent which was
effectively compounded from the standpoint of a customer.
Representative Gara asked whether it was correct that the
higher the debt meant the lower the tariff rate that FERC
would approve. Mr. Palmer replied in the affirmative.
Representative Gara asked whether the tariff rate would be
reduced and margin would be freed up for producers if the
state invested 20 percent to 40 percent into the pipeline
but only requested an 8 percent rate of return.
Mr. Palmer replied that customers would pay lower tolls if
an additional party took 30 percent ownership of the
project and required a lower rate of return. He discussed
that TransCanada and ExxonMobil had come down from a rate
of return expectancy of 14 percent to 12 percent.
Representative Gara wondered whether the rolled in rates
provision in AGIA made it more likely that independent
explorers would help contribute gas to the pipeline. He
explained that the provision required all shippers to share
the costs of an expansion that was needed by a new shipper.
The provision would be lost if the current project was
lost. He noted that BP and ConocoPhillips were opposed to
the requirement and thought that the new shipper should be
required to fund the expansion.
Mr. Palmer responded that the statute had a limit of 115
percent of the original tolls for roll in tolls.
Historically when tolls increased as a result of an
expansion a rolled in structure generally encouraged new
parties to commit their gas; whereas, current customers may
have held an alternate view.
3:00:17 PM
AT EASE
3:07:27 PM
RECONVENED
Vice-chair Fairclough OPENED and CLOSED public testimony.
HB 142 was HEARD and HELD in committee for further
consideration.
[Note: HB 142 was heard again during the meeting and
appears later in the minutes.]
HOUSE BILL NO. 142
"An Act relating to the creation of a rebuttable
presumption that the project licensed under the Alaska
Gasline Inducement Act is uneconomic because of
insufficient firm transportation commitments during
the first open season."
JOE BALASH, DEPUTY COMMISSIONER, DEPARTMENT OF NATURAL
RESOURCES (DNR), shared that HB 142 had raised questions
for the department and that DNR had requested a legal
analysis from the Department of Law and contract attorneys.
The legal report was confidential because it went to the
interpretation of a contract that was composed of the AGIA
statute, the request for proposal, the TransCanada
application, and the accompanying correspondence. It was
important to realize that any matters of interpretation of
the license or the way it operated could be open to future
litigation from the licensee or another party. He examined
the process that was available under the AGIA statute. The
licensee was performing and fulfilling its obligations to
the state in terms of developing the necessary regulatory
products as well as the engineering plans to support the
acquisition of a certificate of public convenience and
necessity. He emphasized that the cumulative process took
years to complete.
4:46:21 PM
Mr. Balash discussed that commercial negotiations between
private parties and potentially the state did not need to
be a prerequisite to engineering and regulatory work that
was also taking place. Under the AGIA process an open
season had been held and was successful in attracting bids.
He discussed that the current question related to whether
or not the bids would be converted into precedent
agreements between enough parties. He explained that the
precedent agreements would only cover the development phase
and not necessarily the construction phase of the project.
He elaborated that a precedent agreement was precedent to a
party entering into a firm transportation agreement that
would support the financing at a much later date once
regulatory approvals were in place. The group of scientists
and engineers was an "army unleashed" that was gathering
necessary information for the FERC certificate. The
department believed the process was going very well and it
had been pleased with the performance of the licensee and
partners. He expressed that DNR did not have significant
insight into the commercial negotiation that was taking
place between the parties. Private parties that had been in
discussions with the licensee had required TransCanada to
maintain certain privileges. The department had not pushed
too hard but wanted to see more progress.
Mr. Balash highlighted that DNR was concerned about the
development of a deadline by which the precedent agreements
would need to be satisfied before other items in the bill
kicked in. He detailed that one party's deadline could be
used by another party as leverage in the commercial
negotiation and could upset the commercial tension that had
existed. The second concern was related to the effect the
legislation could have on the state's reputation based on
the commitment it had made. He stressed that the department
would prefer to not cast any doubt on the assumption that
partners doing business with the state needed to be able to
count on the state's commitment.
4:50:33 PM
Mr. Balash delineated that the administration would
continue to provide information to the legislature and the
public. The department had provided the legislature with a
reimbursement report at the beginning of the legislative
session per the AGIA statute and voluntarily provided semi-
annual reports at the end of April and October of each
year. He communicated that the contents of the report could
be tailored to meet the needs of the legislature. The
department was prepared to work with the bill sponsors to
help alleviate its concerns and to meet the needs of the
legislature and the public.
