Legislature(2005 - 2006)SENATE FINANCE 532
06/02/2006 11:15 AM Senate SPECIAL COMMITTEE ON NATURAL GAS DEV
| Audio | Topic |
|---|---|
| Start | |
| SB2004 | |
| Dennis Bailey, Attorney, Legislative Legal Services | |
| Jim Baldwin, Counsel to the Office of the Attorney General | |
| Steve Thompson, Mayor, City of Fairbanks, and Chair, Municipal Advisory Group | |
| Joseph Donohue, Preston Gates & Ellis | |
| SB2003 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | SB2003 | TELECONFERENCED | |
| += | SB2004 | TELECONFERENCED | |
SB 2003-NATURAL GAS PIPELINE CORPORATION
SENATOR BUNDE referred to page 6, line 29 of Section 41.42.045
(b), "the governor shall promptly make an appointment", and
asked whether the term "promptly" should be further defined.
4:07:30 PM
CHAIR SEEKINS said that is a point well taken. He reminded the
committee that the question of whether appointments to the
board would require legislative confirmation has not been
resolved.
SENATOR BUNDE advised that Tam Cooke provided a legal opinion
that legislative confirmation is unlikely to be enforceable or
allowed.
CHAIR SEEKINS asked for a copy of that opinion.
SENATOR BUNDE said that it is being distributed.
CHAIR SEEKINS commented that Senator Green said, when the
primary function of a board is fiduciary, it is not subject to
confirmation by the legislature. The legislature can stipulate
that board members cannot be dismissed except for cause.
4:09:25 PM
CHAIR SEEKINS said that the other unresolved question having
to do with public members of the board is the residency
requirement.
SENATOR BUNDE interjected that he has submitted an amendment
that requires most of them to be Alaskans. He also noted that
committee members should now have a copy of the memo from Tam
Cooke before them, and read the last sentence from that memo:
"The Board of Directors of the Alaska Natural Gas Pipeline
Corporation do not fall within the types of boards in which
confirmation is required."
4:10:20 PM
CHAIR SEEKINS thanked Senator Bunde. He then brought up the
subject of when board meetings should be held and whether the
meetings should be public.
4:10:50 PM
SENATOR ELTON said that he is more comfortable with the
Permanent Fund Corporation model than that outlined in the
bill. All of its meetings are public and, if the board needs
to address matters that are confidential, it goes into
executive session.
SENATOR GREEN asked if there is or should be a provision for
emergencies in which a decision must be made post-haste.
CHAIR SEEKINS said he thinks that would be handled based on
notice, and asked if anyone had an opinion on it.
4:11:47 PM
SENATOR WILKEN asked how the Alaska railroad board handles
meetings, and whether that would be a good model to follow.
MR. DONOHUE asked Chair Seekins to repeat the question.
CHAIR SEEKINS explained that the discussion is about the
public meeting process and how it should be handled.
MR. DONOHUE replied that the plan was to ensure that at least
one of four meetings would be public, although that would not
preclude making all of them public. The primary concern of DOR
is that the meetings remain exempt from the Open Meetings Act,
because it puts constraints on how quickly the board could
meet, creates litigation points for lack of notice and subject
matter of executive sessions. If AK Pipe is to operate on an
equal footing as a commercial entity with the other members of
the LLC, freedom from the Open Meetings Act is necessary.
4:14:33 PM
SENATOR WILKEN restated his concern about allowing votes on
fiscal issues via teleconference.
SENATOR ELTON said that Mr. Porter stopped by his office to
discuss the issue of public meetings. He understood the model
that Chair Seekins suggested and had no objection to it, and
may be working on some language now.
CHAIR SEEKINS asked Senator Wilken whether all members of the
board must be present, or if a certain number of members could
attend via teleconference.
SENATOR WILKEN said he prefers that all members must be
present.
SENATOR BUNDE said that, on page 6, line 8, where it states
that board members would be paid for "each day or portion of a
day spent at a meeting of the board," he would like the
portion required to earn the honorarium to be more clearly
defined. He said he would prepare an amendment for the
committee's consideration.
