Legislature(2001 - 2002)
04/24/2002 01:42 PM House FIN
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HOUSE BILL NO. 519
An Act authorizing priority treatment under the Right-
of-Way Leasing Act for an Alaska North Slope natural
gas project; expanding the scope for the kinds of gas
development projects that may become qualified projects
under the Alaska Stranded Gas Development Act;
extending the deadline for submitting applications
under the Alaska Stranded Gas Development Act;
exempting an Alaska North Slope natural gas project
from state property tax and all municipal taxes during
construction; and providing for an effective date.
Co-Chair Mulder MOVED to ADOPT the committee substitute,
#22-LS1651\R, Chenoweth, 4/23/02, as the version of the bill
before the Committee. There being NO OBJECTION, it was
adopted.
REPRESENTATIVE PETE KOTT, SPONSOR, provided a sectional
analysis of the proposed draft. He noted that the bill
would amend various statutes in furtherance of the
construction and operation of the Alaska North Slope (ANS)
natural gas project.
Representative Kott pointed out that the bill would provide
an incentive to the industry by allowing a tax exemption for
local property and sales tax for the period of construction
plus two years, which is the most critical provision. Also,
the bill would require that:
· The State Commissioner and officials act in
an expeditious manner to the right of way
leases;
· To add the natural gas pipeline as one of the
qualifying projects in the bill; and
· To provide strong language to secure that
Alaskans are given a better opportunity to
participate in the fabrication, construction
and operation of the project.
Representative Kott explained that the State of Alaska is no
closer than it was two years ago to a gas pipeline. The
current Administration has had the opportunity to negotiate
for the past seven years. He emphasized the great potential
for gas on the North Slope.
Representative Kott commented that members would hear
testimony that the legislation is too costly. He noted that
the existing tax scheme would remain in place and that
passage of the bill would not insure anything. He
encouraged members to look at the long-term benefits. The
State will be getting between $250-$300 million dollars per
year and the cost would be $700 million for the construction
period. HB 519 would be a good way to diversify the State's
economy.
Representative Kott stressed that HB 519 is an important
piece of legislation and is an incentive to the industry.
He emphasized that the bill would bring clarity to the
producers. He reiterated that it is an important "piece of
the pie". The producers are ready to negotiate these terms.
Representative Kott discussed that HB 519 is about Alaska
and its' future. The bill would be a step to the economic
future of Alaska. He claimed that there would be no loss in
revenue to the State and that the money could be negotiated
down the road.
Representative Davies noted concern with previous statements
made by Representative Kott regarding tax exemptions.
Representative Kott advised that the existing tax scheme was
in place.
Representative Davies clarified that if there were to be
construction on the pipeline, the bill would remove the
taxes on the constructive product off the table. He pointed
out that there are other negotiations that could move
forward under the Stranded Gas Act for future
considerations.
Representative Kott expected that could be part of the on-
going negotiations between the Administration and the
producers.
Representative Davies voiced caution and concern that
Fairbanks would experience immediate impacts from the
construction and the "tax holiday" and questioned the timing
of the municipal concerns. He asked if the impacts had been
discussed and what the best way to mitigate those concerns
would be.
Representative Kott responded that concern had not been
discussed. He reminded Representative J. Davies that there
will be "social costs" along side the many benefits. He did
not know what the impact would be to the local communities.
Representative Davies explained that most analysis indicates
that without impact aid, the net impact on local
governmental structures would be negative.
Representative Kott acknowledged that could be true,
however, he had not heard those concerns voiced before.
Representative Davies agreed that there could be long term
benefits but questioned how could the State could receive
the short-term benefits also.
Representative Croft understood that the federal legislation
would defer rather than providing a "tax holiday". He
inquired why a choice of a tax holiday had been made rather
than requesting a deferral.
Representative Kott advised that the bill would provide the
clarity producers want in order to move forward with the
project. The State has received zero gain for all the
discussion that has occurred over the last ten years. The
industry will be receiving nothing without the tax holiday.
Vice-Chair Bunde interjected that the State would like to
see the gas pipeline happen "sooner rather than later". He
asked about the 2004 application deadline.
Representative Kott commented that it would be appropriate
to shorten that time frame in order to get the project "off
the ground".
Vice-Chair Bunde referenced Page 7, Line 6, and asked about
the "annual" base.
Representative Kott replied that would be left up to the
Department of Revenue Commissioner to determine the date for
regulation based on when the project begins.
Representative Harris voiced his appreciation for the
legislation and the incentives that it would create. He
echoed concerns voiced by Representative J. Davies about the
impact to local services. He voiced concern with the
timeline of when the actual construction ends on the project
and recommended that the definition be further clarified.
Representative Harris suggested that there be a project-
labor agreement.
