Legislature(2013 - 2014)HOUSE FINANCE 519
04/08/2014 01:30 PM House FINANCE
| Audio | Topic |
|---|---|
| Start | |
| Presentation: Legislative Legal Services: Review of Mou | |
| 379 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
| + | HB 379 | TELECONFERENCED | |
| + | TELECONFERENCED |
HOUSE FINANCE COMMITTEE
April 8, 2014
1:34 p.m.
1:34:38 PM
CALL TO ORDER
Co-Chair Austerman called the House Finance Committee
meeting to order at 1:34 p.m.
MEMBERS PRESENT
Representative Alan Austerman, Co-Chair
Representative Bill Stoltze, Co-Chair
Representative Mark Neuman, Vice-Chair
Representative Mia Costello
Representative Bryce Edgmon
Representative Les Gara
Representative David Guttenberg
Representative Lindsey Holmes
Representative Cathy Munoz
Representative Steve Thompson
Representative Tammie Wilson
MEMBERS ABSENT
None
ALSO PRESENT
Donald Bullock, Legislative Counsel, Division of Legal and
Research Services, Legislative Affairs Agency;
Representative Benjamin Nageak, Sponsor; Jacob Adams, Chief
Administrative Officer, North Slope Borough, Barrow; Angela
Rodell, Commissioner, Department of Revenue.
SUMMARY
HB 379 OIL & GAS PROPERTY TAX
HB 379 was HEARD and HELD in committee for
further consideration.
PRESENTATION: LEGISLATIVE LEGAL SERVICES: REVIEW OF MOU
^PRESENTATION: LEGISLATIVE LEGAL SERVICES: REVIEW OF MOU
1:35:21 PM
DONALD BULLOCK, LEGISLATIVE COUNSEL, DIVISION OF LEGAL AND
RESEARCH SERVICES, LEGISLATIVE AFFAIRS AGENCY, relayed that
he and Emily Nauman were the primary drafters for oil and
gas issues. He stated that the legislature would not be
voting on the Heads of Agreement (HOA) or Memorandum of
Understanding (MOU). He detailed that the legislature would
vote on legislation that would empower the administration
to enter into certain agreements. He provided a PowerPoint
presentation titled "Memorandum of Understanding MOU" (copy
on file). He addressed slide 2 titled "Parties":
State of Alaska, through the commissioners of natural
resources and revenue
TransCanada Alaska Company, LLC and
Foothills Pipe Lines, Ltd. (Jointly as Licensee)
TransCanada Alaska Development Inc.
Mr. Bullock elaborated that TransCanada and Foothills were
the licensees under the Alaska Gasline Inducement Act
(AGIA). TransCanada Alaska Development Incorporated (TADI)
was expected to have a limited partner interest for the
portion of the pipeline TransCanada would initially own
under the MOU. He relayed that ExxonMobil had been working
with TransCanada on the Alaska Pipeline Project, but was
not a part of the MOU. Additionally, the Alaska Gasline
Development Corporation (AGDC) did not participate in the
MOU.
1:37:23 PM
Mr. Bullock turned to "MOU Issues" on slide 3:
Should the state have an ownership interest?
How should the state transition from AGIA?
Should the state share its interest with a partner?
Mr. Bullock expounded on slide 3. He referred to
discussions about how the state would finance a project if
it chose to have no partners. He relayed that one of the
purposes of the MOU was to enter into an agreement with
TransCanada; TransCanada would own part of the project
initially, which would represent the state's percentage of
gas on the North Slope that would be produced and what the
state would receive in the form of royalty-in-kind and the
TransAlaska Pipeline System (TAPS). He noted that there had
been a major focus on the open season during AGIA
discussions; it had been expected that producers and other
shippers would commit to use the project. Part of the MOU
required the state to enter into the type of agreement that
would have been acquired in a successful open season. He
detailed that the state would pay the cost of transporting
its gas for the term of the contract (20 to 25 years).
Mr. Bullock relayed that the MOU was a cost and was not
like TAPS. He used a grocery store as an example and
explained that a delivery truck would be part of the
store's cost as opposed to an independent profit center. He
communicated that terms of identifying tariffs, operating
as a common carrier, allowing an owner to recover costs,
and return on investment were all TransCanada's business.
He addressed what the connection would be between the MOU
and AGIA if TransCanada was the same party in the MOU as
the licensee under AGIA. He expressed intent to discuss
several ways to get out of AGIA. He noted that under the
MOU TransCanada would initially own approximately one
quarter of the project; the state would have the
opportunity to buy into TransCanada's limited partnership
interest. He detailed that the limited partnership would
continue to own one quarter of the project subject to the
limitation that TransCanada could not sell more than 40
percent of its interest and TransCanada could not have less
than 14 to 15 percent of the overall project after the
state acquired its equity interest. He detailed that if the
state's interest was about 25 percent (with royalty and tax
combined) and TransCanada had 14 percent, the state's
interest in the overall project would be approximately 10
to 11 percent.
1:41:22 PM
Mr. Bullock turned to slide 5 titled "State Ownership":
How does the state acquire an equity interest in the
midstream part of the Alaska LNG Project?
How will the state finance an investment in a project?
Mr. Bullock elaborated on slide 5 and relayed that AGDC had
the power to issue revenue bonds. He detailed that AGDC was
a separate corporation that was intended to shield the
state from some liability. When bonding a project, decision
makers determined whether a project was a good idea and
bond purchasers determined whether it was a good deal. He
added that the interest rate would change depending on
risk. He continued that the interest in the MOU related to
the part of the project north of the liquid natural gas
(LNG) facility. Under the agreement terms the midstream
project started at the transmission lines from Prudhoe Bay
and Point Thomson. He elaborated the process of sending gas
through the pipeline.