4:16:14 PM
CHAIR SEEKINS said that, when he was on the permanent fund
board of trustees, he sometimes spent half a day each way
traveling to a meeting and ended up not meeting at all. He
asked Senator Bunde if he would want to put members of this
board in the position of doing that without compensation.
SENATOR BUNDE said he would like to discuss it.
4:16:59 PM
CHAIR SEEKINS directed Mr. Donohue's attention to page 9,
paragraph (8) starting on line 3, and asked whether the board
of directors could divest the state of Alaska of it's
ownership interest in the project simply by a vote.
MR. DONOHUE replied that there are provisions that would
restrict the transfer of assets as long as the corporation has
outstanding obligations. Since this is a public organization,
its duty is to acquire and maintain an ownership interest over
the life of the project. The provision on page 9 is focused on
allowing the board to use the ownership interest as an asset
to secure debt and so on.
4:19:14 PM
MR. DONOHUE said that he does not think the administration
would have any objection to amending the language to make it
clear that the board cannot transfer the entire asset.
CHAIR SEEKINS asked for questions on indemnification and
confidentiality agreements, which are discussed on page 10.
4:20:01 PM
He went on to page 11, line 9, dealing with police powers of
the state, and asked Mr. Donohue to explain what those powers
are.
4:20:12 PM
MR. DONOHUE answered that the police powers of the state refer
to its sovereign authority to maintain the health and security
of the state, to regulate criminal matters, and commercial
activity within the state.
CHAIR SEEKINS went on to page 21, line 14, and asked if the
insertion of the word "reasonably" before "required" would
address some of the concerns the committee has discussed.
4:21:43 PM
MR. DONOHUE said that is a question for Mr. Porter. He said
that this provision has been a hot issue with producers. They
are uncomfortable with the administration's approach and would
prefer a complete exemption from the public records act. They
are insisting on a confidentiality agreement as part of the
LLC agreement.
4:22:34 PM
CHAIR SEEKINS said that he knows there is a confidentiality
agreement in the SGDA that delineates those things that must
be confidential, and he wonders why that was not done in this
bill.
MR. DONOHUE said that the administration did look to the SGDA
provisions as a model.
4:23:20 PM
CHAIR SEEKINS said that what concerns him is the inclusion of
a blanket statement covering "anything that is required to be
kept confidential under an agreement with an owner entity". He
asked if that means the state has to agree to keep it
confidential first, or that there is a vote to determine
whether it is confidential.
MR. DONOHUE said that, under the LLC agreement, there is a
standard definition of what is confidential and how
information would be shared among the parties. He reiterated
that the producers are concerned about taking a public
corporation into their partnership, which has not been done
before.
He said that he has no legal problem with adding the word
"reasonably", but that this is a policy issue that should be
addressed by Mr. Porter.
4:25:03 PM
CHAIR SEEKINS asked when the legislature would see the LLC
agreement.
MR. DONOHUE said that he does not have an answer to that
question, but that every effort is being made to complete
negotiations as quickly as possible.
4:25:22 PM
SENATOR GREEN commented that, just because there is a
government entity in partnership with a private entity, does
not mean that the same public information standards should be
imposed on the private entity as are required of the state.
MR. DONOHUE assured her that the administration is not trying
to bring the members of the LLC or the LLC itself within the
Freedom of Information Act.
SENATOR GREEN said that she was referring to the call for
information that normally, under a government entity, would
not be kept confidential.
MR. DONOHUE replied that part of the problem might be that the
current public records act is somewhat vague in regard to the
types of proprietary information that would be protected if
challenged. Part of rationale for the expanded list in the
bill, is to clarify the nature of the business information
that could be protected by Alaska Pipe Corporation in the
context of this commercial venture.
4:27:32 PM
CHAIR SEEKINS referred Mr. Donohue to page 27, section 12 of
the bill, and asked him to explain what 45.45.900 actually
accomplishes.
MR. DONOHUE answered that this provision is in current law and
provides that, in the context of a construction contract in
Alaska, a person cannot agree to indemnify another contractor
for their sole negligence or misconduct. So, section 12 amends
that rule by providing for the exception that is added with
section 13.