Representative Kott responded that if the State wants
something, they must be willing to give something. The
communities will receive a large benefit from the proposed
legislation.
PAT POURCHOT, COMMISSIONER, DEPARTMENT OF NATURAL RESOURCES,
advised that the Administration opposes the provisions of
the bill that would unilaterally grant a property tax
exemption that could be worth up to $700 million dollars, in
the absence of a negotiating framework. Commissioner
Pourchot maintained that the Administration does support the
provisions of the bill that would expand the existing
Stranded Gas Act.
Commissioner Pourchot stated that expanding that act would
address many issues regarding issues of the State and issues
of tax and royalty provisions. The stranded gas tax
specifically provides for a municipal input component. He
explained the bill's date. He noted that there are two
separate items in the bill that are unrelated.
· Granting of the property tax exemption is an
absolute exemption.
There is no date provided regarding when the project would
begin or how long that tax exemption would be in place. The
date referred to in the bill, only addresses the fact that
if one avails themselves to a negotiated process under the
Stranded Gas Act, they would need to apply now. The
committee substitute places that date at April 2004. That
date does not mean that an agency has to apply, nor does it
mean that it would have any relationship to a property tax
exemption.
He explained that is important because there has been
discussion about "recouping costs" in the negotiating
process. Once the State gives something away, the State
would have to "give something very valuable" to get back or
there would need to be other types of trade offs on other
kinds of taxes.
Commissioner Pourchot provided a quick history of the
legislation. During the 1990's, the Administration
contracted a study of Alaska State tax laws and the
incentives and disincentives of gas development in Alaska.
One of the conclusions of that study was that indeed,
property tax was the single most important aspect as an
incentive or disincentive for a gas line development. I
advised that was a front-loading problem, and perhaps there
could be a way to back-load taxes to recoup. That was the
idea envisioned when the Legislature passed the Stranded Gas
Act.
Commissioner Pourchot recommended that the Legislature not
trust the Administration or the industry, but instead look
at the information and how it could best contribute to the
economic liability of the project.
Co-Chair Mulder questioned where the $700 million dollar
figure originated.
Commissioner Pourchot deferred those questions to the
Department of Revenue, as they developed the fiscal
information.
Co-Chair Mulder commented that there are two key provisions
in HB 519, the property tax holiday and the reapplication of
the Stranded Gas Act passed through HB 393. He suggested
that they do not act totally separate, because HB 393 puts
in place the negotiation for royalty, severance, and
corporate tax. He said that ultimately, it is up to the
Commissioner to negotiate for the State.
Commissioner Pourchot pointed out that the producers or the
pipeline sponsors would "think long and hard" about giving
back something that they already had. The next question is
what would that be worth. If it was worth $700 million
dollars, the State would have to provide quite a lot of
benefit.
Co-Chair Mulder inquired why it could not be negotiated
back.
Commissioner Pourchot understood that would be determined on
the State's objectives. If the State were attempting to
negotiate back $700 million dollars, the State would need to
offer a royalty reduction.
Co-Chair Mulder pointed out that a royalty only gets
negotiated at the back-end.
Commissioner Pourchot advised that the royalty starts when
the production begins. He stated that it was not in the
State's best interest to take $500 million dollars off the
table and then put back on for more negotiations for a
royalty. He interjected that was not necessary for the
project.
Co-Chair Williams noted that it was only his intent to take
public testimony on the bill at this meeting.
TAPE HFC 02 - 93, Side A
Representative Davies questioned how the State would enter
into the negotiations.
Commissioner Pourchot explained that it begins with an
application from the project sponsor, not from the
Administration.
Representative Hudson asked what caused the original
Stranded Gas Act to terminate.
Commissioner Pourchot advised that the bill called for an
application to be submitted by 2001; the time expired with
no applications.
LARRY PERSILY, DEPUTY COMMISSIONER, DEPARTMENT OF REVENUE,
spoke to HB 519. He stated that the Stranded Gas Act was
passed in 1998. It clarified that the purpose of the
chapter was to encourage new investment to develop the
State's stranded gas resources by authorizing an
establishment of fiscal terms related to the investment and
to allow the fiscal terms applicable to that qualified
sponsor and tailored to the particular economic conditions
of the project. Also, it was intended to maximize the
benefit to the people of the State.
Mr. Persily stated that the Department of Revenue supports
authorizing the Stranded Gas Act, which expired June 30,
2001. He said that when giving billons of dollars for a
project, there would be a problem for the construction
period when there are substantial property taxes and no cash
flow. Given the purpose of the gas flow act, it seems
excessive to waive $760 million dollars or more in property
taxes until it is known how much is needed to be waived.
The Stranded Gas Act clearly states how to maximize the
benefit for the people of Alaska for gas development.
