Legislature(2003 - 2004)
03/23/2004 09:04 AM Senate FIN
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
SENATE BILL NO. 271
"An Act amending the purpose of the Alaska Natural Gas
Development Authority to include planning, developing,
constructing, managing, or operating an economically viable
gas pipeline project from the North Slope of Alaska by a route
that parallels the Trans Alaska Pipeline System or the Alaska
Highway; authorizing evaluation of opportunities for private
sector involvement in the project; amending requirements
related to the Authority's preparation of a development plan;
and providing for an effective date."
This was the first hearing for this bill in the Senate Finance
Committee.
Co-Chair Wilken stated this bill, sponsored by Senator Ogan,
"expands the responsibility of the Alaska Natural Gas Development
Authority to include the review of the economic viability of a gas
pipeline that parallels the Trans Alaska Pipeline."
SENATOR SCOTT OGAN testified that he introduced this legislation
after spending time last summer with Senator Dyson at various
meetings in Canada. Senator Ogan stated that in his capacity as
chair of the Energy Conference, he traveled through Western Canada
to lobby the province of British Columbia to join the Conference.
He relayed that he learned that the Trans Canada pipeline would
have adequate capacity to transport natural gas were a pipeline
constructed in Alaska to the Canadian border.
AT EASE 9:07 AM / 9:07 AM
Senator Ogan opined that Alaska "must have all possible tools in
the toolbox" in its efforts to develop natural gas resources. He
reminded of ongoing negotiations between the Murkowski
Administration and Mid America Group. He was unsure of the status
of these negotiations, but understood an agreement would be reached
for stranded gas development.
Senator Ogan indicated this legislation would allow consideration
of constructing a tax-free natural gas pipeline in Alaska to the
Canadian border. He preferred that the private sector undertake
this project, but in the event it does not, he said this
legislation would provide an opportunity for the State to undertake
the project.
Senator Ogan asserted that a primary focus of the Energy Council is
determining how the US would deal with the upcoming energy
shortage. He commented on the inability to obtain a permit to
construct a nuclear power site and the near impossibility to obtain
a permit to operate a coal burning facility. He reported that the
supply of natural gas available in the Lower 48 is unable to meet
demand and subsequently the costs have increased. As a result of
these factors, he expressed this is the appropriate time for Alaska
to pursue development of natural gas resources for distribution to
other states.
Senator Ogan warned that if Alaska does not take advantage of this
opportunity immediately, entities from other countries would. He
cited that by the year 2020, the US would import between 11 and 24
percent of its liquefied natural gas from other countries. He noted
this estimate includes an assumed 4.5 billion cubic feet of natural
gas produced in Alaska. He told of "offshore" facilities under
construction, some of which are undertaken by producers also
operating in Alaska.
Senator Ogan spoke of producers' preference to ship natural gas
from tidewaters because the expense of approximately $2.5 billion
is less than the proposed $7 or $8 billion project in Alaska.
However, he did not deem this to threat the ability to construct a
natural gas pipeline in Alaska.
Senator Ogan informed that a shared effort is the only feasible way
to finance a natural gas pipeline in Alaska.
Senator Ogan pointed out this bill would extend the termination
date of the Alaska Natural Gas Development Authority until January
1, 2005. He also noted the addition of subsection (12) to the
uncodified law enacted in Section 5(a), 2002 General Election
Ballot Measure 3, contained in Section 4 of the bill to read as
follows.
(12) an evaluation of the opportunities for private
sector involvement in the planning, development, construction,
management, and operation of the gas transmission pipeline
project.
Senator Ogan had understood the omission of this language in the
original ballot initiative was an oversight. He commented to his
"comfort" in adding this language. He asserted, "Usually government
is good at fixing things until they're broke." He asserted
construction of a pipeline is not an appropriate role for
government and that private industry should finance such a project.
However, he remarked that involvement of government could garner
better financial terms for private entities. He surmised that Trans
Canada, Mid America Group, or a producer could take advantage of
these financing opportunities.
Co-Chair Green asked if the extension of the termination date to
January 1, 2005 would be adequate. She understood concerns
regarding time constraints.
Senator Ogan agreed this is an "aggressive date". He noted current
law provides that the Authority is terminated one year following
the first meeting of the Board of Directors, which occurred in June
2003. However, he stressed the immediate need to secure a
commitment to construct a pipeline. He again warned that if not
done in Alaska, natural gas supplies for the U.S. would come from
elsewhere.
Co-Chair Green requested a map showing the current proposed route
of a natural gas pipeline and how a pipeline route, as proposed in
this legislation would differ.
Senator Ogan did not have maps with him, but described the proposed
route paralleling the Alaska-Canada Highway from Delta to the
Canadian border.
Co-Chair Green requested maps be provided to her.
Senator Olson asked if the proposed pipeline to the Canadian border
would be tax-free and asked for clarification.