1:43:40 PM
Mr. Bullock moved to slide 6 titled "State Ownership":
Under the MOU, an affiliate of TransCanada would hold
that portion of the midstream project equal to the
percentage of North Slope gas the state may receive as
royalty in kind and production tax on gas paid as gas.
May be 20 - 25% of the total project depending on
amount of royalty gas in kind and production tax paid
as gas.
Mr. Bullock highlighted the importance of the issue given
that it addressed the percentage of production on the North
Slope. The bill included a new section pertaining to
production tax that allowed producers or lessees paying
royalty-in-kind the choice to pay tax with gas rather than
dollars. He advised that the legislature would need to
consider whether a company committing to pay with gas would
be around in the future. He asked the legislature to
consider what would happen if a producer decided to leave
the state or sell its interest to another producer. He
noted that the state was considering locking interest in
for the initial term of the contract, which could be 20 to
25 years; the MOU referred to the initial contract term as
25 years, but also included language stating the term would
be nothing below 20 years. He reiterated the importance of
the issue. He communicated that the state was not the
driving force behind the percentage of gas the state would
receive. He likened the producers to train engines and the
state to the caboose; when the producers decided to move
the state would move, but until then there was no movement
on production.
1:46:00 PM
Mr. Bullock directed attention to two agreements
anticipated under the MOU (slide 7):
Precedent agreement & Firm Transportation Services
Agreement commits the State to ship its gas in the
part of the midstream project owned by TransCanada for
20 - 25 years.
State may obtain an option to buy 40% of TransCanada's
interest.
Mr. Bullock expounded on slide 7. The precedent agreement
was the first step to moving towards the firm
transportation services agreement. He detailed that Exhibit
C under the MOU specified that the firm transportation
services agreement was expected to come before the
legislature for approval. TransCanada would be the initial
owner of the pipeline and the state would have an option to
buy in. He relayed that TransCanada was a transporter (it
did not own or market gas) and was not in the same
alignment as producers shipping gas. He looked at slide 9:
AGDC may participate in the LNG plant while
TransCanada initially holds an interest in the
midstream portion that the state may have an option to
acquire.
Mr. Bullock shared that AGIA had discussed a competing
natural gas pipeline, but the relevant piece for the
current discussion was the allowable 500 million cubic feet
per day. He continued that at one point the amount was an
estimate of the gas needed to fill in-state demands at a
reasonable cost. He asked the legislature to consider what
gas would be taken out of the state's share of royalty and
tax for in-state delivery because the quantity would not be
available to be liquefied or exported. He pointed to a
comparison of revenue the state would receive for the sale
of gas in-state versus the sale of gas to Asia. He shared
that the issue had come up in discussions on Cook Inlet and
the regulation of Enstar; legislation had been passed due
to Enstar's argument that Cook Inlet gas was subject to a
broader market and more cost. He advised the committee to
keep in mind the amount of the state's gas that would be
using the facility when it considered the part of the LNG
project it should participate in. He communicated that if
the state had greater ownership in the LNG facility or
pipeline it was the part of the project that may be
flexible to new producers and new forms of gas. The
producers' part of the pipeline would be dedicated. He
compared it to the transmission lines on the North Slope;
it was what it took to get the producers' gas liquefied and
shipped. The state's offtakes also pertained to the
regulation. The discussion had been that the producers'
part of the project would be just a cost; the in-state gas
would be subject to different regulation. He was uncertain
how the issue would be handled.
1:51:20 PM
Mr. Bullock directed attention to slides 10 and 11 titled
"Enabling Legislation." He discussed that there had been
"must haves" in AS 43.91.30 for AGIA that talked about
expectations for applications. He referred to the enabling
legislation as a jack-in-the-box where the legislature
would decide on what it wanted, the size, and what could go
into it, but it could not know what would come out when it
came to contracts.
Mr. Bullock moved to slide 12. He believed it was unclear
which components of the enabling legislation were critical.
He surmised that legislation would be enabling if it
empowered the administration to act on items in the MOU and
HOA; if the legislature decided that the MOU should not go
into effect, any changes would raise the issue of who would
participate in state ownership. He turned to slide 14:
Is there a situation in which enabling legislation may
allow the Heads of Agreement to go forward, but not
the MOU?
Ask!
Mr. Bullock elaborated that TransCanada, AGDC, and the
producers were all parties to the HOA. He remarked that it
would be helpful to receive guidance from the
administration. He added that the cost would be protected.
He discussed the range of acceptable tax rates in the HOA
and advised the legislature to consider whether a
comfortable range was built in.
1:53:54 PM
Mr. Bullock turned to slide 16 titled "AGIA":
Transition out of AGIA
To Alaska LNG Project?
Is the AGIA Project to Alberta uneconomic under
AS 43.90.240?
Mr. Bullock referred to a memorandum from Legislative Legal
Services [addressed to Representative Mike Hawker, dated
February 15, 2013] (copy on file). The memorandum addressed
some of the risk associated with ending AGIA. He asked
whether the project was the Alberta project or something
else. Additionally, he queried whether there was an
acceptable modification in the amendments to the project
entered into by the administration that required
TransCanada to look at the LNG option.
Mr. Bullock turned to slide 17:
MOU addresses "uneconomic" exit from AGIA in the
recitals.
What if enabling legislation fails to pass?
What if the MOU is not implemented?
Mr. Bullock elaborated on slide 17 and relayed that if
enabling legislation passed the commissioners would begin
the process of determining the project under AGIA was
uneconomic (a subsequent section discussed that TransCanada
would agree to go along with the change). He referred back
to questions listed on slide 17. He relayed that if the MOU
was not implemented the state would be back where it was
currently with AGIA.