Through HB 519, property taxes would be waived throughout
the construction and then for two full years following the
construction. The $760 million dollars is one quarter of
all the property tax revenue estimated to be received on the
35-year project.
Mr. Persily observed that there is no link between the
property tax waiver and the Stranded Gas Development Act.
Under the Stranded Gas Development Act, the Department of
Natural Resources would negotiate contracts payment in lieu
of taxes. Approval of the contract would remain with the
Legislature.
Mr. Persily spoke to the $500 to $760 million dollars. He
observed that originally, the State looked at what portion
of the property would be subject to property tax and how
many of those miles would be located in Alaska. The
estimated average cost for that project was $500 million
dollars. Probably, it will cost more to built a mile of
pipe in Alaska than it would in the flat lands of Canada.
The $760 million dollar estimate was based on that
projection.
Vice-Chair Bunde asked if there is anything in the proposed
legislation that would prevent a future legislature from
raising taxes.
Mr. Persily acknowledged that in any given year, the
Legislature could change tax rates.
Representative Hudson asked if the contract would be
required to include Alaskan and Canadian taxing authority.
Mr. Persily emphasized that Alaska cannot dictate tax policy
in Canada. It is possible that project sponsors could be
asking for similar incentives or waivers in Canada. He was
not aware of any discussions regarding that.
Representative Davies asked for more information regarding
the Department's property tax calculations and how the tax
holiday would be affecting the numbers.
Mr. Persily discussed that the $760 million dollar
assumption was that production would begin in 2006. In the
first two full years of production, taxes would be waived.
Regarding the $17 billion dollar pipeline, 30% percent of
scheduled the cost would be in Alaska and 70% percent would
be in Canada. There would also be a $3 billion dollar gas
conditioning line on the North Slope. The lost property
revenue estimate is based on an understanding that the
intent was to provide that tax waiver. He observed that the
committee substitute attempts to clarify Page 5, Section
2(c).
DAVID MARQUEZ, ATTORNEY, VECO CORPORATION, ANCHORAGE, spoke
in support of HB 519.
Mr. Marquez noted that a year ago when gas prices were high,
everyone thought the pipeline was just around the corner.
Now reality has set in and the project's costs and risks
make it doubtful that it would be built, unless quick action
is taken to keep it alive. He noted that the producers have
indicated that work would proceed if three legislative
actions to reduce risks were taken:
(1) Federal enabling legislation;
(2) Federal legislation that would help to reduce the
risk of low gas prices; and
(3) Alaskan legislation.
Mr. Marquez discussed that some believe that no federal
assistance should be provided if Alaska is not willing to
step forward. HB 519 sends a clear signal that the State is
willing to participate. He noted that VECO believes that if
the Legislature does take action to reduce the risks and
costs of the project, the pipeline will happen.
Mr. Marquez pointed out that HB 519 takes two steps to
reduce the risks associated with the project. Given the
incentive, it would help to reduce risks associated with
construction costs. Additionally, by revitalizing the
Alaska Stranded Gas Development Act, it would lower the
risks associated with tax and royalty uncertainty and would
protect the State and the municipalities.
Mr. Marquez stated that the incentive would help to reduce
construction costs. HB 519 grants a temporary exemption to
the project from State property taxation and all municipal
taxes for a period from commencement of the project's
construction through the first two years of operation of the
pipeline. He stressed that it is temporary and would not
apply to any taxes currently being collected. The bill
would not affect present revenues. The amount of money
saved through the temporary tax exemption would reduce the
cost of construction, thus reduce the tariff and increases
to the royalty and severance tax. When the tax holiday is
finished, the State and local governments would have a
pipeline on which to levy taxes for many decades and a new
gas industry would have been created.
Mr. Marquez pointed out that the bill would require the
producers to meet certain pro-Alaska conditions before the
temporary tax exemption. First, it would be a southern-
route pipeline. The bill indicates other conditions,
including compliance with the federal acts relating to
natural gas pipelines. Also included is an Alaska hire, buy
and build requirement.
Mr. Marquez stated that the bill puts back into action the
Alaska Stranded Gas Development Act that expired last June.
That Act contemplates that the State and the producers would
sign a contract that covers everything the State and the
producers would need to have for a successful project. It
was enacted after substantial effort by the Legislature, the
industry and the Administration, to encourage the
development of an LNG project and guarantee that the State
and the municipalities were protected in the process.
The committee substitute makes the Act also applicable to a
North Slope gas line, as well as an LNG project, and would
extend the date until April 1, 2004, the deadline for filing
an application for a contract with the State.
Mr. Marquez noted that just as important to the State and
municipalities, the Stranded Gas Development Act provides a
great process for the State and producers to negotiate the
total fiscal regime for the pipeline that would be in the
long-term fiscal interest of the State, while accommodating
affected municipalities. The Act very specifically gives
the municipalities an important role through the formation
of a municipal advisory group under AS 43.82.500-520.