Representative Wilson asked whether the department had
taken into consideration that the increased gas development
in the Lower 48 in recent years may negatively impact the
success of the project.
Mr. Balash replied that DNR had been monitoring the issues
and was cognizant of potential impacts to the viability of
the project. He explained that the department had
commissioned a study the previous fall to examine the
impact of shale gas supplies on an Alaska North Slope
project that had been posted on the AGIA coordinator's
website. The authors of the report were also available to
present to the legislature. He relayed that there were
uncertainties and questions that surrounded the regulation
of fracking and the long-term economic performance of shale
wells. There was an abundance of the shale resource;
however, it was unknown what costs were built into the
reports that were published by the promoters of the
resource. He emphasized that there were a number of factors
that determined the long-term viability of shale and that
drove the cost that shale could be produced economically.
Representative Wilson asked whether the department's
concern was related to the dates listed in the bill. She
viewed HB 142 as the legislature's due diligence as a
result of public questions related to market changes and
other. Mr. Balash replied that the dates were a source of
concern, but it was no problem for the administration to
provide certain information or reports by certain dates. He
expressed that it was possible to rework the language to
lessen the concerns of the administration.
4:55:47 PM
Representative Hawker asked where the bill laid out a
specific deadline for the establishment of the precedent
agreements. Mr. Balash responded that a precedent agreement
deadline was not specifically established, but the dates in
the bill triggered certain other actions or activities. The
administration wanted to be sensitive to how the dates
would affect the actions and considerations of the
commercial parties and it did not want one or more parties
to behave differently than they otherwise would.
Representative Hawker wondered whether the bill legally
mandated the administration to change its current action in
regards to the implementation of the AGIA legislation and
contract. He discussed the distinction between a legal
mandate and how the bill could cause a commercial party to
act in a different way. Mr. Balash responded with a
"qualified no". The qualification was related to the effect
of the creation of a presumption. He explained that the
presumption would be used by someone for some purpose,
which related to a significant matter under the AGIA terms
in Section 240 [AS 43.90.240]. He hoped for an opportunity
to craft language that would eliminate or ameliorate the
administration's concern on the issue.
4:59:19 PM
Representative Hawker was committed to working with the
administration to develop a balanced plan that would serve
the best interests of the public.
Representative Doogan asked about the administration's
position on the specific reasons that TransCanada did not
like the bill. Mr. Balash answered that he had not been
present during Mr. Palmer's testimony; however, there were
significant pieces that raised concerns with the
administration. He reiterated the administration's
willingness to work with sponsors on reducing or
eliminating its concerns and was more than prepared to
provide information.
Representative Doogan wondered whether the bill would cause
problems for the pipeline project and the administration if
it was not amended. Mr. Balash responded in the
affirmative. The administration was concerned about the
success of the project in regards to the commercial
negotiations that were taking place between the private
parties. He opined that the legislature should rely on
legislative legal counsel to determine whether it could
effectively direct the department to do anything regarding
the execution of the contract. Specific areas of concern
lay in the creation of a presumption and in the rebuttal of
a presumption based on a certain standard of evidence. He
shared that it was helpful that sponsors intended to
address firm transportation agreements in the bill with
precedent agreements, but there was also a reference to the
precedent agreements to transportation agreements that
either supported the development or construction of the
project, which was an area that the sponsor would try to
address.
Representative Doogan wondered whether the attorneys
representing each party would have to meet prior to any
further legislative action.
Vice-chair Fairclough conveyed her intent to ask the bill
sponsor to speak with the administration.
Vice-chair Fairclough RE-OPENED and CLOSED public
testimony.
5:06:22 PM
Representative Guttenberg wondered whether the
administration had asked for an attorney general opinion on
the legal ramifications of the legislation. Mr. Balash
replied that the administration had received an attorney
general opinion but was not at liberty to share the
analysis because it went to the interpretation of the
contract that could be subject to litigation at a future
date.
Vice-chair Fairclough noted that the legislature could ask
for a legal analysis from Legislative Legal Services.
