Legislature(2005 - 2006)SENATE FINANCE 532
06/03/2006 09:00 AM Senate SPECIAL COMMITTEE ON NATURAL GAS DEV
| Audio | Topic |
|---|---|
| Start | |
| SB2003 || SB2004 | |
| David Van Tuyl, Bp | |
| Harold Heinze, Alaska Natural Gas Development Authority (angda) | |
| Steven B. Porter, Department of Revenue | |
| Mark Hanley, Anadarko Petroleum | |
| 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
SB 2004-STRANDED GAS DEVELOPMENT ACT AMENDMENTS
CHAIR SEEKINS announced SB 2003 and SB 2004 to be up for
consideration.
9:11:50 AM
^David Van Tuyl, BP
DAVID VAN TUYL, Commercial Manager, Alaska Gas Group, BP,
testified as follows:
It's a privilege for me to be here to offer my
testimony on these two bills. We definitely support
the intent behind both SB 2003 and SB 2004. We
believe these bills will help progress the gas
pipeline fiscal contract.
First, I'd like to offer some comments on SB 2003, the
Act that would ... establish the Alaska Natural Gas
Pipeline Corporation, which I'll call "PipeCo" for
short. SB 2003, as drafted, will enable the state to
form a public corporation as the vehicle for the state
to be a direct participant in the project.
Article 1 establishes PipeCo and sets the rules of
governance within PipeCo. An important aspect of the
rules of governance is an exemption from the Open
Meetings Act, which ensures that PipeCo can hold
certain confidential information it receives from the
limited liability corporation, or LLC, as
confidential. But the rules of governance strike a
good balance in that they require a policy of
conducting at least one meeting in public each year.
Article 2 establishes the purpose and powers of the
new corporation. This article establishes PipeCo's
authorities ... in an appropriate manner to conduct
its business as a member of the gas pipeline LLC. But
we do have a concern that PipeCo needs to be able to
hold confidential information as confidential. This
will ensure the free flow of information between the
members of the LLC, which is critical to the efficient
functioning of the corporation.
The remaining provisions of SB 2003 are fit for
purpose and allow PipeCo to effectively participate in
the project. We therefore support passage of SB 2003,
provided that the bill ensures that PipeCo can keep
confidential information as confidential.
Now I'd like to turn attention briefly to SB 2004,
which includes amendments to the Stranded Gas
Development Act. SB 2004 will enable the legislature
to authorize approval of the gas pipeline fiscal
contract. The administration did a good job in
structuring these amendments and in explaining them to
this committee. However, there is one point that we
see just a bit differently than the administration and
that we'd like to take a moment briefly to clarify for
the record.
The administration stated that the amendment to
AS 43.82.220(a)(2) that allows for the inclusions of
terms in the contract related to the state reimbursing
the producers for certain upstream costs was required
because this was not a right the producers currently
hold under either existing lease or unit agreements.
We don't agree. In old-form leases, commonly known as
DL-1 leases, the state is obligated to pay for certain
upstream costs associated with any of its gas it takes
in kind. So we feel that this ... is a lease right
associated with these DL-1 leases. And the vast
majority of the known North Slope gas resource -
around 90 percent - is found on these DL-1 leases.
The fiscal contract simply extends that existing lease
right to all gas from all leases.
To conclude my brief comments, I want to emphasize
that BP stands ready, willing and able to advance the
gas pipeline project along with our partners,
ConocoPhillips, ExxonMobil and the State of Alaska.
The gas pipeline fiscal contract, coupled with SB 2003
and SB 2004, makes that objective possible. BP also
stands ready to work with the legislature as you
complete your work on these bills.
We support passage of SB 2003 and SB 2004 and then
encourage the legislature to approve the gas pipeline
fiscal contract to enable all Alaskans to benefit from
one of the largest energy projects on the planet.
9:17:12 AM
CHAIR SEEKINS asked why it wouldn't be simpler to hold the state
similar to the companies with respect to confidentiality of
documents.
MR. VAN TUYL agreed it may be a fit solution. He expressed
concern that although certain proprietary information could be
exchanged among LLC partners to the benefit of all partners,
competitive information should remain within the bounds of the
LLC. Furthermore, internal discussions about security measures
would be appropriate to hold within the LLC. Such information
typically wouldn't be made available to shareholders of a public
corporation, he noted.
CHAIR SEEKINS said that appears to be the intent, duplicating
the level of equal footing in terms of confidentiality. He
suggested reviewing this provision.
