Legislature(2005 - 2006)SENATE FINANCE 532
07/25/2006 09:00 AM Senate SPECIAL COMMITTEE ON NATURAL GAS DEV
| Audio | Topic |
|---|---|
| Start | |
| SB3001 || SB3002 | |
| Robert J. Cupina, Ferc | |
| Jacqueline Holmes, Ferc | |
| Donald Shepler, Consultant to the Legislature | |
| Robert Pease, Ferc | |
| Ken Griffin, Deputy Commissioner, Dnr | |
| Karol Lyn Newman, Morgan, Lewis & Bockius, for Anadarko | |
| David Van Tuyl, Bp | |
| Bradford G. Keithley, Jones Day, for Bp | |
| Bill Mcmahon, Exxonmobil | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | SB3001 | TELECONFERENCED | |
| += | SB3002 | TELECONFERENCED | |
SB 3001-OIL/GAS PROD. TAX
SB 3002-STRANDED GAS AMENDMENTS
9:16:36 AM
CHAIR SEEKINS opened the hearing on SB 3001 and SB 3002. He
noted in a letter to the Federal Energy Regulatory Commission
(FERC) the committee had requested discussion of the following
with respect to the proposed gas pipeline: FERC's July 10
report to Congress; its prefiling application process; its
powers to ensure access to capacity on the pipeline for shippers
and prospective shippers not affiliated with pipeline owners;
FERC's review of competition issues as part of its processing of
a certificate application; its enforcement powers and procedures
with respect to affiliate relationships in a producer-owned
Alaska gas pipeline, including the response time of the
enforcement hotline; and FERC's review, if any, relating to
anticompetitive behavior for a pipeline, including the concept
of "basin control."
9:19:45 AM
^Bob Loeffler, Morrison & Foerster, Counsel to the Governor
BOB LOEFFLER, Morrison & Foerster, Counsel to the Governor,
informed listeners he has been counsel to the state in pipeline
matters for a long time. Recalling previous discussion of
FERC's role and authority, he advised members that this morning
he'd added expansion issues to the agenda through an e-mail. He
said the FERC representatives, who were on teleconference from
Washington, D.C., would answer questions rather than provide
testimony as such.
^Robert J. Cupina, FERC
ROBERT J. CUPINA, Deputy Director for Policy, Office of Energy
Projects, Federal Energy Regulatory Commission, introduced
himself as well as Bob Pease and Jacqueline Holmes; he noted
Jeff Wright might join in, depending on the questions.
9:22:33 AM
CHAIR SEEKINS highlighted expansion and basin control. He asked
what safeguards, policies and procedures are in place to
preclude basin control if, for example, the three major
producers were to hinder access to the proposed pipeline to keep
others out of the gas-production business.
MR. CUPINA responded that before there is expansion, there must
be a pipe. He indicated FERC laid the groundwork for the
capacity in the initial pipeline to be sold on a
nondiscriminatory basis when it did its open season rule, as
required under the 2004 Act. That was the beginning of ensuring
that everyone interested in capacity has an equal opportunity.
Once a pipeline is in place and expansion becomes justified
because of increased volumes, the pipeline would conduct another
open season on the expansion capacity, going through the same
process; owners, non-owners and all potential shippers would be
under the same terms and conditions to bid for that service.
9:25:54 AM
CHAIR SEEKINS reported hearing that there is a difficult process
in order to get to the expansion.
MR. CUPINA explained that under that same 2004 Act, the Alaska
Natural Gas Pipeline Act (ANGPA), two types of expansion are
contemplated. The first, voluntary expansion, is common for
interstate pipelines. When a pipeline following its business
model deems that an expansion is profitable, it will go into an
open season to gauge market interest.
He said the second, mandatory or involuntary expansion, is a
brand-new legal authority under ANGPA that applies only to an
Alaska gas pipeline. It would enable a potential shipper to
file a complaint with FERC, saying it wants an expansion but the
pipeline has refused, and asking FERC to order it. Mr. Cupina
suggested the argument could be made that because this hasn't
been fully tested, it could be subject to an on-the-record
complaint proceeding.
CHAIR SEEKINS asked why it was included only for an Alaska gas
pipeline and not elsewhere in the country.
9:29:00 AM
MR. CUPINA replied he believes there were a number of variations
from FERC's normal policy in that Act, specific to Alaska,
recognizing there probably would be only one pipeline, and
taking into account concerns of other stakeholders, smaller
producers in the state that might want gas before it leaves
Alaska and so on. Thus ANGPA was targeted to address some
concerns that don't necessarily apply in the Lower 48, where
there often is competition between pipelines.
SENATOR WILKEN noted a question has come up with respect to the
difficulty new explorers have in accessing the oil pipeline
today; he cited examples. He related his understanding that
expansion of the proposed gas pipeline beyond 25 percent will no
longer allow cheap compressor expansion, but will require
expensive looping and additional compressors. He asked in what
manner the state and producers will say to FERC that
economically they prefer rolled-in pricing rather than
incremental pricing on any expansion, to avoid the problems of
today, and so new producers can have access 20 years from now
and not be burdened with the complete incremental cost of
expansion beyond that 25 percent.
9:32:43 AM
MR. CUPINA answered that is a good example of where FERC
deviated from its standard policy. On expansions going forward
there will be a rebuttable presumption that costs are rolled in.
The standard policy, by contrast, is they are rolled in as long
as they don't increase the rates of existing customers;
otherwise, it's incrementally priced. He added that FERC's open
season rule, in response to comments from parties, addressed
that by making that policy pronouncement with respect to rolled-
in pricing, thereby giving assurance - to the extent possible
without actually having a project and numbers to view - that
future expansions will be on a rolled-in basis.
SENATOR WILKEN asked if there is a way today for the people, the
administration and the producers to make a formal request for
that policy from the date of the contract onward.
MR. CUPINA responded that he couldn't think of anything else
required outside of FERC's order and the rehearing of its order.
He said he wanted to be sure in this discussion not to get into
the provisions of the proposed contract, which they've
studiously avoided because it is unique to the State of Alaska.
SENATOR STEDMAN asked whether it automatically goes to
incremental pricing if there is any change in the price, or
whether some change can be absorbed by the current people.
MR. CUPINA answered, "They didn't lay out any percentage." He
recalled at one time, some years ago, a percentage aspect
determined whether it was rolled in. In the Alaskan order,
however, FERC recognized it was doing something a little
different and, to the extent it could, said its policy will be
to have rolled-in expansion, not increasing the rates for
existing customers. Where FERC was talking about a rebuttable
presumption that costs would be rolled in, it was looking at
mainly the type of expansions expected as production increases.
SENATOR BEN STEVENS referred to the fiscal interest finding and
asked Mr. Loeffler how big the pipeline will be. He recalled it
would originally be 4.2 billion cubic feet (Bcf) a day, with
cheap expansion to 5.9 Bcf.
MR. LOEFFLER confirmed those numbers are about right, the best
known today.
SENATOR BEN STEVENS calculated the cheap expansion to therefore
be 40 percent, not 25 percent. He asked Mr. Cupina whether it
is up to FERC or the pipeline owners to make a determination
with respect to a voluntary-expansion application.
MR. CUPINA responded that FERC ultimately makes the decision,
but it usually starts with a proposal from the pipeline owners.
He opined that FERC was signaling here its inclination to roll
in the cost of expansions, whether or not those costs raise the
rates for existing customers, for reasons mentioned earlier with
respect to later explorers.
9:39:29 AM
SENATOR BEN STEVENS posed a scenario in which the project moves
forward and goes through an open season, with capacity fully
subscribed; three years later, a leaseholder does some
exploration and determines it can now apply for capacity because
it has proven reserves. He asked whether that entity would have
two options: negotiate with the pipeline operators for
voluntary expansion or file a complaint with FERC and request
mandatory expansion.
MR. CUPINA affirmed those two options, but pointed out FERC
would first expect discussions about a voluntary expansion
before going to the next step.
SENATOR BEN STEVENS asked: If there is negotiation between the
pipeline operators and a new producer to determine rolled-in
versus incremental pricing, would that final determination be
made by the pipeline operator or FERC?
9:41:18 AM
^Jacqueline Holmes, FERC
JACQUELINE HOLMES, Associate General Counsel for Energy
Projects, Federal Energy Regulatory Commission, replied that if
the pipeline operator filed a voluntary application for
expansion, the decision whether it would be incremental or
rolled in would ultimately be FERC's. The current policy for
the Alaska pipeline for voluntary expansion, stated in FERC's
open season regulations, is a rebuttable presumption that the
cost of expansion is rolled in.