Representative Gara asked whether the administration would
oppose the bill as long as it included the language
"rebuttably presumed that the project is uneconomic," on
Page 1, Line 11. Mr. Balash responded that it was one of
the areas that concerned the administration. He noted that
the administration preferred to avoid armies of lawyers and
to keep armies of engineers and environmental scientists
working to advance the project. He hoped that an agreement
could be reached that would accomplish the goals of the
sponsors in getting information from the administration.
Representative Gara asked whether it was correct that there
had not been any disputes over the time during which
TransCanada had provided biweekly progress reports to the
administration. Mr. Balash responded in the affirmative.
The progress reports were provided via telephone by the
project leadership and the state gas team leadership. There
were monthly meetings with the technical teams in Houston,
Denver, and Calgary. The administration had been very
pleased with the teams' openness and willingness to talk
through the issues and to discuss what and why the teams
were doing what they were, and how it helped to move the
ball along.
Representative Gara requested that the committee hear from
Larry Persily at the next hearing on the legislation.
Vice-chair Fairclough passed on that the co-chairs had
determined that it would be necessary for him to get the
opinion from Mr. Persily outside of the committee meetings
and to distribute the information to the committee.
Representative Doogan noted that he had also requested that
the committee hear from Mr. Persily.
Representative Gara requested that Mr. Persily be allowed
to testify.
5:11:24 PM
Representative Costello asked whether the administration
had provided communication to the legislature at times
required by statute and semiannually in a report. She
believed that the bill was only asking for communication
from the administration to the legislature. Mr. Balash
replied that communication required by statute and the
semiannual report had been provided to the legislature as a
whole and did not include communications in subcommittee
meetings or responses to written correspondence or other.
He did not have an exhaustive list but would be happy to
provide it.
Representative Costello wondered whether the problem
centered on what the legislature may do with the
information and not on the act of the communication itself.
Mr. Balash disagreed. He noted that the legislature was a
co-equal branch of government.
Representative Costello asked for a characterization of the
information that had been communicated in the biweekly
reports. She asked whether the meetings included
information about the precedent agreement, engineering, the
open season, or other.
Mr. Balash replied that in the biweekly conversations the
administration was provided with a general overview and
information on specific segments including the
environmental regulatory and legal team, the GTP [gas
treatment plant] team, the pipe team, and occasionally from
the commercial team. He relayed that the updates were very
general. During the time that the project was going to
submit its open season terms to FERC the licensee had come
to the administration to determine whether they were
executing a project change under the terms of the license.
The licensee had improved the commercial terms in some
areas and changes in others that had resulted in an
economic improvement to the project, which was approved. He
relayed that different information was provided at
different times depending on what was taking place. He
communicated that the decision making process would
probably move more quickly if TransCanada was free to make
decisions on the pipeline side on its own. Both sides of
the partnership had to be in agreement prior to making any
changes on the pipe side of the negotiation and added a
layer of complexity to the negotiation process.
Representative Costello wondered whether the frustration of
the public and legislature was justified because
TransCanada had not met its self-imposed deadline to
provide them with communication and that the current bill
had been met with resistance due to what it could imply.
Mr. Balash replied that Alaskans had been frustrated for a
long time. He thought that in the current situation the
frustration that the public and the legislature felt was
coming out in the legislation. The way the bill was written
was causing concern for TransCanada and the administrators
of the contract. He opined that the current meeting had
helped to air the frustrations and concerns that ultimately
could be addressed in a version that would address the
frustration around communication.
5:18:34 PM
Representative Hawker asked how much more information was
known by the administration than by the public in reference
to Mr. Balash's testimony that there was not much
information provided on the biweekly calls. Mr. Balash
stressed that his earlier testimony related to "not much
information" related only to the commercial side of the
project. He clarified that the administration had received
a tremendous amount of information from the other segments
of the team that reported on a biweekly basis. The
information provided to the administration was general in
nature and was not "shipper specific." Due to
confidentiality agreements with shippers, TransCanada was
not able to share any specifics related to bids that had
been received.
Representative Hawker wondered how long the state should
wait before it questioned the outcome of the open season in
order to make the bill functional for the administration
and in the state's best interest.