1:55:48 PM
Mr. Bullock looked at slide 18 and discussed the treble
damages provision under AS 43.90.440. He listed the three
ways to get out of AGIA: 1) the licensee violated the
agreement terms; 2) the project was deemed uneconomic (if
the license was abandoned the state would have the
opportunity to pay the balance of the qualified
expenditures to receive data compiled by the expenses); or
3) via the treble damages provision, which related to
whether the state was providing similar inducements to a
competing pipeline. He surmised that due to TransCanada's
involvement in the project the treble damages may not be an
issue. He observed that AS 43.90.440 did not include a
waiver of any action that TransCanada may have. He noted it
would be a more pertinent issue if the enabling legislation
changed or the MOU did not allow TransCanada to continue as
an involved party.
Mr. Bullock turned to slide 20 titled "Why TransCanada?":
Is the MOU the best deal?
Should the state solicit proposals from others?
Mr. Bullock addressed the questions on slide 20 and relayed
that there were not many gas pipeline companies that had
dealt with the northern environment; TransCanada had the
experience. He did not know about TransCanada's involvement
with gas treatment plants; it had been a question under
AGIA whether TransCanada would do the work or hire another
party. The company Enbridge had a pipeline from Alberta to
Saskatchewan. He advised that the legislature may want to
consider what would happen in the event of other proposals.
He noted that the state did not really know about the
producers' relationship with Canada. He remarked that
TransCanada was a good company and surmised that the
relationship was probably positive; TransCanada's business
was building and operating pipelines. He observed that if
three producers had 75 percent of the gas they would have
significant input on how the project was built and would be
concerned with cost. He advised that it would be helpful to
know where the producers stood. He continued that
TransCanada was also involved and was looking forward to
participating in a competing project; he referred to a 460-
mile pipeline that would originate in Prince Rupert,
British Columbia. He believed Alaska had an advantage over
the British Columbia project. He noted that the natural gas
and the fields were not developed in northeastern British
Columbia; the state had the ability to produce and ship gas
much sooner subject to limitations on taking off the amount
of gas.
1:59:36 PM
Mr. Bullock turned to slide 24 titled "Things We Don't
Know":
Things we don't know:
What happened during the first open season in
2010? Why did it fail?
Why did it take from July 2010 to May 2012 to
conclude that the first open season failed?
Mr. Bullock detailed that TransCanada had an open season
from April through July 2010. He pointed to the second
question on slide 24 and noted that TransCanada and
ExxonMobil had reported to the Federal Energy Regulatory
Commission that the first open season had failed. He
advised the committee to think of ways to stay informed
about the process. He discussed that the legislature always
had the power to appropriate; therefore it could always ask
the hard questions (i.e. what the state was getting for the
money and what the status was). He referred to the
Legislative Legal Services memorandum that addressed the
AGIA project (copy on file); the memo specified that the
AGIA project would go down the highway and had been
considered in 2008. TransCanada had been interested to know
whether anyone was interested in shipping gas to an LNG
facility. He continued that even though the AGIA project
was the highway project, TransCanada was soliciting
proposals and shipment commitments that would have gone to
tidewater. Therefore, the state did not know what happened.
He believed it would be beneficial to know why the
particular LNG project did not move forward if TransCanada
had been discussing LNG. Since that time the production tax
structure had changed, which increased the attractiveness
of doing business on the oil fields.
2:02:17 PM
Mr. Bullock remarked that the administration had talked to
the committee about the MOU. He thought it would be more
advantageous to suggest things for the legislature to think
about in order to develop the bounds to move forward on the
project. The administration had stated that it would offer
the contracts to the legislature for approval before
finalizing them. He noted that former Governor Sarah Palin
had relayed that the license for AGIA would go to the
legislature for approval. He remarked that the approval of
the license was controversial; the effective date of the
legislation had failed, which meant the contract had not
been issued until December 2008. Under the separation of
powers there was a risk that the administration could enter
into the contract without legislative approval; the
legislature would continue to have the power to
appropriate. He expounded that generally the legislature
designed the bounds under which the administration may act;
an executive function was different than a legislative
function. He hoped it would not happen, but it depended on
how contentious the issue was. He advised the committee to
be aware of the separation of powers issue. He commented
that whether the governor could exercise his executive
power without legislative involvement had recently come up
related to some of the governor's appointments.
2:04:53 PM
Representative Gara thanked Mr. Bullock for his work. He
had concerns about the issue but wanted to find a way to
vote for it. He wondered whether it would be constitutional
if the governor decided to lock in tax rates or royalty-in-
kind provisions for 20 or 30 years with the oil companies.
He stated that in the past oil companies had wanted fiscal
certainty (i.e. a 20-year lock-in). He referred to
memorandums written by Mr. Bullock addressing whether
preventing a future legislature or voters from making
changes was unconstitutional.
Mr. Bullock replied that Article 9, Section 1 of the Alaska
Constitution stated that the power of the tax would not be
surrendered or contracted away. He relayed that under
former Governor Frank Murkowski's initial contracts a
dispute had occurred about whether taxes could be
solidified for a given period of time. He stated that the
words to the constitution prevented setting taxes in stone
for a given time period and included a prohibition against
dedicated funds. Additionally, he pointed to unforeseen
occurrences such as earthquakes or floods. He shared that
the provisions were consistent with language that advised
against giving away the state's power to tax and from
preventing future legislatures from demanding for needs.