MR. CUPINA, in further response, explained that the rolled-in
presumption was a policy change by FERC for all voluntary
expansion, whether cheap or expensive. Recalling one issue in
the comments, that a rolled-in basis is only beneficial to later
shippers if it applies to the more expensive expansion, he
emphasized that mandatory expansion isn't automatically
incremental. For mandatory expansion, there is another wrinkle
in the Act: the cost of the expansion cannot increase the rates
of the existing shippers. He said it remains to be determined
by FERC exactly how to apply that.
9:48:08 AM
SENATOR BEN STEVENS asked: If there is a petition for mandatory
expansion, does that portion of the expansion capacity go out to
open season?
MR. LOEFFLER recalled that Orders 2005 and 2005-A say they don't
apply to mandatory expansions. "I think the commission reserved
that," he added, offering to check the cite.
MS. HOLMES affirmed that recollection.
MR. CUPINA said he believed the idea of mandatory expansion was
viewed as case-specific, with the expectation it would be rare.
If Mr. Loeffler is correct, that would be a reason why this
whole open season is associated with it.
MS. HOLMES added that technically the current FERC regulations,
which mandate open seasons for voluntary expansions, wouldn't
apply to a mandatory one. If FERC were to consider a mandatory
expansion, it would also consider the process the company would
have to go through at that time.
SENATOR BEN STEVENS mentioned the potential for basin control
and asked: If a new company found gas, went through the
mandatory-expansion process and was granted expansion, would
that company have secure rights to the expansion such that
existing shippers couldn't outbid for it?
MR. LOEFFLER answered that the expansion statute says if the
commission orders mandatory expansion, the order becomes void
unless the person requesting the expansion executes a firm
transportation (FT) agreement. He interpreted it to say there
cannot be an open season, because if the person who applied for
the expansion must execute an FT agreement, it implies the
person is entitled to that capacity if the commission orders it.
He clarified that he didn't know whether FERC had looked at it
or taken a view on it.
9:52:06 AM
SENATOR BEN STEVENS asked whether any provision in Alaska law
can override a FERC ruling.
MR. LOEFFLER replied no.
SENATOR BEN STEVENS related his understanding that federal law
overrides state law in interstate commerce. He asked whether
any provision, in any contract in the U.S. between shippers,
could nullify or mitigate a provision required by FERC.
MS. HOLMES said she believed the answer was no. If FERC
requires something under its jurisdiction under the Natural Gas
Act or its own regulations, a company generally cannot agree
with its shippers not to follow that. There are times, however,
when FERC will grant a waiver of its regulations if good cause
is shown.
MR. LOEFFLER agreed, adding that when FERC issues a certificate
with conditions, the applicant doesn't have to accept it.
9:55:10 AM
SENATOR BEN STEVENS asked: Under voluntary expansion,
regardless of negotiations between the pipeline operator and the
applicant for capacity, is the determination of rolled-in versus
incremental pricing determined by FERC?
MS. HOLMES replied yes, FERC will set the rate for the service
on the pipeline. In response to a hypothetical situation posed
by Chair Seekins, she offered her belief that Section 105
[of ANGPA] says the following: Under a mandatory expansion, the
commission shall ensure the rates don't require existing
shippers on the natural gas transportation project to subsidize
"expansion shippers."
She noted it is a question of what constitutes subsidization;
that is where FERC would look at the price of the expansion and
fair allocation of those costs. Ms. Holmes added that in cases
of cheap expansion in the Lower 48 or the interstate system,
FERC generally requires a rolled-in basis because it benefits
rather than harms existing shippers on the system.
9:59:17 AM
REPRESENTATIVE RALPH SAMUELS, Alaska State Legislature, asked:
If influence in the process is desired, would Congress need to
be petitioned, since FERC will decide, and expansion
capabilities cannot be affected through the contract or statute?
MR. CUPINA replied that FERC would decide on the public interest
in considering whether to issue a certificate. As to whether
contract terms can deviate from FERC policies or Alaska Statute,
he noted Ms. Holmes had said in general they cannot, but FERC
has granted certain waivers, if justified. The law cannot be
changed by writing something into the contract, Mr. Cupina
added, but it is a question of bringing it before the commission
so FERC can see the evidence and reasoning.
MR. LOEFFLER requested confirmation that the contract could
influence what is proposed to FERC, but couldn't control what
FERC decides.
MR. CUPINA affirmed that, adding that everything which comes to
FERC is based on some sort of contract or precedent agreement.
10:02:04 AM
^Donald Shepler, Consultant to the Legislature
DONALD SHEPLER, Greenberg Traurig, LLP, Consultant to the
Legislature, restated that understanding. Highlighting a
distinction between a rate increase and a subsidy, he then
requested confirmation that the 2004 statute in the context of
mandatory expansion doesn't prohibit FERC from ordering
expansion if there is a rate increase to existing shippers;
rather, it's if FERC finds it would result in a subsidy by
existing shippers to the new shippers.
MR. CUPINA agreed, adding that FERC Order 2005-A focused on that
definition of subsidy and indicated it could be applied
differently than for the Lower 48. For mandatory expansion,
there could be rolled-in or incremental pricing, and FERC, to
his belief, said it must look at the situation.
MR. SHEPLER clarified that he'd drawn the distinction because
Mr. Cupina said earlier that FERC cannot mandate expansion if it
results in an increase to existing shippers, whereas it is
actually a subsidy. He suggested lawyers will debate this at
great length.
MS. HOLMES concurred with Mr. Shepler's interpretation.
MR. CUPINA said the point was well taken.
MR. LOEFFLER agreed, but suggested under mandatory expansion the
contract is irrelevant, because mandatory expansion under the
statute is initiated by some excluded party - not the pipeline.
When talking about what is proposed by the pipeline, therefore,
it's only for voluntary expansion, and the contract would have
bearing on what is proposed.
MR. CUPINA concurred. Referring to Ms. Holmes' testimony, he
said a mandatory expansion culminates in a firm contract. It
doesn't begin with a contract, but ends with a contract.
MR. LOEFFLER agreed.
CHAIR SEEKINS asked whether the following understanding is
correct: There is a 40 percent expansion capacity in the pipe.
The contract terms could provide that, without unreasonable
delay, the state or pipeline owners would participate in
voluntary expansion as supplies of gas become available.
MR. LOEFFLER answered yes, noting the LLC agreement describes
the process for the pipeline to entertain a voluntary expansion,
including how it will be studied and voted on. He also recalled
a section that says if someone files for mandatory expansion,
the LLC might reverse a neutral position and decide to be in
control of it, rather than be subject to a FERC proceeding. The
reason is this: If it has a sound economic basis, it would seem
to be in the pipeline's interest to expand its business, just as
it would be in any business's interest to get more customers.
10:10:17 AM
MR. LOEFFLER asked Mr. Pease: If the pipeline owners engage in
behavior viewed as anticompetitive, what remedies does FERC have
in Order 2004 or Order 670, for instance?
^Robert Pease, FERC
ROBERT PEASE, Division of Investigations, Office of Enforcement,
Federal Energy Regulatory Commission, replied that FERC has a
number of remedies and powers, some new. For any violation of
the Natural Gas Act or any statute under the commission's
jurisdiction or regulations, FERC can impose a civil penalty up
to $1 million a day per violation; this is a significant change
in FERC's authority. The commission also has the option of
ordering disgorgement of any profits that would have been gained
by the illegal behavior. As set out in its enforcement policy
statement of last year, it would begin with disgorgement and
then proceed to other remedies including civil penalties.
He said FERC has authority to prohibit undue discrimination on
the pipeline. The idea of the standards of conduct is a level
playing field and similar treatment for all participants,
including affiliates and the producers. Mr. Pease pointed out
that undue discrimination doesn't have to rise to the level of
manipulation to trigger enforcement or FERC's potential million-
dollar-a-day civil penalty authority; violations include those
involving tariff conditions or certificate conditions. If a
violation continued for 100 days, for example, the maximum civil
penalty would be up to $100 million, since it is per day.
10:13:02 AM
MR. PEASE, in response to Chair Seekins, explained that under
FERC regulations, Section 358, "energy affiliate" means an
affiliate of a transmission provider that is engaged in or is
involved in transmission transactions in U.S. energy or
transmission markets. Noting that is the broad definition, he
added that there cannot be undue discrimination in favor of an
energy affiliate.
SENATOR HOFFMAN asked: What course of action does the state
have if there is a disagreement with FERC with respect to
rolled-in or incremental pricing, or mandatory versus voluntary
expansion, when there is a conflict with Article VIII,
Section 2, of the Alaska State Constitution, which says the
legislature shall provide for the utilization, development and
conservation of all natural resources that belong to the state
for the maximum benefit of its people?