He added that there is an additional protection for the
municipalities. The Act, at AS 43.82.020, empowers the
Department of Revenue Commissioner to negotiate contract
terms that provide for periodic payments in lieu of taxes
that otherwise would be imposed by the State or a
municipality. Under AS 43.82.200, 210 and 500, the
Commissioner has to include a term in the contract that
would provide for a portion of the periodic payments made in
place of the tax go to the economically affected
municipalities. Under AS 43.82.120 and 130, the producers'
contract application must contain a description of the
satisfactory terms under which the producers would make gas
available to the meet the State's reasonable gas demand, and
must include rules regarding expansion. The producers must
also furnish a detailed description of how the increased
demand for public services and other negative effects caused
by the project will be mitigated.
Mr. Marquez advised that there is disagreement regarding
what point the incentive should be granted. He commented
that there is concern regarding the "give away" and that;
instead, the State should negotiate with the producers
before any incentives are given. VECO does have a sense of
"urgency" and strongly believes that the incentive should be
granted now. If the action is not taken this year, the only
opportunity for a significant boost to the State economy
could be lost. He stressed that the Stranded Gas
Development Act would protect the long-term fiscal interest
of the State and municipalities. VECO urges that action be
taken this year to keep the project alive.
Mr. Marquez advised that VECO does not consider HB 519 to be
a producer bill. HB 519 is an Alaska bill that would
provide for a short-term investment by Alaska that will pay
off in a project that could be shipping gas, employing
citizens and contractors, and boosting the State's economy
for a hundred years.
Vice-Chair Bunde asked if this type of incentive had
previously ever been used in the development of oil and gas.
Mr. Marquez responded that it had been used around the world
for encouraging development. These incentives are not
front-end loaded. He was not aware of any project like this
in the United States.
Vice-Chair Bunde inquired about the negotiation process.
Mr. Marquez responded that there is a great prize for the
producers on this risky project. The producers are
compelled to enter into negotiations with the State of
Alaska to achieve the prize. Mr. Marquez stated that of
most value would be the prize of the possibility of "tax
certainty" for a 30-year project, which will give the State
leverage during the negotiations.
Vice-Chair Bunde requested that Mr. Marquez address the
concern that Alaska might be "leaving too much on the
table".
Mr. Marquez replied that it was the intent of the producers
to have the opportunity under the Act to provide the
opportunity of stability for the life of the project. If
that can be negotiated and approved by the Legislature, then
subsequent legislatures would have legal difficulty changing
the terms.
Representative Davies referenced the "Alaska hire"
provisions. The problem with Alaska hire is that the State
cannot require it; consequently, those laws are weak. The
only effective way to implement the Alaska hire provisions
would be through a project labor agreement. He asked what
VECO's stand would be on that.
Mr. Marquez explained that there will be more jobs than
Alaskans can fill during the construction of the project,
with many jobs for skilled labors. He thought that a
project labor agreement would not be necessary for the
project and that it could put another burden on an already
risky project.
Representative Croft asserted that it would help the
economics of the project if Alaska agreed to give up its
severance tax as well.
Mr. Marquez replied that relinquishing the severance tax
would help the economics. He added that it would be good
during the negotiations to look at the long-term fiscal
interest of the State in order to determine the factors that
need to be balanced. Experts have indicated that it is the
property tax that will leverage the project forward.
Representative Croft asked why VECO choose a tax holiday
rather than a deferred tax credit.
Mr. Marquez explained that there would be a mechanism for
repayment. The Stranded Gas Development Act provides the
mechanism whereby the total long-term fiscal interests of
the State and the municipalities are protected by the
negotiated terms of the contract. Mr. Marquez argued that
everything important is "on the table" in the legislation.
VECO wants the leveraging start in order that the project
can continue.
Representative Croft questioned if the items outlined by Mr.
Marquez would come through the negotiations such as the
local hire issues.
Mr. Marquez expounded that they would come through the
negotiations. These are opportunities for voluntary
programs.
Representative Croft noted that the State of Alaska would
retain no constitutional power when making requests.
Mr. Marquez replied that under the Stranded Gas Development
Act, there remain provisions for the Alaska hire.
Representative Croft inquired if he should move to add a
severance holiday to the legislation.
Mr. Marquez replied that was not necessary. However, every
incentive offered would increase the chance for the project
to get off the ground.
Representative Croft asked when the State would know that
they had offered too much.
Mr. Marquez responded that there would be two indications:
· If there is no project, then you would know
that you had not given enough; or
· If there is a project, the State would know
what the economics are because under Article
4 of the Stranded Gas Act, it is indicated
what the opportunity for the Department of
Revenue will be.
Representative Croft argued that the State would never know
that they had given too much because of the disclosures
listed in Section 4.