MR. VAN TUYL highlighted the need for clarity.
9:20:20 AM
SENATOR ELTON inquired about protocols established among the
private partners for handling confidential information.
MR. VAN TUYL explained it's a typical provision within any LLC
or undertaking between companies apart from government entities.
The desire is to ensure proprietary information is held
confidential. Provisions also recognize the need to share good
ideas that may not be public; those provisions usually are
clearly, carefully and tightly drafted. His company is looking
at that to ensure the language establishing PipeCo is written
that clearly and carefully.
9:21:43 AM
SENATOR BUNDE related a strongly held tenet among Alaskan
businesses and many citizens: the state should stay out of, and
out of the way of, private enterprise, which does a better job.
However, the companies involved in this project are requesting
state participation. He asked for successful models worldwide
relating to arrangements between governments and private
companies.
MR. VAN TUYL offered to provide that information.
CHAIR SEEKINS announced all members were present.
9:24:20 AM
^Harold Heinze, Alaska Natural Gas Development Authority (ANGDA)
HAROLD HEINZE, Chief Executive Officer, Alaska Natural Gas
Development Authority (ANGDA), Department of Revenue, informed
members that ANGDA is a public corporation of the state which
was assigned broad powers in 2002, under AS 41.41.010, to bring
natural gas from the North Slope to market. He continued:
ANGDA has taken the lead on in-state gas uses and in
lateral-line connection to the Cook Inlet area. The
ANGDA board has closely followed, over the last couple
years, the public information on Stranded Gas Act
negotiations. Since the release of the gas contract
and supporting documents less than a month ago, ANGDA
has been reviewing its provisions with a focus on in-
state gas use. That review has been expanded over the
last few days to include the gas-related legislation
introduced by the Murkowski Administration.
Since ANDGA was not inside the negotiating
confidentiality fence, we have had to cold read the
contract and absorb the numerous consultant studies.
In this first past review, several of us have flagged
concern that the contract language and provisions will
make the actual delivery and use of North Slope gas to
Alaskan communities and citizens very difficult.
Discussion papers on the several topics are currently
being prepared for the June 12th special ANGDA board
meeting, and a listing of the topical items is
attached. At the June 12th meeting, the ANGDA board
will be considering specific modifications to
contracts, and I believe that these suggestions, if
incorporated, will facilitate the common goal of
making North Slope gas available in Alaska.
Prior to that time, there are two observations that
I'd like to flag for the committee's consideration.
First, ANGDA already exists. ANGDA may be useful to
the state in the creation and/or transition to "Alaska
Pipe" proposed in SB 2003. Also, the relationship of
these two similar corporations of the state is of
longer-term significance to accomplish the state's
goals.
And then, secondly, it is important that the state not
disadvantage itself by failing to create and fully
fund the operations of its gas pipeline corporations.
At the same time, it should be recognized that in
creating Alaska Pipe under SB [2003], the legislature
is making the decision that the state invest in the
gas pipeline project. Alaska Pipe is not the decider,
only the management implementer of that decision.
The legislature's decision to invest billions of
dollars of public money and debt should be based on
due-diligence standards; that has not been part of the
public legislative considerations to date. The
legislature may wish to create and fund Alaska Pipe,
but ... condition the activation of its full
authorities on the approval of the contract.
ANGDA wishes to be a positive force in advancing the
gas line contract and will interact with you as
requested.
9:27:59 AM
SENATOR BUNDE referred to his concern expressed to Mr. Porter at
the previous meeting about gearing up and funding PipeCo before
a contract is signed and ratified, and that Mr. Porter had noted
state entities have worked diligently on this for a long time.
Senator Bunde said that's true, but cautioned about the tail
wagging the dog. He questioned, if a gas pipeline contract
failed, whether the desire would be to have a PipeCo out there
negotiating with private enterprise to create a new contract to
replace it. He suggested this duty should continue to lie with
the administration. He also encouraged Mr. Heinze to establish
clear lines of communication with the administration regarding
the contract, if they don't exist already.
9:29:40 AM
MR. HEINZE suggested the need now to create an entity that has
some project identity and can be part of moving forward the big
project. He said it is neither practical nor possible for the
bureaucratic arm of the state to do that, since the negotiators
have other duties and so forth. While the amount of money seems
large on one scale, it is small compared with the payoff.
Noting his group has struggled with funding levels and been
prudent, he cautioned that things don't happen without money.