MR. PEASE noted this discussion has related to FERC jurisdiction
over the pipeline, not the gas itself. He added that in any
case before FERC, including pipeline construction or operation,
the state can certainly make its case as to why FERC should
deviate from something it said previously.
SENATOR HOFFMAN suggested the effort is to determine the maximum
benefit of the resource, since the state will be a percentage
owner, at 25 percent.
MR. PEASE responded that FERC would consider whatever was in the
record of the case, to see whether it justified a change from
what it otherwise would do. He pointed out that FERC doesn't
regulate commodity prices, production and so forth, but is
mindful, under ANGPA, that part of its obligation is to further
production and exploration with respect to pipeline operations.
10:17:06 AM
CHAIR SEEKINS returned to Senator Ben Stevens' remark that
federal law would prevail, since this is an interstate commerce
issue. Agreeing with the need to ensure that the resource is
used for the maximum benefit of Alaskans, Chair Seekins said he
didn't know how it would interplay, but the state could
certainly present its case if FERC regulation were to somehow
affect it.
SENATOR BEN STEVENS asked Mr. Pease whether these enforcement
regulations are different from normal FERC regulations.
MR. PEASE clarified that in the Energy Policy Act of 2005
(EPAct), passed last August, Congress gave FERC enhanced penalty
authority that it didn't have before. The regulation he'd read
has existed since 2004. Prior to that, for a violation under
the Natural Gas Act, FERC had only limited remedies, including:
disgorgement, which he views as giving back money they never
should have had to begin with; conditions put on a certificate;
or revocation of a certificate if the violation was so
egregious, which has rarely happened, if at all, in FERC's
history. Since August 8, therefore, Mr. Pease said FERC has
civil penalty authority for any violation under any of the rules
or statutes that FERC administers.
He further explained that last spring, pursuant to EPAct, FERC
enacted new regulations designed to prevent manipulative
behavior, which carried civil penalties that didn't exist prior
to the statute. Before that, there were so-called behavior
rules, with no civil penalties. Today, there is civil penalty
authority under any rule, statute or regulation under FERC's
authority. Included are the standards of conduct, which govern
affiliate relations, and also the certificate conditions,
including construction and operation of the pipeline under those
certificate conditions. All those potentially are subject to a
civil penalty of $1 million a day per violation.
MR. LOEFFLER noted it also applies to a violation of the open
season regulations.
MR. PEASE agreed, specifying it applies to any and all
regulations and statutes relating to gas under the commission's
jurisdiction.
10:21:13 AM
SENATOR WAGONER asked: With 35 trillion cubic feet (Tcf) of
proven reserves on the North Slope, and a 52- or 54-inch pipe,
what is the advantage to the State of Alaska and smaller
producers - which have the potential to find major gas reserves
- of an early open season? Someone might want to use a 40- or
48-inch pipe, for instance, thus reducing the ability to take in
amounts other than the 35 Tcf of known reserves. Offering his
understanding that nothing in the contract talks about pipe
size, he recalled that one company wants two 36-inch pipes, and
said he was beginning to discover the advantages to that.
MR. LOEFFLER replied there are two parts. First, he suggested
FERC may say something about how it will review the pipe size
when an application is received, although FERC probably couldn't
comment on the larger economic question.
CHAIR SEEKINS suggested the fourth topic on the list, review of
anticompetitive issues as part of the processing of the
certificate application, may fit with this.
MR. LOEFFLER asked whether someone from FERC wished to address
what the commission will look at.
AN UNIDENTIFIED FERC REPRESENTATIVE replied that when FERC gets
an engineering application, pipeline engineers do a flow
analysis to see whether it is adequate for the proposed maximum
throughput. If someone said there were contracts for 4.5 Bcf a
day, for instance, FERC would look at the pipe design and flow
characteristics to ensure they matched. As for potential
expansion, everything FERC looks at is in a contract regime. A
lot of timing questions and determinations of public convenience
and necessity are based on whether there is a contract with the
pipeline for capacity. If there are contracts for 4.5 Bcf a day
and a pipeline designed to adequately accommodate that gas, it
is one part of determining public convenience and necessity. He
noted FERC hears different opinions about the optimum pipe
diameter or number of pipes.
MR. LOEFFLER added there are several layers of answers. There
is a bit of "the chicken or the egg" with respect to how long to
wait for the pipeline. There may be more definite knowledge in
five years, but this pipeline has been anticipated a long time.
He gave his view that an early open season results in an earlier
pipeline, and that the open season is the first step, where
customers are tested to see who is willing to sign up for long-
term capacity. Mr. Loeffler recalled that the commission said,
in its open season order, that if people aren't ready by the
first open season and have a good reason, it will force the
applicant to say why later discoveries cannot be accommodated.
He noted designing the right size of pipe is a combination of
engineering and economics. Commission precedent has been that
extra capacity can be built in a pipeline, beyond existing
contracts, but the pipeline must pay for it if nobody is willing
to sign up. Mr. Loeffler highlighted the expense of this. He
opined that delaying the open season delays the pipeline.
10:28:58 AM
^Ken Griffin, Deputy Commissioner, DNR
KEN GRIFFIN, Deputy Commissioner, Department of Natural
Resources (DNR), returned to an issue raised by Mr. Loeffler,
the requirement to consider accommodating latecomers to the open
season. With respect to how an early open season might
disadvantage independents, he emphasized that people have been
waiting for this pipeline for many years.
He suggested the issue is a premature open season, however, not
just an early one. This occurs if an open season is held and
then the pipeline doesn't progress for a time. It is difficult
for that to happen, Mr. Griffin said, because a binding open
season isn't an incidental activity. It requires an enormous
amount of preparation. There are commitments made on both sides
at that point. If there is some sense that a premature open
season has occurred, there are provisions that FERC will
consider latecomers; the level of that consideration could be
quite significant.
The committee took an at-ease from 10:31:22 AM to 10:53:00 AM.
MR. CUPINA informed members that Mr. Pease had to leave in five
minutes, in case there were more questions relating to
enforcement or discrimination.
CHAIR SEEKINS summarized that FERC has extensive enforcement
powers with respect to undue discrimination. He surmised some
discrimination could be allowed, and that FERC can fine up to
$1 million a day per violation, but may not necessarily impose
that, depending on the egregiousness of the violation.
MR. PEASE affirmed that. He turned to the enforcement hotline,
explaining in response to Chair Seekins that it is an informal
dispute-resolution service offered under "part 1b" of FERC
regulations. An attorney is on duty during all business hours;
there is e-mail capability through FERC's website by which
questions can be asked; and there is an after-hours recording
from which calls are returned the next morning. There can be
anonymous treatment.
He said all information gathered through the hotline is treated
confidentially. The goal is to resolve disputes as quickly as
possible; over 75 percent of calls to the hotline are resolved
in less than two weeks. Ms. Pease explained that some calls
aren't appropriate for resolution through the hotline, however,
and an allegation of wrongdoing, in particular, would be more
appropriate to treat as an investigation.
CHAIR SEEKINS asked what kinds of issues are normally brought to
the hotline.
MR. PEASE answered they involve anything under FERC
jurisdiction, including: multimillion-dollar disputes; requests
for help when lights go out in a city; landowner issues, which
are frequent; restoration issues; and interpretation of various
regulations, where FERC will try to get staff consensus as to
what a particular regulation or provision means.
10:56:35 AM
^Karol Lyn Newman, Morgan, Lewis & Bockius, for Anadarko
KAROL LYN NEWMAN, Morgan, Lewis & Bockius LLP, partner in her
law firm representing Anadarko Petroleum Corporation, referred
to an earlier question as to whether the mandatory-expansion
process contemplates an open season and FERC's indication that
there weren't any rules yet. She said because there are no
rules yet on how Section 105 of ANGPA will be interpreted, it
isn't clear whether open seasons will be conducted in
conjunction with requests for mandatory expansion by potential
shippers. For example, if a small company with some production
asked the pipeline for an expansion to accommodate its reserves
and the answer was no, then the company would go to FERC and
initiate the process for a mandatory expansion.
She suggested it would be consistent with FERC policy if FERC
also looked to see whether other potential shippers needed
additional capacity at that time. Thus the expansion could be
done at one time. Ms. Newman proposed that it is possible,
therefore, for open seasons to be conducted in some fashion
within a mandatory-expansion process. Although she concurred
with Mr. Loeffler's earlier point that the shipper who requested
the expansion would have to sign a contract within the requisite
period of time, Ms. Newman opined this still wouldn't preclude
an open season.
MR. LOEFFLER said he needed to find the statutory provision, but
agreed Ms. Newman's description was more consistent than not
with FERC policy. "FERC likes open seasons," he remarked. He
then paraphrased Section 105(c) of ANGPA, part of the expansion
section, which states:
(c) REQUIREMENT FOR A FIRM TRANSPORTATION COMMITMENT -
Any order of the Commission issued in accordance with
this section shall be void unless the person
requesting the order executes a firm transportation
agreement with the Alaska natural gas transportation
project within such reasonable period of time as the
order may specify.