Senator Ogan affirmed. He explained that if the government owned
the pipeline, through, the Alaska Natural Gas Development
Authority, as a quasi-public private corporation, the pipeline
would be tax exempt. He compared the Authority to the Alaska Rail
Road Corporation, in that its assets are not taxable. He qualified
that an agreement with affected communities for payment in lieu of
taxes would be necessary. He noted such arrangements are expected
for the current proposed pipeline route. He surmised the private
sector would want to take advantage of this tax-exempt status. He
furthered that the State would receive a higher return because
royalties are calculated after tariffs and taxes are deducted from
the transportation costs. He remarked that any efforts to reduce
transportation costs would result in higher profit and earnings for
the State.
Senator Hoffman asked about the need to acquire right of way access
to lands in which the pipeline would traverse.
Senator Ogan replied that a significant portion of the land
involved is Tetlin-owned and that possibly other lands owned by
Doyon Limited located near Tok could be affected. He noted the need
to acquire rights of way, but pointed out the myriad of landowners
in other areas of the state.
Co-Chair Wilken clarified that Senator Ogan's reference to natural
gas supplied from "offshore" sources does not relate to operations
in the Gulf of Mexico for example, but rather from countries other
than the United States.
Senator Ogan affirmed.
Co-Chair Wilken referenced a report "Alaska Natural Gas Development
Authority Benefits to Alaskans" issued in September 2003 [copy not
provided]. He asked how the information in this report differs from
the report required of the Alaska Natural Gas Development Authority
by the ballot initiative of 2002 and referenced in Section 4 of
this bill.
Senator Ogan did not know.
HAROLD HEINZE, Chief Executive Officer, Alaska Natural Gas
Development Authority, testified via teleconference from Anchorage
that the Authority's motives as a public corporation are to
maximize benefits to Alaska. Therefore, he stated, the Authority is
"willing to do or not do lots of things." He explained the
Authority has "no particular interest" in participating in the gas
development business unless "very identifiable benefits" to
Alaskans are involved. He exampled that of all the rhetoric
pertaining to development and transportation of Alaskan natural gas
pipeline, the Authority is the only party addressing the issue of
delivering gas to the Cook Inlet area. Regarding specific
projects, he relayed that the Authority welcomes this legislation
because it allows the Authority to contribute to the "State's
overall team effort in the broadest sense and without any real
restriction." He cautioned, however, that this legislation should
not be construed as a directive to the Authority to pursue certain
actions. He spoke of the Authority's "unique financing abilities"
regarding taxes, debt, debt structure, interest rates and other
variables that could potentially lower the financing costs of any
project. He surmised this is an appropriate role for the Authority,
if it would assist in progressing the project.
Mr. Heinze stressed that the Authority never considered using State
funds to finance any natural gas pipeline project and rather that
funding should be from "the normal money sources that are available
to the private sector." He explained that State involvement allows
greater flexibility and lower interest rates for a private entity
funding the project. He remarked that if the Authority does not
"test" itself "against the normal market, we think the State could
make a very bad mistake."
Mr. Heinze reminded that the provisions of Ballot Measure 3,
creating the Authority specifically provide for a natural gas
pipeline from Prudhoe Bay to Valdez in the Prince William Sound
with a spur line from Glennallen into the Cook Inlet area. He noted
this bill broadens that perspective to allow the Authority to
consider a pipeline route following the Alcan Highway to the
Canadian border. He stressed the value of having this option to
allow the Authority to choose a route in the best interest of
Alaska.
Mr. Heinze informed that a route following the Alyeska Trans Alaska
Pipeline from Prudhoe Bay to Valdez has rights of way already
acquired though the pipeline corridor. He noted that the Yukon
Pacific Corporation has acquired right of ways from private
landowners for this route, which the Authority would acquire for a
natural gas pipeline. He also noted that under imminent domain
laws, private-owned lands could be acquired at fair market value.
He furthered that the portion of the route between Glennallen and
the Cook Inlet is largely located on State-owned land and as an
agency of State government the Authority could utilize these lands.
Mr. Heinze compared this to the proposed route along the Alaska
Canadian Highway, which would be located on a significant portion
of private-owned land and State-owned land. He understood that no
party has obtained rights of way for this route. He considered the
right of way issues in Alaska relatively minor in comparison to
lands in Canada located along the proposed route. He stated the
Trans Canada organization would have to address First Nations and
other landowner issues.
Mr. Heinze spoke to the proposed extension of the termination date
of the Authority. He noted the first meeting of the Board of
Directors was held on June 16, 2003 and according to current
statute, the Authority would expire one year from that date on June
13, 2004. He agreed that meeting this deadline would be
challenging, but assured it could be accomplished "within a couple
of months". He did not oppose an extension to the end of the year
2004, but informed that the Authority intends to complete its work
by the end of the 2004 summer.
Mr. Heinze reported that the Authority has not adopted a business
structure and must first investigate whether it should be
classified as a nonprofit organization, a corporation "with a very
low profit objective, a utility, or another status. He remarked
upon the "tremendous opportunity" the Authority had to become
exempt from federal income tax, to issue tax-exempt bonds, and
achieve favorable debt to equity ratios and low interest rates. He
stressed the importance of all issues combined. He expressed the
Authority's intent to hire a consulting firm to review and provide
advice as to how to provide the lowest cost of service.