He addressed communication, stating intent at the June 12 ANGDA
board meeting to review documents on a number of points and then
submit those "white papers" as letters to the administration and
legislature for consideration. The intent is to be in a
positive, suggestive mode. He indicated that since ANGDA's
formation, Steve Porter has been it liaison with the
administration.
9:31:53 AM
SENATOR BUNDE referenced Mr. Heinze's testimony that the
legislature may wish to create and fund a pipeline corporation,
but condition the activation of its full authorities on the
approval of the contract. Senator Bunde agreed it shouldn't be
activated before contract approval, but also questioned funding
it before that point.
MR. HEINZE clarified that the grant of power to the corporation
- and under the current grant of power to ANGDA - will be broad:
the ability to go out and raise money to accomplish the purposes
for which the entity has been created. He spoke of the ANGDA
board's fiscal restraint, surmising the new pipeline corporation
would show similar restraint. Expressing concern that the grant
of power in SB 2003 "makes the decision to invest in the
pipeline," Mr. Heinze highlighted the diligence required with
that decision, which he didn't necessarily believe had been
satisfied in the legislative review process.
SENATOR BUNDE offered general agreement, but opined that the
decision to invest in the pipeline occurs when the legislature
chooses to approve a contract which does that, not when a
corporation is authorized.
9:34:28 AM
SENATOR OLSON asked how ANGDA would remedy the difficulty of
delivering and using North Slope gas in Alaskan communities.
MR. HEINZE indicated he couldn't answer in detail yet; it's the
purpose of the June 12 board meeting. However, he said, he
believes the concerns can be resolved through modifying the
contract to remove impediments. For example, it would require
major commitments in a difficult, complex process for any
Alaskan utility to successfully take gas from the pipeline.
There is a lack of necessary information and so forth. The
contract doesn't provide any "bootstrapping" for the state to
help achieve this.
He mentioned Wyoming's highly successful development authority,
of benefit to that state, but also the challenge when standing
between two private-sector entities and providing a line of
credit as a guarantee and assurance for certain things to
happen. He suggested this may be an appropriate role in the
state for ANGDA or some other group. Noting the contract limits
normal Regulatory Commission of Alaska (RCA) jurisdiction, he
remarked, "Frankly, we don't even understand at this point fully
what that means, but we do understand that an agency that has to
play a major role in in-state decisions is somehow, again,
limited by the contract language."
9:37:26 AM
SENATOR OLSON said he didn't see the difference between the
producers' ability to provide natural gas to smaller communities
and ANGDA's ability. He suggested the former would be easier,
in fact, especially if RCA was outside some of the process.
MR. HEINZE replied that smaller communities will have to make
long-term, binding commitments to get gas delivered. For
utilities in his area, those would involve several times the
utilities' current worth. For a smaller community along the
way, it likely would exceed the net property value within the
whole jurisdiction. It's not that those terms are unreasonable;
rather, if the only way to protect those interactions is through
the Federal Energy Regulatory Commission (FERC), then a
tremendous burden of expense would be incurred to get natural
gas to even the smallest entity.
9:38:56 AM
CHAIR SEEKINS asked Mr. Heinze to expand on his testimony that
the legislature's decision to invest billions of public dollars
and debt should be based on a due-diligence standard that hadn't
been part of the legislative considerations to date.
MR. HEINZE compared the legislature's decision to a high-level
corporate decision, noting he's familiar with what constitutes
due diligence in such an instance. As a careful reviewer of the
record, he told members nothing right now says $20 billion is
the right number "in a diligence sense." A diligence standard
usually requires receiving professional, accurate advice as to
the range of the numbers, probabilities and so forth. Although
there has been a lot of work to arrive at the estimate, it's
worth a little money for the legislature to have someone look at
the estimate, understand it and then provide a written opinion
about the quality and range of that estimate.
CHAIR SEEKINS agreed and suggested that hearing from one or two
more consultants shouldn't be a problem.
9:41:12 AM
SENATOR BEN STEVENS asked whether Mr. Heinze agreed the
aforementioned amount wouldn't be known until FERC makes a
determination and issues a request for the owners for an
authorization for expenditure, after when FERC is prepared to
issue its certificate of public convenience. He suggested even
the other members of the LLC don't know how much it will cost.
MR. HEINZE agreed the project that will actually be built hasn't
been defined; until then, the cost won't be known. However, he
disagreed on the last point, opining that the corporate entities
have far more knowledge than the state does about the quality of
the estimates and related issues. "In a public sense, we have
zero," he said.