He observed there is a tension between FERC's traditional
policies and this particular clause.
11:01:53 AM
SENATOR BEN STEVENS requested confirmation that if a mandatory-
expansion application was granted, the capacity in the
application would be issued to the applicant.
MR. CUPINA specified that if such a case was brought by a
potential shipper seeking capacity, and FERC granted it based on
the evidence, it would be subject only to execution of the
aforementioned agreement. He noted Ms. Newman was suggesting,
however, that during the course of that proceeding FERC might
also ask whether anyone else wanted capacity, and would consider
that as well. He agreed it certainly is a possibility.
SENATOR BEN STEVENS surmised in that instance the petition would
be for an increase above the applicant's capacity, and the
original applicant's amount wouldn't be reduced on a pro-rata
basis.
MR. CUPINA agreed, noting FERC hadn't seen any of these yet.
11:03:49 AM
CHAIR SEEKINS posed a scenario under mandatory expansion where
person A has applied for 100 units and person B has applied for
another 50. He interpreted this to mean that, if successful,
person A would get 100 units and person B would get 50; they
wouldn't split the 150 units granted.
SENATOR BEN STEVENS agreed, but emphasized his point that if
only 125 units were issued in the permit, there wouldn't be a
pro-rata reduction.
CHAIR SEEKINS requested confirmation that the application for
mandatory expansion wouldn't be on a competitive basis, but
would be for a person's particular requested expansion.
MR. CUPINA affirmed that, saying the person would be bringing
the action and showing justification, and shouldn't be
penalized.
CHAIR SEEKINS related his understanding that under voluntary
expansion, by contrast, someone would have to compete in the
open season.
MR. CUPINA answered that's one way of putting it, but the open
season is so everyone has an opportunity. Ideally, the result
is that all participants get exactly what they want.
CHAIR SEEKINS expressed appreciation to Ms. Newman for bringing
this to the committee's attention.
MS. NEWMAN remarked that she was pleased the concept of "no
subsidy" as opposed to "no increase" had been clarified. She
emphasized the desire to make that distinction, as shown by
comments made to the committee, the Senate, Congress and others
including FERC.
11:06:09 AM
SENATOR GENE THERRIAULT, Alaska State Legislature, agreed that a
critical point is the difference between a subsidy and "no
increase in rate," and how FERC might treat it. He recalled
discussions with FERC's former Chairman Wood which indicated
FERC possibly would allow some increase in the rate and still
not treat it as a subsidy, as long as the original shipper
didn't go beyond the original price at which it signed up
to ship.
He also recalled his involvement in the legislature's input into
the FERC rule-making process. Senator Therriault told members,
"We certainly were advocating for rolled-in pricing across the
board, and what we got from FERC was a bit of a mixed bag: this
presumption, of course, on voluntary, and there's no
determination exactly how things will be treated ... on the
mandatory."
MS. NEWMAN recalled that FERC hadn't directly addressed what
would be a subsidy. For example, if the tariff rate for the
initial capacity of the pipeline was set at $10 a decatherm and
the initial shippers had a contract at $8, it isn't clear
whether the difference would be deemed a subsidy; FERC hasn't
ruled. It might be argued it isn't a subsidy because it hasn't
even hit the regular tariff rate at this point. Another
hypothetical scenario is when someone is at or below the tariff
rate and an inexpensive expansion is done; the average tariff
rate would drop, and the rate in phase two, looked at across the
board on a rolled-in basis, would be $8 or $9. The next
expansion, looping, would cause the rate to rise from the new
level up to $9 or $10. That might not be considered a subsidy.
She said there are a number of factors. For example, the
initial capacity, but not the expansion, will have the benefit
of federal loan guarantees. Will the difference in rates
established for those be considered a subsidy? Ms. Newman noted
FERC will have a number of questions to address once the next
expansion will raise the rate above what existing shippers pay,
and the answers aren't clear.
11:10:21 AM
MR. LOEFFLER agreed it isn't known whether these will be
considered subsidies.
SENATOR BEN STEVENS pointed out that those unknowns are to be
determined by FERC, not the legislature or the contract.
CHAIR SEEKINS surmised they'll apply to any project, no matter
who the sponsor is.
MS. NEWMAN responded that FERC will be the ultimate
decision maker on whether something is or isn't a subsidy and
thus whether a given expansion will be priced incrementally or
on a rolled-in basis; that applies to the Alaska pipeline under
the guidelines in ANGPA, which has a provision dealing with
mandatory expansion. Suggesting FERC could address this better
than she, Ms. Newman added that FERC's current general policy
tends to require that expansions be incrementally priced if
they'll cause the rates paid by existing shippers to increase.
Agreeing FERC will decide, she emphasized that the proposal is
always made by the applicant.
11:12:56 AM
CHAIR SEEKINS asked whether this would apply equally to any
interstate project that fell within FERC jurisdiction.
AN UNIDENTIFIED FERC REPRESENTATIVE answered yes.
CHAIR SEEKINS asked whether anything in the contract would
affect the eventual ruling from FERC.
MS. HOLMES replied that a contract would shape the proposal that
FERC ultimately would rule on.
CHAIR SEEKINS surmised in the end it would be based on FERC
policy and regulations, not necessarily on the request, probably
based on the best public interest.
MS. HOLMES affirmed that.
11:14:36 AM
SENATOR THERRIAULT alluded to Article 8.7 of the contract,
voicing concern that the state-sponsored expansion in 8.7
appears more restrictive for the state. It doesn't mention a
subsidy, but relates to an increase in the rate, which is more
cut-and-dried and perhaps wouldn't allow latitude for FERC to
consider whether it is a subsidy.
CHAIR SEEKINS asked if that concern goes to the scenario
described by Ms. Newman: the effective tariff is below the
original approved tariff, and new expansion brings it back to
the original rate; it would be seen as a rate increase, not a
subsidy, since it wouldn't have reached the original tariff.
SENATOR THERRIAULT affirmed that. Based on personal
conversation with FERC's former Chairman Wood, he suggested
there would be latitude to consider an increase in rates up to
the original stated tariff, and FERC might determine it isn't a
subsidy. It would still be under the letter of the law, the
federal statute.
MR. LOEFFLER agreed that in addition to voluntary and mandatory
expansion there is a third type: state-sponsored, state-
initiated expansion under the contract. Saying it is a separate
dialogue, he acknowledged the point raised by Anadarko and
Senator Therriault, but said all that matters is what FERC has
put in its orders; conversations with prior chairmen have no
value, since FERC operates through the written word. While that
precise issue, what a subsidy is, was discussed in Order 2005 or
Order 2005-A, he said FERC didn't take a position on it.
11:17:44 AM
MR. SHEPLER highlighted discussion in either Order 2005 or
Order 2005-A of the following issue: If the first phase of the
pipeline received federal loan guarantees, reducing the debt
cost and lowering the rate for the existing shippers, would that
be viewed as a subsidy to those shippers? For purposes of
applying subsidy language going forward, Mr. Shepler said, there
would be a requirement that the rates had to go above the so-
called subsidized rates flowing from the federal loan guarantee.
Thus there is some written discussion in FERC's order on how it
would approach the issue of a subsidy. He agreed this arises in
the context of a mandatory expansion, which current regulations
don't address, but said it somewhat illustrates the complexity
of issues when starting down the road of mandatory expansion.
MR. LOEFFLER also emphasized the complexity, saying the federal
loan guarantee would make credit available on better terms than
the private market, but those terms are unknown. "You can't
lock yourself into assumptions of what the future will be," he
added.
MR. CUPINA agreed there is discussion in both Order 2005 and
Order 2005-A, the rehearing, about how FERC's current policy
outside of Alaska has been primarily to judge a subsidy by
whether or not existing customers' rates would rise.
Distinguishing that from this rule for an Alaska pipeline, he
noted FERC had said there might be other ways of defining
"subsidy" without actually doing so, preserving the ultimate
decision to be a case-specific determination.
11:22:17 AM
^David Van Tuyl, BP
DAVID VAN TUYL, Commercial Manager, Alaska Gas Group, BP,
emphasized BP's focus on getting the pipeline built, as seen by
its submittal of an application and going through negotiations
to put a contract before the legislature, and as reflected by
chief executive John Browne in the Wall Street Journal two
months ago. Mr. Van Tuyl said once a project is built, BP can
entertain the possibilities of expansions and rolled-in versus
incremental rates.