Along the same lines there had been discussions related to
payment in lieu of taxes; it also brought up whether it was
constitutional to set aside the state's power to tax in
exchange for contractual payment. He noted the issue was
similar to whether a city council or borough assembly could
bind future assemblies or councils from making tax changes.
Mr. Bullock continued that the legislature always had the
opportunity to pass a law that may be deemed
unconstitutional; it was up to the legislature to decide
whether it wanted to take the risk. He referred to a
University of Alaska lands case that was struck down three
years after the law had been implemented. In the past the
legislature had decided to not risk the possibility a law
may be unconstitutional. He spoke to the current version of
SB 138 that had been amended in the Senate and in the House
Resources Committee. A provision in the bill added a new
section to the production tax AS 43.55.014, which allowed
producers who agreed to pay royalty-in-kind or royalty
adjustments to have the option of paying their production
tax in the form of gas. He did not believe the idea was
bad, but he was uncertain about how the tax in the form of
gas related to the tax percentage. Additionally, the state
would be committed to using a fraction of the pipeline that
would represent the amount of gas the state was expected to
receive. He remarked that royalty was a sure-thing and had
flexibility that tax did not; there was authority in the
gas leasing statute AS 38.05.180 defining that certain
fields needed a royalty reduction in order to make the
fields feasible.
2:11:44 PM
Mr. Bullock continued to address Representative Gara's
question. He addressed what would occur if the legislature
increased the tax; if tax was paid in the form of gas the
state would need to look at expanding its portion of the
pipeline. Similarly, if the state legislature decided to
lower the tax rate it would be short on gas. He believed it
was an important consideration. He noted that an earlier
version of the bill included language specifying that
paying the tax in the form of gas was an irreconcilable
election. Whether someone could sell out had not been
discussed. He did not believe it was clear whether future
owners or producers would honor the agreement. He stressed
that the issue was a big deal because it would impact the
extent the state would commit to a project.
Representative Gara referred to what he believed was a
tilted relationship with TransCanada. He spoke about the
idea of a tax rate lock in for 20 to 30 years. He noted
that the legislature was split on the issue. He believed
the legislature would be playing with constitutional fire
if it locked the state in. He was concerned about spending
millions of dollars while risking that the locked in rate
may be deemed unconstitutional and that producers may walk
away. He wondered about including a provision stating that
in the event that parts of the law were deemed
unconstitutional it did not give producers the right to
walk away from the project.
2:15:06 PM
Mr. Bullock replied that all of the agreements would be
between the producers and initially TransCanada. Due to the
MOU the state was not at the project table. The MOU
included a provision specifying that some of the
negotiations TransCanada engaged in would be confidential.
He stated that contracts had risks and the state could only
cover itself as much as possible. He noted that the
project's primary driver was the market for gas and what
sellers could expect to receive. He communicated that it
did not matter how much the project cost if there was no
market; if there was a market the question became how to
get the product to market at the lowest cost. He relayed
that TransCanada had brought some of its projects in under
budget, but contracts were inherently risky. He believed
binding producers to a contract would be difficult and
would result in litigation.
Representative Wilson pointed to the current partnership
with TransCanada. She wondered whether the state would need
to go through a process to terminate the partnership if it
chose to do so.
Mr. Bullock answered that TransCanada was the licensee
under AGIA and there were ways to statutorily get out of
AGIA. He detailed that the MOU specified that if the state
signed the option to purchase part of the project and
secured firm transportation agreements, TransCanada would
agree that the Alberta project was uneconomic. He
elaborated that if the legislation did not satisfy
TransCanada the uneconomic issue would persist and AGIA
would remain. Currently under the agreement with
TransCanada the state was reimbursing accrued costs that
had been expended since December 31, 2013.
Representative Wilson wondered if it was possible to do a
cost comparison on what it would cost the state if it had
to prove using TransCanada was uneconomical versus moving
forward with the agreement under discussion. She pointed to
potential court cases that would occur if the state chose
not to continue a partnership with TransCanada. She was
wondering if the state had an opportunity to get out of the
contract with TransCanada without significant court costs
and other.
2:19:04 PM
Mr. Bullock responded that there may be a way to determine
the different costs. He referred to language in the MOU
stating that the commissioners would move forward to show
that the project was uneconomic because there was not room
for two pipelines. He referenced the AGIA provision AS
43.90.440 that discussed competing pipelines versus the
abandonment provision AS 43.90.240 that was based on no
money at the wellhead (transportation costs were too high).
He questioned whether the project was already uneconomic if
it was the Alberta project. He stated that if the argument
was that the state had drawn back from the allegation that
the Alberta project was the only option, there would be a
dispute about whether modifications had turned the project
into something else. He agreed that if litigation occurred
it could "go on." He addressed what it would take for the
state to enter the project on its own. He discussed that
the state would pay TransCanada to operate its portion of
the project under the agreement; if the state chose to move
forward alone it would be responsible for bonding costs and
taking on its own risk. He observed that there was no
simple solution to determine the best course of action.
Representative Guttenberg pointed to Mr. Bullock's caboose
and engine analogy. He wondered how the state guaranteed
production or delivery of gas when the state did not have
control of production. He wondered if the cost of the
state's ability to market gas was devalued. He asked if the
contracts considered the situation.
Mr. Bullock answered that purchasers would take into
consideration how reliable the gas supply was. He continued
that if the seller did not have the power to ensure supply,
it may result in reduced cost. Additionally, if there was a
slowdown in production the state would be competing in the
same market with three of the best energy companies in the
world; the state would have one pot to draw from, whereas
the other entities could probably find another LNG source.
He thought it was logical that the state's price may have
to reflect some of the risk, but he could not quantify it.