SENATOR BEN STEVENS partially agreed and partially disagreed.
He concurred that the corporate entities have greater knowledge
of the potential costs of a project of this magnitude, but said
the decision by the board of directors of the partner
corporations won't commit the funds until FERC has given them
the permit that says, "Show us your authorization for
expenditure, and here will be the rate of return and here will
be the tariff set, based on the project costs ... that we
approve that you have given to us." He suggested, at that
point, FERC may not approve it.
9:43:59 AM
MR. HEINZE agreed with the assertion regarding FERC. Under
federal regulations for the open season in Alaska and under its
general proceedings, FERC clearly requires public disclosure of
the estimate, cost factors and so forth that have gone into the
cost calculation. Hopefully, in this case that will occur. He
cautioned, however, that it would be "terribly unfortunate if we
found ourselves in Washington, D.C., before FERC, having to drag
that information out on the table." Mr. Heinze proposed that
the process of moving forward is better served by being aware
that information exists which hasn't yet been revealed.
SENATOR BEN STEVENS suggested there is a need for public access
to confidential information only if and when the state commits
to being a participant. At the time of FERC's sanctioning, all
LLC members could determine whether to be partners, and the LLC
would vote on whether to move forward. He said he respects both
positions: wanting information before participating, and
refusing to provide it until there is a commitment to become a
partner. He noted that's the policy call the legislature must
make about moving to the next level before undertaking due
diligence.
9:47:02 AM
MR. HEINZE pointed out two parts to the issues. First, to his
understanding, a legislative decision on the contract is a
decision to move forward with state involvement; from what can
be seen of the "withdrawal provisions," however, and from what
isn't seen with respect to LLC voting procedures, the state's
"voice" and choices aren't known after that point. "Clearly, at
that moment, the legislature is in charge of the decision
whether to become an interest owner in the pipeline or not," he
added. Second, people beyond the legislature need information.
If the marketing arms of the corporate entities have certain
information available, he asked, why isn't it available to local
utilities, for example? Why isn't it available through RCA?
9:48:35 AM
^Steven B. Porter, Department of Revenue
STEVEN B. PORTER, Deputy Commissioner, Department of Revenue
(DOR), came forward to answer questions, affirming he'd been
immersed in the project for some time.
CHAIR SEEKINS asked whether the administration has a good idea
of the quality of the rough cost estimates.
MR. PORTER agreed with Mr. Heinze that it's appropriate to do
due diligence on the cost estimate; he indicated DOR did that
due diligence and spent substantial time with its contractor to
ensure there was comfort in depending on the information and
cost estimates provided by the producers. However, the report
it received is a summary. The data itself isn't available to
third parties - including the public, ANGDA or utilities -
because it is confidential. It puts third parties in a little
more difficult position.
9:50:57 AM
SENATOR BEN STEVENS asked Mr. Porter whether he was referring to
information developed during a multimillion-dollar study a few
years ago; if so, he requested details.
MR. PORTER affirmed it was that $125 million study, saying the
information is owned by the three producers - ConocoPhillips, BP
and ExxonMobil. Noting Mr. Van Tuyl could provide details,
Mr. Porter said he'd spent a substantial number of hours with
the study as well. Pointing out "they do have a data room," he
characterized it as a scoping study of the project and a pretty
comprehensive analysis, at that point in time, done to arrive at
a rough cost estimate.
9:52:09 AM
MR. VAN TUYL specified the aforementioned study was jointly
conducted by BP - "actually done by Phillips at the time" - and
ExxonMobil over 18 months in 2001-2002. They completed a
technical feasibility study; did a commercial analysis of the
project; and conducted fieldwork - people walked much of the
route and sampled streams and more than 1,000 river crossings,
flew the aerial extent of the pipeline route, and completed
Global Positioning System (GPS) survey data and a preliminary
engineering estimate.
He said conclusions from that study were 1) the project was
technically feasible and 2) at the time, it wasn't commercially
viable because the identified risks - including regulatory risks
and potential fiscal risks - outweighed the rewards. Thus they
embarked on two activities. The first was pursuing federal
legislation to define the federal regulatory process to ensure
the process is efficient and well defined; he noted that in
October 2004 the federal government passed the Alaska Natural
Gas Pipeline Act, which defined the regulatory process. The
second was that in January 2004, "on the back of that study,"
the three companies jointly submitted an application to the
state to initiate negotiation of a fiscal contract under the
Alaska Stranded Gas Development Act ("Stranded Gas Act").