He related BP's position that it is appropriate for FERC to make
decisions once facts are known, on a case-by-case basis. It is
limiting and perhaps a bit dangerous to presuppose what those
facts should be and limit the outcomes; specifically, mandating
what an expansion application must include creates additional
risk for the "anchor shippers" of the project. Mr. Van Tuyl
told members BP doesn't want to jeopardize the possibility of
getting the pipeline built in the first place - its prime
objective.
He noted FERC Orders 2005 and 2005-A reflect some of these
concerns, and include accommodations for shippers not yet ready
at the time of the initial open season. "If those folks choose
not to spend the money now to define what their gas resources
are, there is even an opportunity after the initial open season
that a late bid of firm capacity must be given due
consideration," Mr. Van Tuyl told members.
He suggested FERC rules anticipate those kinds of specific needs
for the Alaska project. Mr. Van Tuyl said the legislative
consultants had even outlined clearly that the state has been
able to have its voice heard before FERC in shaping those
policies. He emphasized the desire to let the parties freely
operate under FERC policies on a case-by-case basis and to allow
that process to work.
11:25:31 AM
MR. CUPINA explained that the accommodation in the initial open
season is not to close the door on additional requests for
capacity after the open season concludes but before final design
of the pipeline is complete. Rather, it leaves the open season
door slightly ajar for those that might come in during the time
the project is being completely engineered, and recognizes that
folks might not be ready the first day of the open season, but
might be ready to sign a contract two years later. The
commission has said that opportunity should at least be
available, and if there is some good reason why they cannot be
accommodated, FERC will look at that. It is another special
provision recognizing the unique circumstances in Alaska.
11:27:02 AM
^Bradford G. Keithley, Jones Day, for BP
BRADFORD G. KEITHLEY, Jones Day, law firm, testifying at the
request of BP, noted this morning the focus had been on
mandatory-expansion provisions as a protection for nonaffiliated
producers with concerns about basin control. He related his
view that in the real world, however, the enforcement mechanisms
discussed by Mr. Pease will motivate or control producer
behavior before ever getting to the mandatory provisions.
Mr. Keithley characterized mandatory expansion as the remedy of
last resort or the tertiary remedy.
He explained that under the rules described by Mr. Pease, the
producer-sponsors of the pipeline will have an obligation, under
Orders 2004 and 670, that will significantly control their
behavior. Under Order 2004, the producers won't be able to
favor their affiliates over nonaffiliates, and must treat them
in like fashion. Mr. Keithley said that will apply from the
outset, during the initial open season as well as any subsequent
open seasons.
He turned to basin control, pointing out that Order 670 is clear
that persons governed by that order, including producers and
their affiliates, cannot engage in anticompetitive behavior such
as squeezing out independent companies from the production
markets in order to take over their leases. Mr. Keithley
explained that Order 670 was enacted by FERC after Congress
passed EPAct in 2005 in response to the Enron debacle; the
statute and regulations give FERC the million-dollar-a-day
violation authority. Those regulations will control how the
producers think about this from the outset, and will ensure that
the producers don't engage in behavior that can be viewed as
anticompetitive.
He said although the mandatory-expansion provision requires a
complaint and a formal procedure before FERC, violations of
Order 2004 or Order 670 could easily go through the FERC
hotline, where, as Mr. Pease noted, 75 percent of the complaints
are resolved within two weeks. Mr. Keithley pointed out that
this is a quick procedure compared with the lengthy mandatory-
expansion procedure.
He also pointed out that the state, as an owner, would have
knowledge of the producers' behavior; if it saw a violation or
anticompetitive activity, it could raise those issues in
ownership meetings, but also report it to FERC. Mr. Keithley
emphasized that nonaffiliates wouldn't have to wait until
mandatory-expansion provisions kicked in because Orders 2004 and
670 create a right to a remedy far more quickly. Similarly, if
people thought something in the initial open season was designed
to adversely affect nonaffiliates, they could raise the same
concerns under Orders 2004 and 670 with FERC, to have them
resolved immediately in connection with the initial open season.
11:32:20 AM
SENATOR ELTON asked whether there has been any application of
Order 670 by FERC. He requested assurance that it will
significantly change participants' behavior.
MR. KEITHLEY responded that FERC had rules prior to when
Congress passed stiffer penalties that resulted in Order 670.
Under that order's predecessors, FERC took action against
pipelines that engaged in behavior it found inappropriate. For
example, FERC imposed penalties in connection with a natural gas
pipeline's preferential treatment of its marketing affiliate,
including allowing the affiliate to sit in on meetings with
respect to pipeline operations; the remedies imposed were so
severe, the company decided to give up its marketing affiliate.
He explained that in Order 670, FERC both reinforced that sort
of precedent and brought in federal Securities and Exchange
Commission (SEC) law with respect to what fraud, anticompetitive
behavior or inappropriate behavior is. Mr. Keithley reported
that Congress, in passing EPAct in 2005, directed that SEC
regulations and law be considered; FERC explicitly did that,
saying it was because SEC had a substantial body of precedent on
what fraud and bad behavior are. Energy lawyers have had that
precedent to look at, in addition to FERC precedent under the
prior regulations, to judge what FERC's behavior will be.
He related his experience, having represented BP in these
situations, that the bias is to err on the side of caution.
Mr. Keithley indicated the penalty provisions - $1 million a day
and potential "structure penalties" which could require that one
operation be divorced from another - are so severe that these
companies tend toward being overcautious. He said FERC has done
everything to reinforce that behavior on the part of the
pipelines.
11:36:19 AM
CHAIR SEEKINS asked Mr. Cupina to also provide some history
relating to the application of Order 670.
MR. CUPINA deferred to FERC's Office of Enforcement, but said he
could obtain post-EPAct information. He noted in many public
settings the chairman or commissioners have pointed out a main
feature of EPAct: FERC's receipt of this significant new
authority. Mr. Cupina said he has every reason to believe it
will be used to its full extent. He offered to follow up any
requests after talking with the Office of Enforcement.
SENATOR ELTON asked if he could assume that a complaint about a
possible violation of Order 670, with its potential penalties of
$1 million a day, wouldn't be resolved in two weeks.
MR. CUPINA replied he believed that was safe to say, though he
wouldn't say "never." He agreed it would likely be a serious
matter requiring investigation. In response to Chair Seekins,
he noted several possible outcomes from the hotline, including
mediation, a fairly quick turnaround or a more formal
proceeding. He again deferred to the Office of Enforcement.
MR. KEITHLEY agreed that a complaint of behavior that has
resulted in damages won't be resolved in two weeks. Providing
his own experience, however, he said a more normal situation is
that a nonaffiliate asks a pipeline to do something and the
pipeline says no; the nonaffiliate asserts the pipeline did it
for its affiliate, and the pipeline denies it; the nonaffiliate
calls the enforcement hotline and provides facts; the hotline
calls the pipeline, which takes those calls seriously because of
potential steep penalties; and the pipeline then either explains
what occurred to the satisfaction of enforcement or, more often,
moderates its behavior in dealing with the nonaffiliate. Those
can be resolved in two weeks.
He explained that what usually goes to the hotline hasn't
continued a long time and resulted in a lot of damages.
Mr. Keithley said those front-end situations, where people
aren't taking litigation postures, are resolved fairly quickly,
even though they may involve substantial issues.
11:41:17 AM
CHAIR SEEKINS turned attention to FERC's review of competition
issues when processing the certificate application.
MR. CUPINA said it isn't usually a competitive issue in the
certificate unless talking about some historical periods when
there were competing pipeline proposals. A past example was
that the FERC might have found, in response to an intervenor or
protestor in a case, that an open season was conducted
improperly. A person seeking capacity might have followed all
the rules and yet, for whatever reason, not received it; thus
FERC might have ordered another open season or found the
allegation improper, all within the certificate investigation.
Mr. Cupina said FERC deals with such issues as they arise, but
for the most part they aren't seen in the certificate.
11:43:11 AM
CHAIR SEEKINS asked where FERC jurisdiction begins and ends in
the process of getting gas to market.
MR. CUPINA answered that in jurisdictional cases, some past
precedents say interstate movement starts at the tailgate of the
plant, where the gas is "pipeline quality" because it has been
conditioned and processed; it is a matter of whether the gas
meets pipeline-quality specifications at that point. In
general, the interstate journey starts after the gas has been
collected along a system, before it gets into the main line.
The main line is jurisdictional from that point to the terminus.
CHAIR SEEKINS asked whether it's after it comes out of the gas
treatment plant (GTP).
MR. CUPINA affirmed that.
CHAIR SEEKINS asked whether the GTP itself is not under FERC
jurisdiction.
MR. CUPINA replied not normally, but said he thought in the
Alaska Natural Gas Transportation Act (ANGTA) project the
treatment plant was, under that statute, part of the project.