Mr. Heinze addressed the issue of natural gas imported into the US.
He asserted "major forces at work around world working very
dynamically, looking at the United States as a place to move their
gas to." He stressed the importance of reaching a decision
regarding Alaska natural gas expediently. He agreed with Senator
Ogan that if efforts to develop and transport the resource from
Alaska were delayed, Alaska would be "left out of the game."
Mr. Heinze summarized that the Authority operates in the best
interest of Alaska, and would benefit from the ability to consider
all options.
Co-Chair Wilken again referenced the report " Alaska Natural Gas
Development Authority Benefits to Alaskans" and restated his
question about comparison of this report to the report required in
Section 4 of this bill.
Mr. Heinze replied the existing report is a compilation of a
"fairly large number " of Alaska consulting firms and reflects an
attempt to identify actions relevant for advancing the project. He
informed that since the report was issued, the Authority has
received only minimal funding and the recommendations of the report
would require approximately $2.5 million to implement. Therefore,
he informed, most of the recommended efforts have not been
undertaken. He noted that a benefit analysis that provides a
testing model should be finalized by the end of the month. He
predicted that all other aspects specified in the development plan,
including a revenue sharing plan with municipal governments, would
be addressed by the upcoming summer. He assured the Authority has a
"fairly good understanding" of possible projects and costs. He
summarized the report issued in September represents efforts the
Authority would have preferred be done, although funding and time
have been inadequate to undertaken them all.
Senator Olson asked the impact of this legislation on the existing
tax structures of the North Slope Borough, the Fairbanks North Star
Borough and other local governments.
Senator Ogan responded that if the Authority constructed a pipeline
were constructed from Prudhoe Bay to the Canadian border, the
pipeline would be tax-free. He noted the same status was envisioned
for a Prudhoe Bay to Valdez route and would require negotiation to
address local government concerns. He listed examples of increased
costs to local governments with the location of a pipeline in the
community from: school enrollment, wear and tear on local roadways
and emergency services.
Mr. Heinze remarked that in recognition of the increased costs, the
Authority is directed by the provisions of Ballot Measure 3, as
shown in Section 4 of the bill, to include a revenue sharing plan
with municipal governments in the development plan. He spoke of
intentions to recognize that despite exemption from taxation, the
Authority would be "morally obligated" to identify ways for local
governments to address the increased expenses and also to share in
the revenue generated.
Senator Olson surmised that this legislation has not been "accepted
with enthusiasm" by the North Slope Borough or the Fairbanks North
Star Borough.
Mr. Heinze replied that this bill does nothing to change the
Authority's tax status established in Ballot Measure 3. He
qualified that this bill "raises eyebrows" to this realization. He
emphasized that he has been forthright in expressing to local
government a willingness to identify ways to offset the impacts a
pipeline would have on the communities.
Senator Ogan stressed that the State has an "overwhelming" interest
in having an independent entity constructing the pipeline because
both producer and the State would share equal interest in
maintaining low tariffs. He remarked that a natural gas pipeline
would also benefit the State because it would encourage development
in other areas of the North Slope, such as the Foothills region. He
elaborated on the benefits to the State and to the North Star
Borough in the development of the Foothills resources. He
understood that Senator Olson has concerns with this legislation,
but Senator Ogan argued that revenues from the development of the
Foothills region would outweigh the tax exemption of the pipeline.
Senator Hoffman surmised this legislation should therefore include
a requirement of the Authority to include a plan for payment in
lieu of taxes for local governments.
Co-Chair Wilken asked if subsection 5(a)(5) of Ballot Measure 3,
contained in Section 4 of the bill would suffice. This language
stipulates that the Authority must include a plan for revenue
sharing it its development plan.
Senator Hoffman opined that this language is not specific enough to
assure that payment in lieu of taxes would be addressed.
Senator Ogan was unsure. He stated that the impact on local
governments must be considered and deferred to the Senate Finance
Committee as the appropriate entity to address the matter.
Mr. Heinze line 9, recalled that the ballot initiative was drafted
to model the Alaska Gasline Port Authority already in existence. He
defined the Alaska Gasline Port Authority as a consortium of three
local governments formed with the intent to export natural gas from
the North Slope, using a tax-exempt method and a revenue sharing
plan.
Senator Bunde pointed out the stipulation that the Alaska Natural
Gas Development Authority "must include" a revenue sharing plan
with municipal governments in its development plan. He surmised
this affords flexibility.
Co-Chair Green offered a motion to report the bill from Committee
with individual recommendations and previous fiscal note.
There was no objection and SB 271 MOVED from Committee with zero
fiscal note #1 from the Department of Revenue.
Co-Chair Wilken directed attention to information distributed to
members from the Department of Labor and Workforce Development
responding to issues that were raised during hearings the previous
week.
Senator Bunde commented that the largest portion of Alaska's
population is between the ages of 35 and 50, which he characterized
as the "working ages". He furthered that given no changes to
current trends the smallest portion of Alaska's population would be
aged 30 to 50 by the year 2015. He opined this should be understood
when considering efforts to create jobs and implement an income
tax. He pointed out that the smallest population age group would be
required to contribute the most.
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