9:54:42 AM
SENATOR HOFFMAN requested confirmation that even after the due
diligence was concluded, the state: 1) felt the project made
fiscal sense, 2) was considering investment at 16 percent and
3) because of the lucrativeness of the venture, negotiated with
the "majors" to increase its participation to 20 percent. He
recalled hearing that from Dr. Pedro van Meurs.
MR. PORTER offered his personal knowledge: in the negotiations,
the state's intent has always been to align its ownership
interest with its gas interest. Although there has been
discussion of what that ownership interest would be, he didn't
remember being at a point of trying to increase the ownership
interest by 4 percent because it was an economic venture.
9:56:56 AM
MR. VAN TUYL clarified that the project evaluated during the
2001-2002 joint study involved transporting natural gas from the
North Slope to Alberta, Canada. That is the first major hub;
from there, gas can be placed virtually anywhere on the North
American grid with the existing infrastructure. It also looked
at the option of continuing on to Chicago.
He explained that one unknown factor was what the world would
look like when Alaska's gas entered the Alberta market - what
the western Canadian sedimentary basin would do, for example, or
how much ullage out of Alberta would exist. Thus the study also
looked at a project continuing to the Midwest; Chicago was
chosen because it is North America's most "liquid" market.
Indicating the study looked at a full 4 billion cubic feet (Bcf)
a day from Alberta to Chicago, Mr. Van Tuyl said it isn't known
whether any or part of that section would have to be built.
SENATOR WAGONER asked whether figures for both the
aforementioned scenarios were based on 4 Bcf of gas a day.
MR. VAN TUYL affirmed that. He then specified that looked at
was a "sort of nameplate capacity" of 4.5 Bcf a day leaving the
North Slope. "I think the actual numbers came out to be 4.3,
with ultimate delivery to market to be something around 3.9 when
you have fuel and shrinkage along the way," he added.
9:59:21 AM
SENATOR BEN STEVENS asked whether the study included in-state
transmission or demand.
MR. VAN TUYL answered in detail:
We did not do ... any kind of a full, independent
study of in-state use. What we did do was look at how
we might accommodate a future LDC or local
distribution company's ability to satisfy that in-
state need. And in the fiscal contract, that
manifested itself in the commitment of the companies
to provide up to four off-take points in Alaska. But
we didn't do an independent study of what ... the
demand might be.
We did reference some studies that were done by the
state to look at in-state demand and whatnot. So we
used those numbers to determine sort of what in-state
needs might be, but we didn't do a separate, bottoms-
up cost analysis or a study analysis, at least none
that I can recall right now.
10:00:32 AM
SENATOR BEN STEVENS asked whether it's anticipated, if the
contract is ratified, that data from the due diligence of the
$125 million study would be made available for informational
purposes to the state and to a state entity such as ANGDA.
MR. PORTER replied that under certain circumstances and under
certain confidentiality rights, he thinks the state and its
affiliates possibly could be brought into that data room for a
look. "I don't know that we've discussed the timing of a public
sharing of the data," he added.
10:01:30 AM
MR. VAN TUYL suggested this relates to his own testimony
regarding the desire of his company - and to his belief, his
partners - to hold certain information as proprietary, in that
the cost estimates include the use of proprietary technologies
to develop those costs and savings. He surmised certain
information might be made public, whereas other information
wouldn't; to his knowledge, details hadn't been parsed out as to
what could be made public. He noted there is a process whereby
people can sign confidentiality agreements and have access to
the data, but that is a controlled access.
10:02:28 AM
CHAIR SEEKINS asked whether it would be advantageous for the
companies to underestimate the due diligence relating to the
cost and "surprise us later."
MR. VAN TUYL noted he is an engineer trained to come up with the
best technical data possible; support the data; and then do an
internal risk analysis and have other experts on other areas of
the project "sort of poke holes at the estimate and say, 'Well,
you didn't adequately identify the range of possible outcomes on
labor or on the cost of steel or whatnot.'" A contingency to
cover that is included as part of the estimate. The effort is
to come up with a hard estimate of the cost, he said, rather
than a highball or lowball estimate, within a range.
He reported that, currently, with the data available and the
rigor with which the cost estimate was done, that range is "plus
or minus 20 percent," given market conditions at the time. This
is an important caveat. Since the 2001 timeframe, for instance,
the cost of steel has more than doubled; he also mentioned the
labor market for industrial development. If that estimate were
redone - which it hasn't been - the number probably would be
higher today.