11:45:13 AM
CHAIR SEEKINS turned to issues related to SB 3001, saying the
state is proposing a capital-expenditure credit for construction
of the pipeline, to go to owners of project. He asked whether a
20 percent credit of $2 billion, for instance, would be included
or excluded as a basis for the tariff. He said it would be
credited by the state against taxes on the project.
MR. LOEFFLER recalled that the last time he'd heard about the
credit, it was to be on the treatment plant, given to the
companies as producers, not as owners of the pipeline. He
acknowledged that may complicate the hypothetical situation.
CHAIR SEEKINS opined it would be actually given to the producers
as a tax credit, but flows from construction of the pipeline,
the capital expense. He asked how Mr. Cupina envisioned it
would be treated in terms of establishing a tariff.
MR. CUPINA replied he wasn't sure that sort of side agreement
would affect FERC's ultimate transportation rate, and he
believed the rate for the pipeline transportation charge to be
based on the capital costs, with return and taxes and so forth.
11:48:13 AM
MR. KEITHLEY suggested it goes to the previous question of where
FERC jurisdiction begins. Saying he wasn't sure Mr. Cupina had
been burdened with all the facts about how the system has been
set up, Mr. Keithley explained that in the proposed contract,
all parties have agreed that certain facilities - which he would
list - will be treated as FERC-jurisdictional, and have agreed
to submit an application to FERC governing all these facilities.
He informed Mr. Cupina that the North Slope has extensive field
facilities, within each unit, that gather the gas. Mr. Keithley
said the facilities covered by the contract are those pipelines
that will start at the gathering facilities within the field -
Prudhoe Bay or Point Thomson, for instance - and will run from
each field to the GTP; there the gas is treated, if necessary,
and then goes into the main line, as it's called in the proposed
contract, for transportation to Canada.
He noted the parties have agreed in the proposed contract to
treat the following as FERC-jurisdictional: those pipelines to
the GTP that come from the gathering facilities in each field;
the GTP; and the downstream line that will run to Canada. The
view that the parties have taken is that the GTP is in the
nature of a "straddle plant" - a FERC term describing a plant
halfway down a line - as opposed to a field treatment plant.
Asking Mr. Cupina to correct him if necessary, Mr. Keithley
offered his experience that FERC has always accepted
jurisdiction over an entity that went to FERC and said it was
jurisdictional. He emphasized that in the proposed contract all
four owners have committed to make applications for FERC
jurisdiction over those facilities.
11:51:00 AM
MR. CUPINA built on that clarification, noting FERC Order 2005-A
tried to address gas-conditioning facilities that might be
jurisdictional, pointing out that precedent cases say that for
the treatment of the gas to enhance safe and efficient
transportation, it could be subject to FERC's jurisdiction. It
also says if an applicant under ANGPA attempts to file an
application under Section 7 for authorization for a
jurisdictional natural-gas-conditioning service through that
plant, FERC will review it and set the rate. The plant may or
may not be jurisdictional, but the rate and the service would be
unbundled and separate from the transportation rate on the pipe.
MR. LOEFFLER asked: If the plant isn't jurisdictional, how
could FERC set the rates for the plant?
MR. CUPINA answered that this seems, depending on the function
of the plant, to leave it for the applicant to come in under
Section 7 for that conditioning service.
CHAIR SEEKINS asked: Are there two separate charges, one a
tariff downstream from the GTP and one for conditioning the gas
to put it into the GTP, and both would be jurisdictional and set
by FERC?
MR. CUPINA replied that is how this section reads.
CHAIR SEEKINS suggested there are options, rather than a base
charge.
MR. CUPINA added that one reason they'd be unbundled and
separate is that it might be possible for a shipper to either
process its own gas or bring gas that doesn't need to be
conditioned.
CHAIR SEEKINS surmised a shipper that brought gas in
preconditioned or pretreated wouldn't be subject to that charge.
MR. CUPINA affirmed that.
MR. KEITHLEY concurred, adding that the pipelines from the field
to the GTP also will be separately owned and charged, again so
that if other producers or marketers want to build and use their
own pipeline, they are free to do so. And if they want to
bypass the GTP, they may, subject to the quality restrictions of
the pipeline.
11:54:23 AM
CHAIR SEEKINS related his understanding that the contract
anticipates that the application will subject those gathering
lines to FERC regulation.
MR. KEITHLEY noted "gathering lines" is a term of art for
transmission lines. He specified they are short transmission
lines that will come from the gathering facilities in the field
to the GTP. He informed Mr. Cupina that the vision they've had
in mind is the pipelines behind the Venice plant, which FERC
asserts jurisdiction over in southern Louisiana.
MR. CUPINA added that the cite in Order 2005-A is to the Venice
Gathering Company as an example where FERC could have
jurisdiction, depending on the function of that land and if it
is enhancing safe and efficient transportation.
11:55:44 AM
SENATOR STEDMAN restated an earlier question with respect to the
rate set on the transmission lines and the GTP. He asked
whether the rate is based on the total cost; on debt and equity;
or just on equity, which leads into Chair Seekins' earlier
question - since equity position can be altered through credits
- of whether it has an effect on it. If the capital structure
is changed in five years, for example, does the rate ever get
reviewed to reflect the different capital structure?
MR. CUPINA answered that the rate base starts with the capital
cost itself. Although the debt-equity ratio will ultimately
determine the rate of return on equity, it doesn't affect the
capital cost.
SENATOR STEDMAN requested clarification.
MR. LOEFFLER explained that generally rates are based on costs,
looking at the amount of capital invested in the project. The
rate on debt is picked up off of the actual debt instruments;
the rate on equity is set by FERC, based on risks the project
faces. Typically, the FERC staff extracts a settlement
condition, that rates be reviewed within three years of startup
of the operation. Debt-equity ratios do change over time as
debt is paid down on the project. He interpreted Senator
Stedman's concern to be this: Why isn't a credit given for the
plant or the pipeline relevant to the determination of the cost?
SENATOR STEDMAN said that was close. He noted there has been a
lot of discussion about the impact on the equity position and
any alterations of that. He provided details.
MR. LOEFFLER answered that as shippers come in to complain about
rates, causing a review, looked at is whether the current equity
rate of return is justified; that could change over time. For
example, it could be said that for operating pipelines, it
doesn't survive the construction risk; if it is successful as a
venture, it gets a lower rate of return.
He noted shippers and pipelines fight about such issues all the
time; it's open for review. As to whether the integrated
company would be looked at - seeing benefits on one side that
reduce the cost of investment on the other side - Mr. Loeffler
said this is typically where FERC looks at the pipeline
investment, rather the production side. He added that he could
see how shippers could construct an argument of what the true
cost is, but normally those jurisdictional lines are followed.
12:00:40 PM
SENATOR STEDMAN asked whether the following is accurate: If the
tariff is set on the equity position when a company builds a GTP
or gas line, any alterations of that equity position get
reviewed periodically; if there is future divestiture by one or
more owners, then that rate structure would be reviewed because
most likely there would be a different debt-equity structure.
Or if there is a decision to build it with 60 percent equity and
40 percent debt and then flip it to 80-20, it would be
readjusted. In the end, rates are set on the equity position as
it changes over time, regardless of divestiture or leverage
changes.
MR. KEITHLEY answered that FERC comes at this issue from two
different perspectives. First, it starts with the pipeline's
costs and debt-equity ratio on its books. If FERC believes that
is unrepresentative of the pipeline industry as a whole,
however, it has in the past imposed what FERC calls
"hypothetical capital structures" on the pipeline, and has
calculated rates assuming the pipeline had a certain capital
structure. The owner doesn't have the ability to manipulate its
capital structure in a way that produces rates that it might
prefer; the commission has the ability to restate those in a
fashion that would maintain rates at a level produced by a
typical pipeline.
12:02:53 PM
SENATOR STEDMAN asked: How often has a capital structure been
dictated to gas-line owners around the country?
MR. KEITHLEY deferred to Mr. Cupina, but said he'd seen
hypothetical capital structures in perhaps 30 to 40 percent of
the cases he'd looked at. He noted a pipeline may be a wholly
owned affiliate of a parent company that is in an entirely
different business or a variety of businesses, with a capital
structure reflecting that mix; the commission may impose a
hypothetical capital structure to deal with that situation.
It's not 100 percent, but not infrequent.
MR. CUPINA said he believed Mr. Keithley's last comment was
fair. Noting capital structures vary somewhat but not to
extremes, he indicated 60-40, 50-50 and 55-45 are fairly typical
structures.
MR. LOEFFLER reported he'd submitted a study on capital
structure as of June 2004 to the Legislative Budget and Audit
Committee, relating to perhaps 50 recent FERC cases and their
capital structures and rates of return; they cluster in a range.