Representative Guttenberg noted that the producers would
own 75 percent of the project and that TransCanada would
build and operate it. He wondered if there were scenarios
built in that would allow the producers to decline
participation.
Mr. Bullock replied that there had been talk about the
advantage of having TransCanada as a skilled pipeline
builder and operator, but the state was not included in
discussions related to who would build. He stated that
under the MOU the decision would be between the producers
and TransCanada. He noted that the producers had northern
experience (albeit not with a project as large as the one
proposed), but they may have another builder in mind. He
believed the producers would discuss the option of using
TransCanada as a builder. He opined that producers would
approach the project with a goal of keeping costs down. He
compared the project to TAPS, which was a regulated common
carrier owned by producers (owners received profit). In
1986 when wellhead prices had been low the state had been
concerned about continued production. He noted that if an
entity owned the production and received a return on the
pipeline and retail outlets it could afford to take a
financial hit somewhere along the way. He stated that if a
pipeline was not an independent profit center costs should
be minimized to receive the maximum revenue from the gas.
2:25:30 PM
Representative Guttenberg observed that producers had done
well under TAPS when they could keep their tariffs up and
the wellhead price down. He remarked that the state
received less money at the wellhead but producers had
recouped their charges by costing back to themselves.
Mr. Bullock replied that it was a business. He expounded
that when tariffs had been higher wellhead prices had been
low, but the municipalities taxing the pipeline property
had been in a better position; there had been
dissatisfaction with the TAPS tariff settlement that kept
tariffs down, which devalued the pipeline. The state was
now looking at increasing tariffs partly due to the value
change to the pipeline and to lower throughput.
Vice-Chair Neuman wondered if TransCanada would continue to
collect money from the state at a 90 percent reimbursement
(until the passage of legislation) if AGIA was found
uneconomic under the abandonment clause.
Mr. Bullock replied that AGIA was still alive. He
elaborated that in the current post-first season phase
costs that were qualified expenditures under AGIA were
reimbursable at the 90 percent rate. He communicated that
AGIA would end if the MOU went into effect. He explained
that the liability to reimburse TransCanada would enter a
different phase, which would refer to certain costs in the
MOU. He detailed that if the state terminated the contract
it would be liable to pay different amounts of money to
TransCanada depending on when the contract was terminated.
He noted that although the reimbursement rate under AGIA
was 90 percent, the costs were more easily identified by
what they related to. The MOU included a provision to
provide a credit for reimbursement paid after December 31,
2013. The agreement and the administration both anticipated
that AGIA would end in the first half of the current year.
He noted that Legislative Legal Services had become aware
of the administration's intent when the Department of
Natural Resources' (DNR) budget did not include funding for
the pipeline office that worked with the AGIA project. He
reiterated that the expectation that AGIA would end on June
30, 2014 would change if enabling legislation did not reach
expectations or if the state took a different ownership
approach.
2:29:44 PM
Vice-Chair Neuman wondered if TransCanada could encumber
funds or enter into contracts for work to be performed that
went beyond the trigger event. Mr. Bullock answered that
the legislature had enacted AGIA in a reimbursement mode;
reimbursing costs that were expended protected the state
from costs that had not been paid by TransCanada. The
effort had been to avoid funding the license upfront. He
shared that the Department of Revenue had published a
report in January related to AGIA.
Vice-Chair Neuman referred to development cost
reimbursement under the MOU. He noted that if the contract
was terminated for reason other than the execution of
transition agreements, the state would be liable to
reimburse TransCanada for all post December 31, 2013
development costs (less the amount equal to the allowance
for funds used during construction at a rate of 7.1 percent
and at the AGIA reimbursement rate). He asked Mr. Bullock
to elaborate.
Mr. Bullock replied that AGIA was still a contract to
reimburse qualified expenditures, which would continue
until the license ended. He detailed that the provision was
included in Exhibit C under the section related to the
termination of the agreement (page 8). The provision
related primarily to the reimbursement of costs that
TransCanada would have expended; it also included a credit
for any payments that had been made to the affiliate
TransCanada Alaska (the licensee).
2:32:43 PM
Representative Holmes expressed concern about exhibit B.
She pointed to Section 3 of Exhibit B (equity option term
sheet) where TransCanada had the right to make all
decisions on behalf of the limited partnership with several
exceptions. She believed the language provided TransCanada
with the seat at the table with producers on the gas
treatment plant and pipeline decisions. She pointed to
discussions in the legislature that the state appeared to
bare 100 percent of the financial risk, but had no seat at
the table. She thought the idea made no sense. She read
from Section 8 that "the parties acknowledge the
confidentiality provisions of the Alaska LNG project
agreements to which the limited partnership may become a
party, may prohibit or restrict disclosure of project
information to the state." She summarized that she felt
uncomfortable that the state would bare all the financial
risk, would have no say in the project negotiations, and
may not have access to the information.
Mr. Bullock answered that under AGIA TransCanada was
responsible for 10 percent of the qualified expenditures.
He surmised that the company was probably paying additional
costs because there were limitations on qualified
expenditures. He remarked that under the MOU it was not
clear to him what costs the state would reimburse. The
state would pay the costs plus the allowance for funds used
during construction (7.1 percent). He agreed that under the
MOU the parties developing the project were the three
producers and TransCanada and that TransCanada would ship
the gas received by the state through the project that it
owned and managed. At some point if the state decided to
buy into the project it would be liable for the operating
costs as well. He relayed that between July 30, 2010 and
May 2012 the state had not been privy to the status of the
project, the success of the open season, or conditions that
had prevented the open season. The MOU did include a
confidentiality agreement that may restrict TransCanada's
ability to share information. He stated that the MOU could
be looked at as a draft. He believed it should be taken
into consideration so the state would know as costs were
accrued up to various termination points whether the
project was viable.