Mr. Marquez agreed that there is some risk to the State.
That risk must be balanced against the non-tax benefits
which come from the project.
Representative Harris asked about "access" to the pipeline
and the provisions to tap the line.
Mr. Marquez understood that there would be federal managers
on the pipeline. There is a provision in the Stranded Gas
Act that would allow for the producers to come forward in
their application and during the negotiations of the plan.
That door provides the opportunity to negotiate.
Co-Chair Mulder indicated that he understood that there was
concern regarding the smaller producers who might want to
tap into it. He asked if under the Stranded Gas Act, and
the expansion rule, if the State would be able to protect
the interest of those smaller producers for accessing and
placing their gas through the pipeline.
Mr. Marquez responded that access is an extremely complex
issue. He understood that Act would "rule" and would
provide an "open door" for the State.
Representative Hudson asked how the ballot initiative would
be affected.
Mr. Marquez believed that the initiative could empower the
State to determine if the project was feasible. He added
that the beauty of the gas pipeline is that once it is
constructed, there would be opportunity for more lines.
BILL ALLEN, CHAIRMAN, CHIEF EXECUTIVE OFFICIER (CEO), VECO
CORPORATION, ANCHORAGE, requested that the Vice President of
VECO, Mr. Rick Smith, read his testimony. He explained that
they were his words but because of an accident, his speech
had been impeded.
Mr. Allen added that he was not before the Committee to
speak for the producers but rather he was in attendance as
an Alaskan. An Alaskan who has fought for local hire, jobs
and the State's future.
RICK SMITH, VICE PRESIDENT, VECO CORPORATION, ANCHORAGE,
read the comments of Mr. Allen.
Mr. Smith addressed the differences, which involve how best
to maximum the benefits for Alaska. He acknowledged that it
is a complex issue.
The benefits cannot be measured simply in terms of "net
revenues" to the State and local governments. The benefits
are the taxes collected minus the incentives given. The
formula must include a valuation for new jobs and new
economic activity that the gas industry will generate. Mr.
Smith explained that the legislation is about a whole new
industry for Alaska through the economic diversification.
Mr. Smith stated that there is enough gas on the North Slope
to fill a pipeline for the next fifty years. A pipeline
that could generate between $250-$300 million dollars in
revenues each year for the State. He added that over the
life of the project, it would ultimately generate between
$12 and $30 billion dollars for Alaska.
Mr. Smith pointed out that Governor Knowles has tried for
years to "negotiate" terms that would get the project
underway. Many legislators have devoted their effort in
finding a way to make the gas line a reality.
He pointed out that instead, Prudhoe Bay is declining.
Alaska's traditional mainstay industries, timber, mining and
fishing, are locked up in a struggle for their survival. In
short, the State's economic prospects are looking grim.
TAPE HFC 02 - 93, Side B
Mr. Smith contended that Alaska desperately needs a gas
pipeline and the jobs and economic stability that it will
bring. A number of years ago, with prices soaring, it
seemed that the project was a sure thing. Unfortunately,
now the economics have changed and because of the current
prices, the project does not appear feasible. He pointed
out that international competition increases each year.
Mr. Smith pointed out that producers have made it clear that
without State and federal incentives, they cannot justify
investing the $20 billion dollars in a project that carries
such a tremendous risk.
Mr. Smith pointed out that Alaska's congressional delegation
is working hard to pass the necessary federal incentives and
have implied that it is very important that the State of
Alaska quickly do the same. Producers have indicated that
the incentives in HB 519 combined with federal action, would
be enough to get the project started. Passage of HB 519
would send a clear signal to producers and Washington D.C.,
that Alaska is willing to "step up to the plate" and invest
in our future.
Mr. Smith concluded that as elected officials, the
legislators must decide what incentives are appropriate. He
suggested they bear in mind the value of the project to the
State. He recommended that legislators consider the number
of jobs, the tremendous long-term economic growth and the
future prosperity such a project could bring.
KEN KONRAD, (TESTIFIED VIA TELECONFERENCE), SENIOR VICE
PRESIDENT, GAS FOR BP EXPLORATION ALASKA INC., ANCHORAGE,
testified that creating a supportive government framework is
an essential ingredient toward developing a successful ANS
gas project. He acknowledged that an international project
of such magnitude brings many risks adding that government
working constructively with the industry could play a major
role in reducing those risks by establishing clear and
predictable rules under which the project is undertaken.
Mr. Konrad stated that BP, with their partners, has laid out
key government actions that would facilitate future
investment on such an undertaking. It would provide
specifically:
· A clear and efficient federal regulatory
process. Progress is being made with Alaska
gas provisions currently part of the pending
U.S. Senate energy bill.