10:04:34 AM
MR. HEINZE offered his experience: at this level of corporate
decision, several people would scrutinize what was going on and
ensure points of challenge were put on the table so management
had full information. In this instance, however, he didn't know
of any way to do that, other than for the legislature to hire
somebody to review the estimate and offer independent advice.
MR. PORTER highlighted one reason the state was comfortable with
the data-room information created by the industry: it was
created for internal purposes at the time, not to negotiate with
the state; their job was to provide their management teams with
a number they believed accurate in order to facilitate good
decision making.
10:06:24 AM
CHAIR SEEKINS surmised someone was estimating how the economic
conditions had changed and thus would affect this project.
MR. VAN TUYL said BP did its own internal assessments compared
with the work finished in 2002, and updated it; he imagined the
partner companies did the same, though they hadn't come together
collectively with a consensus view of the updated number.
10:07:08 AM
SENATOR WAGONER questioned whether $20 billion is known to be a
good number. Regarding due diligence on the part of the state,
he acknowledged the necessity, but said he wasn't sure how to go
about it. He cautioned about knowing what it entails before the
legislature goes much further in investing in "plus or minus 20
percent" of this high-risk line. He highlighted the
legislature's responsibility to be diligent in investing the
state's money.
10:08:54 AM
MR. HEINZE brought attention to an article in the June 4
electronic issue of Petroleum News about success in big
projects; it quotes heavily from Al Rogers of Independent
Project Analysis (IPA). Mr. Heinze clarified that he didn't
question the intention of the people who made the estimates.
However, the state needs to understand that competent people may
get it wrong half the time, and to understand what kind of labor
productivity is built in, for example. There is plenty of
opportunity for things to go awry. As part of diligence,
therefore, those questions should be asked. In response to
Chair Seekins, he agreed to fax a copy of the article.
10:10:33 AM
SENATOR WAGONER noted the aforementioned article summarized what
Mr. Rogers said during the recent meetings at Centennial Hall.
Senator Wagoner remarked that it was no great revelation.
MR. PORTER acknowledged that point, but clarified the state's
commitment to authorize this contract or participate in this gas
pipeline is not a commitment to spend the 20 percent; rather,
it's to move forward with the analysis "to get us there."
That's why the work commitments are designed as they are. There
can be no decision today to build the gas pipeline, which is why
Mr. Rogers in the IPA presentation talked about a staged
analysis, Mr. Porter added.
He explained, "We're going to go back through, a scoping time
where we do project planning, we continue to go back through a
review of the engineering, do the analysis in the project
planning to get that cost estimate even more accurate." That's
why a project-sanction decision on whether to move forward with
a major process of building this pipeline is actually three to
four years away. At that point, the state needs the right to
decide whether to take the risk as a participant.
MR. HEINZE said Mr. Porter had just highlighted the reason for
moving forward to form the corporation. Someone is needed to
examine not only the financial aspects, but also the entire
project, to be a good participant in defining the project and
moving forward. Absent forming the corporation and providing
money, Mr. Heinze questioned how it would get done.
10:13:38 AM
SENATOR BEN STEVENS referred to the Alaska Natural Gas Pipeline
Act passed by Congress in October 2004 and its $18 billion loan
guarantee. He asked whether this federal guarantee would apply
if the state became a participant.
MR. VAN TUYL affirmed that, noting the aforementioned
legislation had many facets, including loan guarantees for up to
$18 billion and providing for financing for "up to 80 percent
debt" associated with the project. One key aspect of the LLC
agreement is to ensure the participants can access the financing
they need to go forward with the project. He highlighted the
importance to participants of being able to take advantage of
those loan guarantees.
SENATOR BEN STEVENS surmised that if the sponsor group
anticipated costs exceeding the loan-back guarantee, they'd ask
Congress for an increase in the loan guarantee amount.
MR. VAN TUYL indicated he wasn't aware of that intent by BP.
SENATOR BEN STEVENS clarified he was observing that Congress
likely would be receptive to a request for an increase, given
the situation with gas in the Lower 48.
10:17:27 AM
SENATOR STEDMAN referred to Mr. Porter's earlier comments and
the cost estimates. Senator Stedman said it seems "we're going
through the normal process" and wouldn't know the exact cost
until the project is sanctioned in two or three years; even
then, it would be a guess, likely a low estimate, from what
they'd heard about dealing with mega-projects.
CHAIR SEEKINS suggested due diligence is a continuing standard.
The committee took an at-ease from 10:18:02 AM to 10:29:24 AM.