Mr. Balash answered that the outcome of the open season
would depend on the reason a given action or inaction
occurred. The reason that a bid did not result in a
precedent agreement could be due to an outstanding
commercial issue related to how private parties would
divide up their proceeds, but it would be different if the
shippers were flat out not interested in the project. Based
on the overall construct of AGIA the administration had
much more patience if there was a waiting period due to the
negotiation of terms between private parties than a wait
due to no interest from shippers. He explained that it was
public knowledge that the administration was working to
settle the dispute over the Pt. Thompson acreage and it
could be a "key domino to fall" if it was resolved
successfully. He believed the Supreme Court had recently
communicated that the dispute needed to be resolved within
a certain number of days and would then proceed to a
hearing on the issue.
Representative Hawker wondered how long the state should
wait to find out what the issues really were so that it
could address them. He was troubled by the comment that the
state should not be concerned about a delay in
communication due to issues of a commercial nature between
TransCanada and potential shippers. He thought that had
been the situation for the past 30 years. He believed that
the whole issue was to "coerce action, to expedite action,
to incentivize action."
5:24:14 PM
Mr. Balash replied that the nature of the differences was
relevant and important. He discussed that whether the issue
should be used as a fuse for the continuation or
discontinuation of regulatory and engineering work was a
pivot point. There was some time that could be allowed for
negotiations on terms between companies. He believed that
the fundamental question was related to Page 2, Line 12 of
the bill that related to whether or not the economics were
still present for the project to advance. He opined that
the information that would best inform everyone was related
to the markets, the timing, and what the shippers thought
about the project. He believed that the information would
help the state to know whether it should continue spending
money to advance the project.
Representative Hawker wondered whether the legislation
presented a breach of the contract. He opined that the bill
did not impose a mandate for the establishment of a
precedent agreement or transportation commitment and that
concerns were more related to how commercial parties may
alter their behavior as a result of the bill. He expressed
that many legislative members believed that the state
should be concerned with the amount of time that it would
take for issues to be resolved.
Mr. Balash respectfully declined to answer the question
based on advice from legal counsel. He added that the
language on Page 1 related to creating a rebuttable
presumption begged the question for what purpose and to
what end.
Representative Hawker remarked that the committee could ask
counsel the question. He thought it was problematic.
Vice-chair Fairclough pointed to the indeterminate fiscal
note from the Department of Law.
HB 142 was HEARD and HELD in committee for further
consideration.
| Document Name | Date/Time | Subjects |
|---|---|---|
| HB 121 - Treasures of the Tidelands - WA.pdf |
HFIN 4/4/2011 1:30:00 PM HRES 3/16/2011 1:00:00 PM |
HB 121 |
| NCSL Revolving Loan briefing paper.pdf |
HFIN 4/4/2011 1:30:00 PM HRES 3/16/2011 1:00:00 PM |
HB 121 |
| HB 121 - CCED - Letter of support - SWAMC.pdf |
HFIN 4/4/2011 1:30:00 PM HRES 3/16/2011 1:00:00 PM |
HB 121 |
| HB 121 - Shellfish Production Stats - West Coast.pdf |
HFIN 4/4/2011 1:30:00 PM HRES 3/16/2011 1:00:00 PM |
HB 121 |
| CSHB 121 Sectional Analysis.pdf |
HFIN 3/30/2011 1:30:00 PM HFIN 4/4/2011 1:30:00 PM |
HB 121 |
| HB 121 - Alaskan Shellfish Grower's Association - Support.pdf |
HFIN 3/30/2011 1:30:00 PM HFIN 4/4/2011 1:30:00 PM |
HB 121 |
| HB 121-CCED-Letter of Support-Taco Loco.pdf |
HFIN 4/4/2011 1:30:00 PM |
HB 121 |
| HB121-FN NEW CCED-DED-03-29-11(D).pdf |
HFIN 4/4/2011 1:30:00 PM |
HB 121 |
| HB121-FN NEW CCED-DED-03-25-11(B).pdf |
HFIN 4/4/2011 1:30:00 PM |
HB 121 |
| HB121-FN NEW CCED-DED-03-25-11(A).pdf |
HFIN 4/4/2011 1:30:00 PM |
HB 121 |
| HB121-FN NEW CCED-DED-02-15-11(C).pdf |
HFIN 4/4/2011 1:30:00 PM |
HB 121 |
| HB 121 CS WORK DRAFT version X 0040411.pdf |
HFIN 4/4/2011 1:30:00 PM |
HB 121 |
| HB 142 Breach of Contract-Leg Legal.PDF |
HFIN 4/4/2011 1:30:00 PM |
HB 142 |