· An efficient and predictable Canada/First
Nations regulatory process. BP remains very
active working in Canada to establish such a
process and progress is being made.
· A simple, clear, and predictable fiscal
framework in Alaska such that the massive,
long payout investments being contemplated,
could be undertaken with the knowledge that
the rules will not change.
Mr. Konrad advised that HB 519 could be a positive step
toward achieving the necessary fiscal framework in Alaska.
The bill is modeled after HB 393, which was passed in 1998.
He continued that HB 519 and the Stranded Gas Act could:
· Demonstrate leadership and intent by the
legislature to provide stable fiscal terms
that encourage development of Alaska North
Slope (ANS) gas while fully and fairly
compensating the people of the State.
· Establish a protocol, beginning with an
application, and followed by a process to
exchange information between investors and
the State.
· Empower the State to enter into contract
negotiations to achieve clear and simple tax
royalty terms. Subsequently, those terms
would need to be approved by both the
executive and the legislature branch.
· Provide a process for the State and investors
while providing for municipal input.
· Provide for contract review, approval, and
termination provisions, inclusive of
municipal input, legislative authorization,
and judicial review.
· Provide for prioritization of State agency
support for a qualifying project.
Mr. Konrad suggested that these guidelines would establish a
thoughtful and workable framework important for addressing
fiscal issues subject to subsequent approval by the
legislature.
Mr. Konrad thought that the bill could encourage Alaska
hire, training, and purchasing. BP supports the use of in-
state capabilities, however, some technical modifications
should be considered to ensure that the bill's language does
not draw legal challenge. He stated that the changes to the
bill were an improvement and that passage of HB 519 would
send a positive message to investors.
Vice-Chair Bunde asked how recent Congressional action would
impact the viability of the gas pipeline project.
Mr. Konrad responded that action was a vital step and that
it moved the legislation in a positive direction. He
anticipated that the energy bill could pass from the U.S.
Senate and then be reconciled in the House. If approved, it
would complete one of the three legs of the government
framework provisions. HB 519 addresses the State of
Alaska's portion.
Representative Croft asked if there were provisions included
in the federal legislation to address repayment of the tax
credits.
Mr. Konrad understood that the tax credits would "kick in"
when there are low prices. He noted that it is not clear
that the federal government would offer the tax benefits.
JOE MARUSHACK, VICE PRESIDENT, ALASKA NORTH SLOPE (ANS) GAS
COMMERCIALIZATION, PHILLIPS PETROLEUM COMPANY-ALASKA,
ANCHORAGE, testified that there are two major things that HB
519 could accomplish.
· It would revive the stranded gas development
act "process" passed by the Alaska
Legislature in 1998.
That process could help progress the project. It was a
negotiated and thoroughly debated process, which will
provide an opportunity for fiscal clarity and certainty that
is essential to move a gas pipeline project forward. That
process provides for public notice and comment. It also
provides for legislative approval of any agreement between
the State and the project's sponsors.
· The second thing the proposed legislation
would do is provide property tax abatement
during the construction period and the first
two years of operation of a gas pipeline
project.
That aspect of the bill sends a clear signal to U.S.
Congress, who are currently considering national energy
legislation.
Mr. Marushack noted that for the past several months most of
Phillips Gas emphasis has been directed toward the federal
level in order to achieve congressional legislative changes
needed to advance this project. These items include:
· New federal legislation that creates
permitting certainty and is part of a Senate
energy bill.
· A federal tax mechanism that could help
mitigate the market risk of a project this
large. That would downside the mitigation.
Mr. Marushack claimed that HB 519 could send a positive
response to Washington, D.C. He spoke to the property tax
portion of the bill. Mr. Marushack stated that Alaska
should clarify that the property tax abatement proposed in
HB 519, would not be the single difference in the economics
of the project. Clearly, it adds value and would lower the
tariff, increasing wellhead value and increasing the State's
royalty value. Passage of HB 519 would let the rest of the
country know that the elected representatives of Alaska are
willing to do what they can to try to make the project
happen. Additionally, it could improve the project's
viability.
Mr. Marushack noted that they support revival of the
Stranded Gas Act and the declaration of support implied by
the property tax abatement in HB 519. He urged the House
Finance Committee to quickly pass it from Committee.
RHONDA BOYLES, (TESTIFIED VIA TELECONFERENCE), MAYOR,
FAIRBANKS NORTH STAR BOROUGH, FAIRBANKS, spoke in support of
a gas pipeline and property tax exemptions during the
construction period to gain the possibility of 35 years of
property tax and some stability. She stressed that Interior
Alaska desperately needs natural gas. Ms. Boyles added that
it is important to establish an environment that is
conducive to economic development and diversification.
Decisions must be made with the idea of an economic
incentive. Ms. Boyles stressed that it is important to send
a message to the entire State, that Alaska is open for
business.