He explained that the standard mechanism for a joint venture
between oil and gas entities is to hire an affiliated operator
to manage the construction and operate the project at no
profit; so that operator would not be willing to accept any
risk. The risk would be absorbed by the LLC, which would
indemnify the operator against its own negligence or
misconduct by its employees, and the cost would be spread
among the LLC members according to their membership interest.
The members can insure against it on an individual basis or
self-insure, which is what the oil companies do. The operator,
as an affiliate of one of the members of the LLC, has every
incentive to avoid negligence and misconduct; but in a project
as big as this, such things do occur.
CHAIR SEEKINS asked if this indemnification flows only to the
operating entity and is not a cross-indemnification of the
owners of the project.
4:32:53 PM
MR. DONOHUE answered that this provision deals with two types
of indemnification: the operator, and the members of the LLC.
These are contractual agreements that will be narrowly drafted
to deal with certain kinds of misconduct by low-level
employees that the policy makers of each of the partners
cannot control.
He said there are also provisions that allow the operator to
hire experts to assist in construction or permitting and other
special areas. The entities providing the consulting service
to the operator would be indemnified in the same way. Some
companies may also loan employees to the operator during
certain phases of the project, and these employees too would
be indemnified.
CHAIR SEEKINS asked if the actions of someone hired
temporarily by or loaned to the operator do not flow back to
their original employer, but are indemnified as if he were a
regular employee of the operator.
4:34:59 PM
MR. DONOHUE answered yes; the indemnification covers any
employee that is loaned to the operator, the entity that
loaned the employee, and any entity providing consulting
services to the operator. He stressed the fact that these are
entities affiliated with members of the LLC, and not just any
consultant to the operator.
CHAIR SEEKINS asked whether, if the negligence of an employee
of the state of Alaska caused damages, the cost of the damages
would be shared on an equal basis between all of the members
of the LLC.
MR. DONOHUE answered yes, as long as the employee was working
for the operator.
4:35:53 PM
SENATOR GREEN asked if Mr. Donohue said that the operator
would not have to pay at all.
MR. DONOHUE responded that the producers and the state would
share the 100 percent ownership interest. The operator would
be a separate entity affiliated with one of the owner
entities, but would not have ownership in the LLC.
SENATOR GREEN asked if the four owners would share 100 percent
of the liability.
MR. DONOHUE answered yes; it would be shared in proportion to
their ownership interest.
4:37:11 PM
SENATOR BUNDE referred to page 5, paragraph (3)(A), which
lists specific things that would disqualify a person for
membership on the board and noted that, although it excludes
employees of the state, it does not exclude executives or
employees of the major oil companies. He asked why that is not
addressed.
CHAIR SEEKINS also asked why state employees, but not oil
company employees, are excluded from serving on the board.
MR. DONOHUE responded that he could not understand why a
governor would appoint an oil company employee to the board.
He said the desire is to get experienced people on the board,
which might mean former oil company employees, who would then
be subject to the conflict of interest clause.
4:38:37 PM
SENATOR BUNDE said that the conflict of interest section says
board members and applicants to the board have to declare a
conflict, but does not say it precludes them from serving.
SENATOR GREEN asked where the conflict of interest section is
located, and then found it on page 7.
4:39:20 PM
SENATOR ELTON asked if there is anything that precludes a
future legislature from tweaking any of these provisions.
MR. DONOHUE replied that there is nothing in the fiscal
contract, but there are provisions in the LLC called member
default provisions, that would be triggered by amendments to
this statute in the future. These are designed particularly to
address producers' concerns about confidentiality and the
makeup of the board. They include a dispute resolution
process, and a specific provision on page 11, section 22, that
specifies the powers of the corporation in the event of
changes that adversely affect its ability to perform its
obligations under the contract.
4:41:46 PM
SENATOR ELTON suggested that it might be helpful for the
Administration to identify elements in the bill that the
legislature will be prevented from changing in the future.
MR. DONOHUE advised that these issues are under discussion.
The triggering mechanisms and the penalties have not been
resolved; so he does not think the administration can give
more specific examples at this time.
SENATOR ELTON likened this to putting the cart before the
horse, and said that he is uncomfortable not knowing if the
legislature will have the power to change this in the future.
4:43:58 PM
CHAIR SEEKINS commented that it is hard to predict; but the
LLC will have to comply with the decisions the legislature
makes now.