2:37:31 PM
Mr. Bullock returned to the issue of reimbursement. The MOU
specified seven ways the MOU could be terminated (page 7).
Only the execution delivery of all transition agreements
did not potentially involve the state paying money. He was
not attempting to provide an opinion on the MOU, but to
provide questions the committee could think about.
Representative Holmes observed that the MOU was not
currently binding. Mr. Bullock interjected that one part of
the MOU was binding pertaining to development costs. He
explained that if the MOU did not go into effect page 7 of
the memorandum addressed what the state would be liable if
the MOU was terminated for any other reason other than the
passage of enabling legislation.
Representative Holmes noted that the MOU included
references that if enabling legislation passed the
commitment by the state and TransCanada to move forward to
terminate AGIA as uneconomic was binding.
Mr. Bullock replied that the agreement did not mention the
termination of AGIA due to a competing pipeline, which was
risky. Additionally, the MOU did not contain language
specifying that regardless of the uneconomic provision that
TransCanada and the administration mutually agree to end
the license. He referred to a discussion in the House
Resources Committee about what would happen if TransCanada
did not agree. The commissioner of DNR had testified that
the state would take advantage of arbitration provisions
included in the uneconomic provision and that the state
would have a good chance. He relayed that the commissioners
and TransCanada could determine that the Alberta project
was uneconomic; however, if it went to arbitration there
would be more objective standards the panel would consider.
He elaborated that the panel would look at what it would
cost to get the gas to market and whether there was money
to be made in selling or shipping gas or purchasing
affordable gas. He noted that the in-state project faced
the same issue where delivery costs were low enough that
purchasers were not paying more than they would for oil.
2:42:07 PM
Co-Chair Stoltze recalled sitting through the AGIA vote in
August 2008. He believed TransCanada had bullied the state
in the past. He wondered how to determine when and if the
state should discontinue moving forward with a partner.
Mr. Bullock replied that it came down to the market (i.e.
who would buy the state's gas and how much they were
willing to pay). Once the market had been established and a
range of prices had been determined the state could look at
the project itself to determine whether it could keep the
cost of delivery down low enough and make money on the gas.
He noted that the state would only earn money on the gas
(transportation would be a cost until the state reached a
point where another entity could pay it to transport or
liquefy the gas). Once a market had been identified the
producers and TransCanada would determine how to move
forward to protect the project from cost increases. He
noted that both the producers and TransCanada had an
interest in keeping costs low. The state would only be a
shipper of gas, which was why it had entered into the firm
transportation services agreement; the state was a
customer, not a transporter.
Co-Chair Stoltze believed the House Resources Committee had
discussed the issue and appeared to be proceeding on an
option that included TransCanada. He noted that it would be
part of the House Finance Committee's responsibility to
discuss the issue.
Mr. Bullock believed consultants would speak with the
committee later in the week about options for alternative
financing and its impact. He relayed that the state would
take on significant liabilities if it took on ownership
upfront (in addition to ensuring a market existed to cover
the state's costs). There was also the consideration that
the agreement with TransCanada was possibly a good deal; it
took on some of the state's risk and potentially what the
state paid above cost would be reasonable.
Co-Chair Stoltze noted that the issue needed to be vetted.
He wondered if the deal was a good or bad. He had not
received a straight answer from consultants.
Mr. Bullock advised the legislature not to vote for
something it did not understand. He compared the
legislature to a jury receiving advice from expert
witnesses who had the role of providing information to make
the decision makers comfortable. He believed the committee
should consider what the state would receive from ownership
of the pipeline.
2:49:47 PM
Co-Chair Austerman asked Mr. Bullock for confirmation that
he would be available to discuss the topic in the future.
Mr. Bullock replied in the affirmative. He remarked on the
importance of the issue and noted that the decisions would
impact the future of Alaskans.
Co-Chair Austerman thanked Mr. Bullock for his service.
2:50:46 PM
AT EASE
2:54:03 PM
RECONVENED
#379
HOUSE BILL NO. 379
"An Act relating to the limitation on the value of
property taxable by a municipality; and providing for
an effective date."
2:54:34 PM
REPRESENTATIVE BENJAMIN NAGEAK, read from a prepared
statement on HB 379:
Thank you for having me here today to present HB 379,
"An Act relating to the limitation on the value of
property taxable by a municipality; and providing for
an effective date."
HB 379 seeks to make a legislative change to the
formula how a municipality may use oil and gas tax
revenue. This is not a bill to raise taxes; it is a
bill to give municipalities the flexibility to raise
the cap which they can then use for their operating
budgets.
I have a long history with this issue, having served
on the North Slope Borough Assembly and as Borough
Mayor and can go on and on about it - which as you
know I am very happy to do! But also here today from
the North Slope Borough is Mr. Jake Adams, who served
on the first North Slope Borough Assembly and as the
second mayor of the Borough and was here at the very
beginning of the process that got all this started.
At the committee's pleasure Mr. Adams is available to
take you through a little of the history and the
importance of this issue to the Borough.
Mr. Chairman I also have two other employees from the
North Slope Borough, John Bitney and Rob Elkins, to
answer technical questions about the formula and how
that would work with this bill.
JACOB ADAMS, CHIEF ADMINISTRATIVE OFFICER, NORTH SLOPE
BOROUGH, BARROW, thanked the committee for hearing the
bill. He shared that his work with the borough had begun in
1972. He provided prepared remarks:
It was a struggle for us in the early days to form the
North Slope Borough. We were sued by the state and by
the oil companies. They said the Eskimos weren't
capable of governing themselves and managing finances.