Ms. Boyles emphasized that she supports economic incentives.
She commented that Alaska should not assume that the
municipalities would be hesitant to come to the table. The
municipalities need a seat at the table to help determine
the long-term decisions. Ms. Boyle recommended that the
Committee set aside any agenda, territory issues, personal
desires and consider the future of the State. Alaska needs
a gas line and viable project.
JOHN ELLWOOD, (TESTIFIED VIA TELECONFERENCE), EXECUTIVE VICE
PRESIDENT AND CHIEF OPERATING OFFICER, FOOTHILLS PIPE LINES
LTD., ANCHORAGE, commented that because of the size and
complexity of an Alaska North Slope natural gas project,
issuance of a right-of-way lease for such a project under
the Alaska Right-of-Way Leasing Act, AS 38.35, involves
unique legal and administrative considerations. As a
result, Foothills believes that certain statutory changes
are needed in order to provide clarity to the process for
consideration of a right-of-way lease application for the
Alaska North Slope gas project.
Mr. Ellwood stated that in the context of the effort to
finalize a State right-of-way lease for the Alaska Highway
Project, certain issues have come up with respect to getting
a lease for a gas conditioning facility to condition gas
prior to its entering into the linear pipeline. In order to
address the issues, Foothill's has suggested an amendment to
HB 519 that would clarify the ability of the Department of
Natural Resources Commissioner to phase administrative
review, analysis and findings under the Alaska Right-of-Way
Leasing Act. That action would permit action on pending
lease applications. He noted that the change was necessary
to clarify and add predictability. It would be in the
State's best interest.
Mr. Ellwood discussed that a lease application is currently
pending for the use of State lands for a gas conditioning
facility for the Alaska Highway Project under the Right-of-
Way Leasing Act. He added that lease application was
separate from the lease application for the linear pipeline.
There are several reasons for pursuing a lease for the
conditioning facility separately from a lease for the linear
pipeline. The timing of ground-disturbing activities for
the conditioning facility differs from that associated with
the linear pipeline. Moreover, the stipulations appropriate
for the linear pipeline differ significantly from those
appropriate for the conditioning facility.
Mr. Ellwood added that considerable uncertainties remain
with respect to the conditioning facility. Until commercial
negotiations with the producers are concluded, it will not
be known:
· Who will construct and/or own the facility;
· Whether custody to the gas would be
transferred at the inlet or the outlet of the
facility; or
· To what extent the ANGTS could and/or will
utilize a portion of the producers' existing
North Slope facilities.
Mr. Ellwood continued, despite those factors that weigh in
favor of prosecuting the application for a gas conditioning
facility separately from the application for the linear
pipeline, the lack of express authority to phase
administrative review, analysis and findings under AS 38.35
for an Alaska North Slope gas project could prevent the
Department of Natural Resources from conducting such a
phased review, even though it might be in the best interests
of the State. Alternatively, in the event that the
Department was to decide to prosecute the applications
separately, under the Alaska Supreme Court case law
addressing the permissible use of phasing or segmentation in
the State permitting and land disposal decisions, the
Department could be exposed to legal challenge for improper
phasing.
Mr. Ellwood stated that in order to address the issues, they
proposed an amendment, which would provide the Department
the necessary authority to limit the scope of its
administrative review, analysis and findings for a proposed
lease of land that pertains to a discrete phase of an Alaska
North Slope natural gas project, following a southern route,
and providing that certain conditions are met. The
conditions are:
· The only uses to be authorized by the
proposed lease are part of the discrete
phase;
· Before the next phase of the project may
proceed, public notice and the opportunity to
comment must be provided under regulations
adopted by the Department of Natural
Resources Commissioner unless the pipeline is
subject to a consistency review under AS
46.40, public notice and the opportunity to
comment are provided under AS 46.40.096©;
· The Commissioner's approval required before
the next phase of the project may proceed;
and
· The Commissioner describes the reasons for a
decision to phase.
Mr. Ellwood claimed that the conditions would ensure that
the best interests of the State were served by the
Department's decision to phase.
KEN THOMPSON, (TESTIFIED VIA TELECONFERENCE), PRESIDENT,
PACIFIC RIM LEADERSHIP DEVELOPMENT, LCC., ANCHORAGE, advised
that HB 519 would apply to a tax incentive. He stated that
it would propose authorizing priority treatment and
providing certain tax exemptions.
Mr. Thompson voiced support HB 519 if the following changes
were made:
· Ensure the application deadline be no later
than April 1, 2004.
He noted that originally, the deadline was set as June 30,
2005. If such positive incentives as the tax exemptions,
which are worth millions of dollars, are indeed approved by
the State, the State should insist upon a quicker decision
to move ahead with the gas project or pull the incentives
off the table. He added that the producers may argue that
they cannot commit to reaching an agreement by April 1,2004.