SENATOR BUNDE observed that the state is often accused of not
doing business well; he gave examples.
MR. VAN TUYL said he could give a more complete response after
additional research. He provided as an example the involvement
of the federal Minerals Management Service (MMS) in taking its
royalty share of gas in kind, similar to the arrangement
proposed here for the state. The MMS royalty-in-kind (RIK)
program started a number of years ago on a relatively small
scale in order to get experience and then decide whether it is
an appropriate government role; it has grown, and recently MMS
took out ten-year firm transportation (FT) - similar to what
will be looked at for this project - to transport its royalty
share of gas and commit the gas to a project.
He said MMS cited three reasons for continued expansion of its
RIK program: higher market value for the royalty gas; lower
administrative costs than with the traditional royalty-in-value
program; and fewer disputes with the industry, because of
commercial alignment. Mr. Van Tuyl reported a similar RIK
arrangement with the State of Wyoming for which similar reasons
were cited. He offered to reference articles in which MMS
stated the foregoing, and to try to provide international
examples of equity participation by governments as well.
10:33:37 AM
MR. PORTER related his belief that the business of state
government is not to be in private enterprise. In government,
the advocates for participating in a major project tend to
overestimate benefits to the public and to underestimate costs
and risks; he noted a substantial amount of research has been
done on this. Mr. Porter said he has some comfort with this
project, however, because the state's three partners are some of
the largest corporations in the world and have private decision-
making analysis, with the state as a minority partner.
SENATOR DYSON asked in which ways the interests of the state or
its people aren't exactly aligned with the fiscal interests of
the major companies, even potentially.
MR. PORTER answered that the corporations have one primary
responsibility: to their shareholders, to make a profit. The
state's additional responsibilities include creating and
participating in a project and trying to bring the maximum
benefit to Alaska's people; in-state gas use is somewhat in that
arena. Another issue, for which a solution hasn't yet been
found, is that a number of people in the Interior and the Cook
Inlet area want to see a petrochemical industry. Although
elements of four studies have looked at trying to make it
economically viable, none of the contractors have come back and
said it's a good idea. The producers are less interested in
where it occurs, other than trying to capture the most value.
10:37:45 AM
MR. VAN TUYL highlighted a key aspect: unprecedented commercial
alignment, with the state able to align itself with experienced
participants, creating a good synergy. Although different
interests exist, he offered the belief that the contract deals
with those specific interests. He cited examples, including the
studies required in Article 9 by all participants; provisions
for "Alaska hire"; and that any party is free to compete for the
opportunity to provide in-state gas, something BP - which brings
energy to customers - will compete for.
10:40:23 AM
MR. PORTER pointed out the parties' different positions
regarding financial structures. Even the three producers have
different financial priorities and ways they like to finance
projects, he said. Any of the three producers may be able to
pay cash for this project, for example, under today's oil-price
scenarios. The state has an interest in protecting its downside
risk, and its cash-flow issues differ from those of the
producers. When the state comes to the table to negotiate how
to finance this, ensuring it is protected in that environment is
challenging.
SENATOR DYSON remarked that in his years at BP, he learned about
environmental, political and permitting issues. While the
"over-the-top" route desired by the industry would have been
shorter and perhaps cheaper, he opined, the highway route could
be built sooner and be less problematic, and would allow more
in-state use. He asked how financial arrangements are being
structured so they don't do a disservice to the producers'
stockholders and yet take care of state interests including the
following: timing, since doing the project soon would increase
state income for services; in-state use such as gas in the Cook
Inlet region seven or eight years from now for power, home
heating and, hopefully, continuation of value-added industry;
and "people" issues such as training for construction and long-
term operating jobs.
10:45:09 AM
MR. PORTER recognized the desire to bring the gas on line as
soon as possible, but also recalled testimony by IPA that being
schedule-driven can ultimately cost more than holding off for a
couple of years and doing it right. He suggested the industry,
while good at methodically walking through the process, has a
"freight train" problem as well: once a management team decides
to move forward, it tends to minimize costs and be schedule-
driven, which occasionally in the past had created an
environment in which information was lacking in the decision-
making processes, leading to cost overruns. Thus the state may
be the party dragging its feet to ensure a particular stage of
the project is done effectively and thoroughly before jumping to
the next stage - ensuring the producers spend the money
necessary for the analysis required to make the decision to move
forward.