SENATOR ELTON agreed, and likened it to the way the
legislature is dealing with amendments to the SGDA that
implicate the kind of contract that can come before the
legislature for a vote. In this situation however, the
legislature does not have the ability to vote on the LLC.
CHAIR SEEKINS said that the legislature would provide the
framework within which the LLC can operate.
4:45:19 PM
MR. DONOHUE said that the legislature would not be precluded
from changing the law in these areas; but there could be
limited penalties on the Alaska member within the LLC that
would affect voting rights and access to confidential
information.
CHAIR SEEKINS said he could not imagine that information
normally available to shareholders of a corporation would be
withheld from the citizens of the State. He said he thinks
the committee is trying to get at what information it is not
necessary to share with shareholders of a corporation, because
the people of the state are really acting as shareholders in
the LLC. He asked Mr. Donohue if the state is bound by the
agreement.
MR. DONOHUE said that changes could be made but might be
subject to penalties, which are limited as described in this
power. [page 11, paragraph (22)]
4:48:24 PM
SENATOR ELTON said he would describe a couple of examples, and
then go back to the situation the committee finds itself in
with the contract. By passing this bill, the legislature will
be making decisions on indemnification in sections 12 and 13.
It will be determining how many board members there should be
and where they come from. Those are two examples of decisions
that a future legislature may want to "tweak". The legislature
is adopting the SGDA amendments after having seen the
contract, to accommodate the contract. The other way to do
this is to wait and adopt legislation authorizing Pipeco after
seeing what the LLC looks like.
4:49:54 PM
MR. DONOHUE remarked that he understands that the
administration intends to bring the LLC to the legislature for
review in conjunction with the Alaska Pipe legislation.
4:50:07 PM
SENATOR WILKEN said he is not comfortable with his knowledge
of the subject matter; but he knows the 29 pages of
legislation the committee is dealing with are very important.
He said he hopes that Chair Seekins has asked the legal and
professional advisers available to the state to look at this
legislation and advise the committee.
SENATOR BEN STEVENS asked Mr. Donohue if it is the LLC
management agreement the committee is talking about.
MR. DONOHUE said yes, that is what is being negotiated.
SENATOR BEN STEVENS asked if there has been any discussion
about the LLC operating agreement.
MR. DONOHUE said that there have been discussions, but he is
not sure where they stand.
SENATOR BEN STEVENS said that an LLC operates on two
guidelines, a management agreement and an operating agreement.
The first to pass is the management agreement that defines the
members' rights within the organization. Then the parties to
the management agreement develop the operating agreement that
defines how the organization will function and how the money
will flow through the operation. He has no expectation that
there will be an operating agreement by the time the contract
comes up for ratification; it may take three years before that
is developed. As all Pipeco will do is to set up the public
entity that will become a member of the management agreement.
SENATOR GREEN asked if there is a different standard required
when a government entity is involved.
SENATOR BEN STEVENS responded that he asked that question
yesterday, specifically regarding Sarbanes-Oxley.
4:54:59 PM
MR. DONOHUE said that Louisiana Cutler is looking into it. He
responded to Senator Ben Stevens that the management and
operating agreements are very closely related, even if they
are not created simultaneously.
SENATOR BEN STEVENS agreed that they are closely related, but
stressed that the LLC operating agreement evolves through
participation of the members and is constantly changing.
4:56:59 PM
SENATOR BEN STEVENS voiced concern about the establishment of
the corporation that will become a member of the LLC, and
commented that he will feel better when he has actually seen
the LLC agreement. He does not have much concern about the
operating agreement, because the LLC will manage that.
4:58:14 PM
CHAIR SEEKINS acknowledged Senator Bettye Davis.
4:58:36 PM
CHAIR SEEKINS said that the committee will meet at 9:00 am
Saturday and will have comments from BP, ConocoPhillips, and
ExxonMobil, followed by public comment on SB 2003 and SB 2004.
4:59:14 PM
He said that on Sunday at 2:00 pm the committee would
entertain amendments from members. He requested that
legislative legal services draft the amendments and that they
be provided to his staff person, Brian Hove.
CHAIR SEEKINS said that the committee might begin
consideration of amendments on Saturday if there is time.
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