When the oil and gas property tax laws were passed in
1973 the cap was written into state law about how much
property tax revenue could be used for municipal
operating budget. That was 40 years ago. Today the
North Slope Borough is my home and it's the home of my
children and grandchildren. It is a success story due
to the wealth of resources that are on the North Slope
Borough. We've built up our infrastructure with
schools, roads, airports, water and sewer system,
health clinics, and others. We pay for these services
that are provided by the State of Alaska and many
other regions. We basically pay for it while other
areas depend on the state for financial resources to
pay for those services. For example, we provide rescue
services for the entire North Slope. We also have a
fish and wildlife department that cooperatively works
with the North Slope, the State of Alaska, and federal
government. We have built up these services with
property tax revenues allowed by the state law. The
state taxes on oil and gas properties are at 20 mills.
The North Slope Borough has always kept property taxes
lower than the State of Alaska. We take all of the
revenues available to us and have been taxing at
primarily about 18.5 mills over the last 40 years;
there has been only one exception when we went to 19
mills. That's the only time we have deviated from 18.5
mills.
The bill before you today is a request to allow us to
raise the cap on the amount of revenue that can be
used for our operating budget. We will not raise the
property tax mill rate; we need that 18.5 mill to be
there so we try hard not to raise our mill levy much
beyond 18.5 mills (most other municipalities depend on
bond rating by rating agencies). We simply do not need
as much revenue for debt services these days because
we pretty much built all of the infrastructure that we
need in our communities, but need the operating
revenues to keep the maintenance up on these
infrastructures. Thank you for your time today.
3:01:07 PM
Co-Chair Stoltze asked the department to join the table.
ANGELA RODELL, COMMISSIONER, DEPARTMENT OF REVENUE, shared
that the department had worked closely with Representative
Nageak to craft a solution to address the North Slope
Borough's need to acquire additional operating budget
funds, while refraining from impacting the state's revenue
received from state property tax, along with the need to
keep as neutral as possible. She believed the bill achieved
all of the aforementioned purposes. She pointed to an
indeterminate fiscal note from the Department of Revenue
(DOR). The note included a potential impact of $10 million.
She noted that currently the North Slope Borough had a rate
of 18.5 mills, which had been in place for a number of
years. The borough had always had the opportunity to go to
20 mills; if it chose to go to 20 mills the impact to the
state would be approximately $10 million. She did not
believe the borough should be criticized or held
accountable for keeping its property taxes low and allowing
the state to collect some of its share of oil and gas
property tax.
3:03:46 PM
Co-Chair Stoltze wondered if DOR was satisfied with the
current legislation. Commissioner Rodell replied that the
department had spoken with the borough and sponsor about
adding a couple of timing pieces to clarify when the
multiplier would be calculated with the assessed value and
when the state would be noticed. The goal would be to
remove any confusion about when valuations were locked in.
The language had been provided to the sponsor's office as a
potential amendment.
Co-Chair Stoltze asked his staff to provide the
department's amendment language to committee members.
Representative Wilson wondered how how pipeline revenue was
collected by the North Slope Borough compared to Fairbanks
North Star Borough. Commissioner Rodell replied that the
calculation on the value of oil and gas property tax was
done separately from traditional residential property tax
valuations. The calculation was converted into a mill rate
and adjusted. She did not believe Fairbanks was anywhere
near its limits. She detailed that because Fairbanks had a
low mill rate the bill would allow the borough to use the
higher end of the 375 percent oil and gas property
valuation in the calculation evaluation for the mill rate.
3:06:10 PM
Representative Wilson pointed to page 34 of a handout
titled "Alaska Taxable 2013" (copy on file). She asked if
the Fairbanks tax had to go towards debt service and the
operating budget.
Commissioner Rodell replied that the calculation was
combined. She explained that the debt service calculation
was not capped and would continue to be uncapped. There had
been a cap of 20 mills in practice on the state's property
tax rate because the local property tax was fully
deductible from the state property tax. An extra
calculation was required on the valuation for oil and gas
property in addition to the traditional residential
property tax to compile an overall valuation that the
operating mill rate was applied to; the calculation was
combined with the debt service to determine an overall mill
rate (the figure was typically less than 20 mills). She
believed the current Fairbanks rate was significantly below
20 mills.
Representative Wilson wondered why the state mandated how
communities used the 12 mills from the pipeline (i.e. for
debt or operations). She thought communities should have
the ability to choose how to use the funds. She surmised
that if residents were taxed at 12 mills the pipeline could
only be taxed at 20 mills. She noted that 8 mills from the
pipeline tax went to the state. She understood that
initially the structure had been a way to encourage the
construction of infrastructure in communities, but she did
not believe the calculations were needed any longer.
Commissioner Rodell replied that originally the issue had
been about fairness on the state property tax and a way to
redistribute oil and gas property wealth throughout the
state to communities that may not have the same benefit.
She believed the state was indifferent about whether the
funds were used for operating budgets versus debt service.
The bill addressed reallocation and allowing increased
operation. She relayed that if the percentage was lifted
all together it would create a substantial tax increase
because it would triple the valuation the calculation was
based on; that tax would increase the cost of
transportation, which was deductible from the oil
production tax. She summarized that changes to oil and gas
property taxes had a direct cost to the state.
Vice-Chair Neuman wondered how the tiered formula had been
derived and how it would impact other municipalities and
jurisdictions. Commissioner Rodell answered that the tiered
formula was an effort to minimize the impact on tax payers
and the state, while giving communities the flexibility to
determine whether they wanted property tax to go to
operations or debt service. Additionally, the goal had been
to ensure that the bill would not impact a community's
ability to raise or lower their mill rate (whether the
community was like Fairbanks with a low tax rate or like
Valdez with a tax rate at 20 mills). She concluded that the
tiered solution had been the most balanced and had
addressed concerns regarding oil and gas property tax.