He suggested his report could be obtained and resubmitted if the
committee so desired.
12:04:43 PM
^Bill McMahon, ExxonMobil
S.A. (BILL) McMAHON, JR., Alaska Gas Development, ExxonMobil
Production Company, offered clarification with respect to the
credit: The commitment allowance that started this whole
conversation is something the state is making available to
shippers of gas who make the FT commitment required to get the
pipeline built. He said the state had envisioned it being
available to the three sponsors through the fiscal contract, and
to other producers on the North Slope through the uniform
upstream fiscal contract that is envisioned. It is truly
divorced from the pipeline structure. Not only would
ExxonMobil, BP and ConocoPhillips be eligible, but others could
make themselves eligible by committing in the open season.
SENATOR BEN STEVENS pointed out Mr. Cupina was being asked to
comment on what FERC would do with respect to elements of a
contract he hadn't seen, and that hadn't been finalized. He
suggested the answers would be determined by FERC once it had
the complete submittal of the application and the financing
structure.
He said the incentive for investment via the tax credit against
the petroleum production tax (PPT) was exactly that - an
incentive. Recalling hours of discussion on whether an
incentive should apply to a FERC-regulated facility, and whether
the incentives and credits should be passed on to shippers,
Senator Ben Stevens said it became evident it was almost a wash
for the state: either the credit and sacrifice would be made
up front and the money received back through lower tariff costs,
or there would be no credit and the money would be received back
through higher tariff costs.
He also recalled that the position in opposition to why FERC
should be mandated to roll in those investment tax credits was
from the basis of an independent producer and shipper that had
made no investment. Senator Ben Stevens emphasized that
Mr. Cupina didn't have all the information.
MR. CUPINA expressed appreciation for that, noting at the outset
he'd told members he didn't want to wade into the stranded gas
contract, since FERC is unaware of most of its provisions. He
agreed conceptually, however, with the speaker who'd said the
transportation rate would stand on its own; he mentioned the
costs that went into the rate, rates of return, debt-equity
ratios and so forth.
12:10:13 PM
SENATOR WILKEN told Mr. Cupina he was trying to get a sense of
where the Alaska gas pipeline project is in supplying America
with gas, which he believes is needed. Noting EPAct required
federal agencies to band together and have three meetings on
liquefied natural gas (LNG) by August 2006, he asked whether
FERC participated in those. He also requested a thumbnail
sketch of the meetings and results, and asked where to obtain a
summary.
MR. CUPINA answered that those meetings were the task of the
U.S. Department of Energy (DOE), and FERC participated along
with other agencies. He said EPAct required a minimum of three
meetings, and three were held, in Boston, Massachusetts;
Astoria, Oregon; and Los Angeles, California. Additional
meetings are possible. Mr. Cupina recalled either recent
testimony or trade articles about the outcome, noting they were
dubbed "LNG forums"; the purpose was to help communicate
unvarnished facts and science to the public and public
officials, rather than advocate for any particular project.
He reported that the results seemed good as far as they went,
but from what he'd read coming from DOE, DOE hadn't believed
those who were opposed to LNG were persuaded to change their
minds. Mr. Cupina indicated a FERC person made presentations as
part of the forums, and would do so in any additional meetings.
He offered to follow up as far as executive summaries of
meetings already held, and indicated summaries might be
available on DOE's website under the Office of Fossil Energy.
12:13:28 PM
SENATOR WILKEN observed that FERC's July report to Congress
talked about a meeting with steel producers about design,
testing, manufacturing and so forth for pipe for an Alaska
project. He asked Mr. Cupina about the results, including how
it might relate to the Mackenzie Valley pipeline and how the
industry feels about supplying steel for two major pipelines.
MR. CUPINA said he didn't recall getting into the issue of
supplying both projects. They'd wanted to talk about higher-
tensile-strength steel and ensuring everything is certified by
the Department of Transportation (DOT) as part of working up to
whatever steel is needed for an Alaska project. He
characterized it as a technical session, a courtesy meeting.
12:15:20 PM
SENATOR WILKEN asked whether it is assumed by all that the
Mackenzie Valley pipeline and the Alaska pipeline couldn't
happen concurrently.
MR. CUPINA mentioned logistics, skills, resources and materials,
saying there seems to be some question about whether both could
be done at exactly the same time. He reported hearing that the
Mackenzie Valley project would be done earlier, which is hard to
gauge at this time.
SENATOR WILKEN asked where supplying America with Alaska's gas
is in the pecking order. Noting page 13 of the aforementioned
report talks about 23 projects, he said it appears today about
60 Bcf a day is consumed, projected to be 80 Bcf by 2025.
Surmising the additional 20 Bcf wouldn't be from Lower 48
production, he highlighted four groups of proposals on FERC's
table: the Alaska project; 11 that were approved, LNG terminals
to supply about 20 Bcf; an expansion of 2 that were existing,
1 that was under construction and 1 that was operating, for
another 2 Bcf; and then 10 that were proposed, which would
contribute 11.5 Bcf.
He estimated the aforementioned would total 39 Bcf, if all 23
projects were built, whereas only 20 Bcf would be needed.
Senator Wilken requested a definition of "approved" and
"proposed" in this context. When FERC has approved something,
for example, where is that in the sequence of building an LNG
receiving plant and processing plant?
12:18:40 PM
MR. CUPINA replied it is probably the biggest step, a necessary
but not totally sufficient step because everything FERC approves
still must meet conditions related to other federal statutes
such as the Coastal Zone Management Act, Clean Air Act or Clean
Water Act, administered by the states; applicants usually are
successful in meeting those. Although there is a lot of
activity, with investment occurring and relationships being
formed, all 20-some projects won't be built; rather, the market
will sort them out. Typically, the construction timetable is at
least 33 months from the start of construction, perhaps 6 months
after FERC approval.
SENATOR WILKEN asked whether the Alaska project is in the
"approved" category.
MR. CUPINA answered it isn't even "proposed" yet; that is
preceded by the "prefiling" stage; then there would be an
application for the certificate. In further response, he
emphasized that even though a project is already approved, it
might not be built for quite a while - or at all.
SENATOR WILKEN asked where Alaska's 4 or 5 Bcf fits in with
respect to supplying mid-America with gas.
MR. CUPINA expressed hope that it would be part of the mix to
supply the 80-some Bcf projected. In further response, he
indicated the 5 projects under construction are in the Gulf of
Mexico; some of the 11 that are approved are on the East Coast.
As far as what gas goes to which part of the country, however,
he said it isn't clear-cut, especially with the hubs and market
centers and the way gas can move increasingly in different
directions.
12:23:52 PM
SENATOR BEN STEVENS recalled hearing testimony from the Alaska
Gasline Port Authority ("Port Authority") that its project is
approved and ready to go with respect to the Valdez terminal.
He asked whether that is included as proposed or approved.
MR. CUPINA replied no. He clarified that a predecessor to that
project, Yukon Pacific Corporation (YPC), was approved by the
commission at least 15 years ago.
SENATOR BEN STEVENS asked whether the YPC project is listed as a
proposed or approved project.
MR. CUPINA answered no. In further response, he indicated the
listed terminals are import terminals, bringing gas in to the
Lower 48. However, the YPC project at the time was to export
gas. The gas-line proposal being contemplated now would, to his
understanding, bring gas to the Lower 48, but that hasn't been
before FERC. He noted when FERC approved the YPC project an
evaluation was made - by the U.S. Department of the Interior, to
his belief - on environmental impacts of the pipeline upstream
of Valdez, to bring the gas to the terminal before it is
liquefied. Possibly some analysis from that environmental
impact statement (EIS) is still valid, but it was a long time
ago. The project as contemplated today isn't before FERC.
CHAIR SEEKINS surmised the Port Authority project cannot just
assume the YPC approval, but must seek its own.
MR. CUPINA said he believed so, and some circumstances are
different because the previous project was an export project,
while this one would bring gas to the Lower 48; thus it would be
interstate commerce, not foreign commerce.
SENATOR WILKEN, in response to Chair Seekins, clarified that his
own question hadn't related to the Valdez project; rather, he
was trying to figure out where the larger project fit in. He
asked whether the website shows the status and capacity of those
23 projects.
MR. CUPINA affirmed that. He explained that the report
highlights not so much that demand will be satisfied by these
projects, but the importance of being in the game, gaining
headway in order to be part of the ongoing dynamic to satisfy
the need. It is by no means certain where all these pieces will
end up just because they are approved or proposed.
12:30:14 PM
CHAIR SEEKINS asked whether some of these projects approved by
FERC have run into opposition from the states.