Mr. Thompson stressed that the bill should not be passed
without a firm "line in the sand". The producers only get
the benefits in return for acting by the end of next year or
th
in early 2004, which is the 25 anniversary of the startup
of Prudhoe Bay. He claimed that the State has given the
producers more than a "reasonable length of time" for
meetings, studies and speeches. If the tax exemptions are
provided, then the State should ask for one thing in return
and that is "An approved project underway by April 1, 2004".
· Grant the property and sales tax exemption
only to a well-defined gas project, i.e. only
to selected facilities and the main gas trunk
line.
Mr. Thompson stated that the original draft allowed for tax
exemptions for "related facilities". He stated that
language was too broad and suggested wording to clarify what
investment is granted:
"The property and sales tax exemption granted by this
Act applies only to the following facilities: the new
natural gas trunk line in Alaska downstream of the new
Prudhoe Bay natural gas conditioning plant and related
new compressor stations; and select components, but not
all, of the new Prudhoe Bay natural gas conditioning
plant that specifically relate to conditioning of the
gas to remove impurities to get 'pipeline quality' gas
for pressurized shipment down the main trunk line."
Mr. Thompson advised that components of the natural
conditioning plant that are used for ancillary economic
purposes are not exempt from property or sales taxes.
Likewise, other secondary pipelines, gathering lines, or
other facilities on the North Slope, upstream from the new
Prudhoe Bay gas conditioning plant, are not exempt from
property or sales tax by the bill and are considered a
stand-alone field or facility development.
· Limit the outright incentive exemption from
property and sales tax to the period of
pipeline construction only.
He added that consideration should be allowed for an
additional two years of tax exemption after gas line
startup.
Mr. Thompson pointed out that the most controversial part of
HB 519 was the outright granting of hundreds of millions of
dollars of property tax and sales tax exemptions without gas
project investors having to show economic data verifying the
absolute need for a tax exemption to achieve an acceptable
investors' rate-of-return. Proponents of the bill argue
that the State must grant outright tax relief to help make
the project viable and to send a strong signal to the U.S.
Congress that Alaska is doing its' share to help the gas
project.
He noted that opponents of the bill as written argue that
the State should not give away hundreds of millions of
dollars of tax relief without gas project investors actually
showing economic calculations that the relief is needed for
an acceptable return. Perhaps the most controversial
portion of HB 519 is the outright granting of property tax
and sales tax exemption dollars without gas project
investors having to show any economic data verifying the
absolute need for tax exemption to achieve an acceptable
investors' rate-of-return.
Mr. Thompson proposed a compromise. The State must grant
some substantial incentive to help "jump start" the gas
project with billions of dollars of investments at stake.
However, there should not be tax exemption after the
calendar year of gas sales startup, without proof of
economic need. To compromise, Mr. Thompson recommended
allowing an outright grant of property tax exemptions during
construction and through the calendar year of the gas line
startup. At the time of startup, if factors indicate the
project rate-of-return is not acceptable, the investors
could apply to the DNR Commissioner for an additional two
years property and sales tax exemptions, conditioned upon
showing economic data indicating the need for additional tax
relief. Mr. Thompson stressed that now is the time for
action.
PAMELA LA BOLLE, PRESIDENT, ALASKA STATE CHAMBER OF
COMMERCE, JUNEAU, testified that the Alaska State Chamber
represents 35 local chambers and 700 businesses, most of
whom are small businesses deeply concerned with the economic
future of Alaska. She noted that as the "Voice of Alaska
Business", the Chamber appreciates the opportunity to
address bills of importance to the economic development of
the State. The Chamber's top five priorities include urging
the Legislature and the Governor to encourage the producers
to proceed with development of a southern gas line route
through Alaska.
The Chamber supports passage of HB 519 and urges its
passage. Alaska needs a gas pipeline. For members to have
business thrive, resources must be developed. With the
defeat of Alaska National Wildlife Refuge (ANWR) in the U.S.
Congress, there are no other large developments on the
horizon that would spur the growth of the economy.
Ms. LaBolle commented that the State and local governments
would benefit greatly for years to come if we can encourage
producers to take the risks inherent in developing the North
Slope gas resources by building a project through Alaska.
The temporary tax exemption provided by the bill should be
looked upon as an investment by the State and the
municipalities to encourage the producers to move forward
with a project, which will create jobs, benefit
municipalities, spur economic opportunity for businesses and
start a whole new gas industry.
Ms. LaBolle discussed that by revitalizing the Alaska
Stranded Gas Development Act and having it apply to the
project, the State and producers could create a contract
that would assure tax clarity. She encouraged passage of
the bill.
Co-Chair Williams stated that HB 519 would be HELD in
Committee for further consideration.
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