3:11:45 PM
Vice-Chair Neuman asked if the department proposed to work
with the legislation specifically for the North Slope
Borough. Commissioner Rodell replied that the North Slope
Borough had raised the concern. The department had worked
with the borough to make the bill as neutral as possible to
limit the impact on the state's property tax collection.
Vice-Chair Neuman believed the response to his prior
question may have been affirmative. He asked how the issue
would impact future gas pipelines and taxation (whether the
pipeline went through the North Slope, Fairbanks, Mat-Su,
or other). He asked whether the bill could reduce the tax
revenue to the state.
Commissioner Rodell answered that the department was not
yet in a position to make any recommendations on oil and
gas property with respect to the Alaska LNG project. She
referred to the creation of a municipal advisory group that
allowed the department to work with communities from Kenai
to the North Slope Borough and communities that may not
have the pipeline but that were impacted by a project like
the gasline. After the creation of an advisory board there
would be discussion about property tax implications and
impact payments. She did not believe the legislation would
affect the discussion or prohibit it from moving forward in
any way.
Vice-Chair Neuman surmised that if there was a natural gas
pipeline running through the North Slope Borough and others
that all communities would expect the same gratitude. He
believed it would impact the state's general fund revenue.
He remarked on the expense of a pipeline sitting on $45
billion land.
Commissioner Rodell replied that the state would have to
work with municipalities on oil and gas property tax in
relation to AK LNG. For example, law currently excluded LNG
facilities from being considered taxable property. She
believed the state would want to talk about what a $20
billion LNG facility in Nikiski meant for oil and gas
property tax; it was a conversation the administration
intended to have with municipalities because it would like
to have consensus with municipalities on how the property
was taxed. There were currently laws that would need to be
considered in light of the AK LNG project.
Co-Chair Stoltze surmised the gasline proposal must be
serious because municipalities had broken their previous
silence on the issue.
3:16:37 PM
Vice-Chair Neuman asked about the effect of the fiscal
note. He asked for verification that the current analysis
estimated a potential cost of $10 million per year.
Commissioner Rodell agreed that the cost could be $10
million per year if the municipalities all increased rates
to 20 mills. The department did not anticipate that the
communities would all implement the increase.
Co-Chair Stoltze wondered if the department's amendment
would impact the fiscal note. Commissioner Rodell replied
in the negative.
Vice-Chair Neuman asked whether the North Slope Borough
currently received impact assistance representing a certain
percentage of the royalty paid toward the Permanent Fund
Dividend. Mr. Adams answered that the North Slope Borough
and communities within the National Petroleum Reserve -
Alaska (NPRA) received impact funds. He estimated that the
funds were about $4 million in the current year.
Representative Nageak added that the state distributed the
funds to the communities.
Representative Munoz addressed the North Slope Borough's
desire to allocate a greater percentage of its tax revenue
to operations. She wondered whether the legislation would
provide sufficient flexibility for the borough to pick up
more debt if it chose.
Mr. Adams did not believe the borough wanted to pursue any
more changes in the way it administered property tax. The
bill would provide the borough with the flexibility needed
to ensure that municipality operations were well taken care
of. He remarked that the community had sufficient
infrastructure and did not have more need for the selling
of general obligation bonds. Maintenance of the existing
facilities was what concerned the community.
3:19:58 PM
Co-Chair Stoltze wondered if members had questions or
concerns about the proposed amendment from the department.
He intended to bring the language back in a CS the
following day.
Vice-Chair Neuman asked for a more defined fiscal note from
DOR.
Co-Chair Stoltze asked the department to work with Vice-
Chair Neuman on his fiscal note questions. Commissioner
Rodell replied in the affirmative.
Co-Chair Stoltze CLOSED public testimony.
HB 379 was HEARD and HELD in committee for further
consideration.
Co-Chair Stoltze discussed the schedule for the following
day.
ADJOURNMENT
3:22:56 PM
The meeting was adjourned at 3:22 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| 13Taxable.pdf |
HFIN 4/8/2014 1:30:00 PM |
HB 379 |
| HB 379 Letter of Support.pdf |
HFIN 4/8/2014 1:30:00 PM |
HB 379 |
| HB 379 Sponsor Statement_.pdf |
HFIN 4/8/2014 1:30:00 PM |
HB 379 |
| Sectional Analysis.pdf |
HFIN 4/8/2014 1:30:00 PM |
HB 379 |
| AK LNG MOU.pdf |
HFIN 4/8/2014 1:30:00 PM |
AKLNG |
| HB04 Legal Memo RE AGIA.pdf |
HFIN 4/8/2014 1:30:00 PM |
HB 4 |
| Summary of MOU.pdf |
HFIN 4/8/2014 1:30:00 PM |
AKLMG |
| Authority To End AGIA.pdf |
HFIN 4/8/2014 1:30:00 PM |
AKLNG |
| AGIA Timeline.pdf |
HFIN 4/8/2014 1:30:00 PM |
AKLNG |
| MOU Review HFIN LegLegal.pdf |
HFIN 4/8/2014 1:30:00 PM |
AKLNG |
| HB 379 DOR Suggested Language.pdf |
HFIN 4/8/2014 1:30:00 PM |
HB 379 |
| HB 379 WORKDRAFT CS FIN U version.pdf |
HFIN 4/8/2014 1:30:00 PM |
HB 379 |