MR. CUPINA replied yes. For example, in Massachusetts they'd
been informed of opposition by public and state officials.
SENATOR STEDMAN said Senator Wilken's points about the report
were good, but he'd read it more as "the window of opportunity
is not going to stay open forever for Alaska, and we need to get
our house in order and get to market before a competitor does."
He suggested delays of three or four years would create an issue
with that window of opportunity.
SENATOR THERRIAULT reported that his office had e-mailed to
committee members several pages received from Dr. Tony Finizza
of Econ One Research, Inc., this morning. That document talks
about the window of opportunity, noting LNG and nonconventional
gas - from tight sands and coal bed methane, for instance - fill
the market differential, but likely would be the first gas
pushed out of the market by other supplies, including the
proposed Alaska project.
12:32:33 PM
MR. CUPINA pointed out although the open season is one first
step, the report also mentions that the open season could take
place after the FERC prefiling process begins and during that
process, which could save six months' time. The staff and
commission could be active in developing the application and
working with the stakeholders; that is where staff resources can
really be brought to bear in helping to develop the project.
Thus FERC sees the beginning of the prefiling process as a more
important milestone than completing the open season beforehand.
He explained, in response to Mr. Loeffler, that the
aforementioned is in the regulations for LNG, but also in the
guidelines at FERC.gov for pipeline projects. It is part of the
process to identify issues as early as possible and try to
resolve them up front, bringing all stakeholders in. Mr. Cupina
reported good results from this, and said Congress saw fit to
make it mandatory for LNG projects because of the level of
public involvement. It is prefiling, before the application.
In further response, he indicated sponsors of gas pipeline
projects are strongly encouraged to use this option. The goal
is to cut the time and produce a better EIS, so everybody's
concerns are addressed.
12:37:42 PM
MS. NEWMAN pointed out that, as a matter of law, contracting
parties cannot confer jurisdiction on FERC if FERC doesn't have
it. She agreed with Mr. Keithley that FERC historically has
accepted jurisdiction over facilities - even gathering
facilities, exempt from its jurisdiction by statute - and then
issued rates after concluding this was in connection with
interstate transportation. However, a District of Columbia
Circuit decision, written by now-Justice John Roberts, said
although everyone had requested jurisdiction over certain
facilities, it didn't exist and couldn't be asserted unless
Congress changed the law.
She noted the question becomes whether some facilities fit
within the letter of the law; this depends on what they are and
how they're used, and a body of law defines which facilities are
and aren't FERC-jurisdictional under the Natural Gas Act and/or
ANGPA, if it confers something different. It isn't certain,
just because FERC does it, that it will survive. As to who
could or would challenge it, Ms. Newman didn't have the answer.
It depends on who is bound by the commitment to go to FERC and
request FERC jurisdiction; then it depends on whether FERC, in
light of the recent District of Columbia Circuit decision, will
assert jurisdiction over something it doesn't really have
jurisdiction over. It will be a matter of law that decides it -
not a matter of preference.
CHAIR SEEKINS asked what Ms. Newman proposed as a solution.
MS. NEWMAN suggested if everyone wants to confer jurisdiction on
FERC over particular facilities, perhaps FERC should be asked
for guidance as to whether facilities that can be adequately
described at that point are FERC-jurisdictional, rather than
waiting until the application is filed.
CHAIR SEEKINS asked: If the gas transmission lines weren't
subject to FERC jurisdiction, would they be under jurisdiction
of the Regulatory Commission of Alaska (RCA)?
MS. NEWMAN replied it would depend on Alaska Statutes.
MR. LOEFFLER noted it's a whole separate analysis.
MS. NEWMAN agreed, indicating if Alaska conferred jurisdiction
to an Alaskan regulatory body over facilities used in the way
these facilities would be used, the answer would be yes. If it
didn't, the answer would be no. Then theoretically there would
be no regulation.
12:41:36 PM
CHAIR SEEKINS acknowledged he isn't a lawyer, but remarked that
from reading the law it appears they must be under some kind of
regulation.
MS. NEWMAN responded that, as a practical matter, this isn't the
case. Facilities fall between the cracks.
MR. LOEFFLER agreed with Ms. Newman, but pointed out that a lot
of facts aren't known today.
CHAIR SEEKINS asked: Regardless of who owns the project, would
the same questions arise at the same level?
MS. NEWMAN affirmed that, saying what dictates jurisdictional
status is the nature of the facilities and how they are used.
CHAIR SEEKINS posed a situation in which the transmission lines
are found not subject to FERC regulation. He surmised a company
perhaps could charge whatever rate it wanted for access to those
lines by any willing shipper.
MR. LOEFFLER emphasized "perhaps," noting they could be subject
to regulation. There are divisions among field facilities,
gathering lines, transmission lines and interstate transmission
lines. It gets complicated.
CHAIR SEEKINS suggested if those were built by ConocoPhillips or
BP, for instance, that company perhaps would determine whether
there was access and at what cost, regardless of who the shipper
downstream was.
MR. LOEFFLER replied, "Perhaps."
MS. NEWMAN, in response to Chair Seekins, agreed these
jurisdictional issues aren't project-specific. She couldn't say
right now, with the limited information she'd seen, whether or
not the facilities linking the gathering system to the plant
would be under FERC jurisdiction. Ms. Newman offered her belief
that FERC has indicated, if there is a conditioning plant and
the desire is for an unbundled rate, that there would still be
the jurisdictional step of determining whether the conditioning
plant itself is jurisdictional. "They may be very close to
that, conceptually, already," she added.
CHAIR SEEKINS referred to testimony about strict rules against
anticompetitive actions, and strict penalties if such activities
are detected relating to facilities and pipes regulated by FERC.
MR. CUPINA noted those were covered by Mr. Pease with respect to
EPAct authorities and FERC enforcement.
12:46:48 PM
SENATOR BEN STEVENS expressed concern about encroaching on an
individual owner's right to operate a facility. One
hypothetical example involved a unit owned by a consortium that
doesn't want to invest in a pipeline to the GTP, but wants to go
to FERC and request mandatory access to a pipeline built by
owners of three other units. He voiced concern that even if
FERC didn't have jurisdiction, someone could petition for it, to
obtain access control or to circumvent the need to invest in
one's own facilities to get to the GTP. He said it's either
FERC-regulated or owner-operated; if the latter, they don't have
to give access to anyone unless there is a negotiated agreement.
MS. NEWMAN acknowledged that.
MR. LOEFFLER explained that if it is a unit facility, a pipeline
within a unit, FERC usually doesn't touch it. Although there
have been historic questions about access to unit facilities by
smaller parties, the contract doesn't touch that or intend to do
so. If a company builds a pipeline to ship just its own gas and
it isn't FERC-jurisdictional, to his understanding, RCA's view
has been this: If it isn't offered to someone else, "you can
keep it to yourself." Even that area of law with respect to RCA
is evolving, however. Mr. Loeffler surmised a 100-mile pipeline
feeding into the main line and going out of state would be FERC-
jurisdictional, and then the open season and access requirements
would apply.
MR. KEITHLEY added that BP - and probably the other parties to
the proposed contract - looked at the lines from the unit to the
GTP and onward, under applicable FERC law, and concluded they
are validly FERC-jurisdictional. They aren't saying FERC has
jurisdiction simply because all the parties agree, and they
aren't proposing that FERC take jurisdiction over something
questionable. Mr. Keithley said he didn't want to get into
future lines that may or may not be FERC-jurisdictional.
12:53:08 PM
CHAIR SEEKINS highlighted the concern of not wanting an
anticompetitive situation, but also not wanting it to be
punitive towards someone who already made the investment.
MS. NEWMAN raised the question of the rate structure and what
happens if the capital structure changes tomorrow, for instance.
She explained that the FERC process works through a series of
sections in the Natural Gas Act. Section 7 establishes the
initial rate for the service to be offered, in this case the
pipeline. The second step is that FERC usually conditions a
brand-new facility on its coming in, in three years, for a rate
justification; this affects a tariff rate, but not a negotiated
rate under a contract with shippers.
She noted the next step is a possible rate-increase filing by
the pipeline under Section 4. However, pipelines in the U.S.
for the last 15-20 years haven't filed rate cases. Ms. Newman
said the only alternate is Section 5, a complaint process filed
by FERC or a shipper; providing prospective relief only, it is
rare, though seen in the past year because pipeline rates have
gotten so out of whack. Once the rates are set in a certificate
case and go through the rate justification, they are only likely
to change if the pipeline makes a filing. Since FERC doesn't
review things as a matter of course to see if there is over-
earning, someone must take initiative to trigger the proceeding.
CHAIR SEEKINS asked whether there were further questions or
clarifications. Hearing none, he thanked participants and held
SB 3001 and SB 3002 over.
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