10:47:51 AM
SENATOR DYSON said he hopes Mr. Porter is right. He expressed
concern about getting the revenue stream flowing and getting
gas, particularly for the Interior and Cook Inlet. For whatever
reasons, including some valid ones, he noted, the producers may
want to go slowly, and the state's 20 percent interest doesn't
give it veto power over the qualified project plan.
MR. PORTER highlighted one problem encountered in negotiations
with regard to voting in the LLC: generally, veto power
provides the ability only to delay a project, not to move it
faster. What can move a project faster is the stability of the
teams - ensuring the producers aren't trading out their
management teams continually - and ensuring the project is done
well and efficiently. In addition, as co-owner, the state plans
to watch the diligence under which they proceed, and has the
right to blow the whistle, if necessary, if there is stalling.
SENATOR DYSON indicated he had continuing concerns. He said it
appears the only option for the state would be to quit. He
asked about other sanctions or inducements that wouldn't stop
the progress or cause a change in teams.
10:51:23 AM
MR. VAN TUYL said Senator Dyson raised a number of excellent
issues. Regarding the over-the-top or highway route, he
reported both were looked at in the 2001-2001 joint study; it
was concluded there was no cost advantage to either. More
important, the northern route is prohibited by both federal and
state law. Thus the exclusive focus is on making the highway
route as efficient as possible regarding costs and schedules.
He emphasized BP's desire to diligently advance this pipeline
project, noting the contract package includes terms that would
increase oil taxes by a billion dollars a year, just for the
opportunity to do the project. With respect to timing, Mr. Van
Tuyl said the contract gives the state a "stick," a diligence
standard. If the producers fail to live up to it, the state can
terminate their rights under the contract, the fiscal stability
they've bargained for, which BP wouldn't want to jeopardize.
He discussed minimizing unfructified capital - that which isn't
bearing fruit. Once a company starts investing in a project,
the idea is to get it on-stream as soon as reasonably possible.
There is a dynamic tension: do it quickly, but do it right,
avoiding mistakes such as becoming schedule-driven. The fear is
having a project cost two or three times what was anticipated.
He suggested the contract recognizes this tension and ensures
diligent advancement of the project, recognizing the goal isn't,
at all costs, to deliver a project by a certain date.
10:55:12 AM
SENATOR BUNDE voiced concern about misalignment between the
legislature and the people: the legislature may want high
prices in order to fund services, and yet the people may want
low gas prices and legislators may campaign on providing that.
He asked whether the firewalls are adequate to protect the
legislature from this, for instance.
MR. PORTER replied the issue has arisen several times,
especially with the Municipal Advisory Group (MAG) and
interested parties. He suggested the misalignment could be
focused, rather than eliminated. The gas that Alaska sells has
to be based on a commercial basis. The tension must lie with
the legislature, not the entity selling the gas. If people want
cheap gas in Cook Inlet, for example, they need to understand
it's a subsidy and ask the legislature for it; if the
legislature decides to provide Alaskans with cheap gas, then
it's up to the legislature to handle that stress, tension and
decision from a policy standpoint. It's a subsidization
decision, one legislators make daily.
SENATOR BUNDE asked whether there's an adequate firewall between
PipeCo and the legislature so that PipeCo can continue to be
commercial.
MR. PORTER answered it's exactly why PipeCo was created as it
was. It's meant to be as independent as possible, with minimum
exposure to political influence. It's the reason for six-year
terms, for example, so any one administration can't control the
entity's decision making. Together with removal for cause, this
provides an amount of independence that Mr. Porter said he hopes
will protect the entity from such influence.
11:00:31 AM
SENATOR SEEKINS expressed appreciation for the insulation of a
corporate group from political influence. He cited a personal
example.
SENATOR BEN STEVENS commented on the state's unfructified
resources. He then turned to the balance between the state's
exposure to risk and the potential benefits. Referring to the
presentation from Mr. Rogers and IPA, he cited an estimated cost
of $22.5 billion; $18 billion in loan-back guarantees; and the
state's $1.2 billion share of the $5.8 billion overall equity at
risk over the project life.
He indicated this pales when compared with the amount the
legislature will spend over the next 30 years. Even if a
50 percent overrun resulted in a cost of $33.7 billion - and if
Congress didn't raise the loan-back guarantee - the state's
share of the $15.7 billion total risk would be $3 billion over
35 years or so. Senator Ben Stevens suggested this amount is
almost insignificant when considering the benefits of
infrastructure, employment, revenues for public services and so
forth. If the state's participation is the catalyst that moves
the project forward, he said, it's worth the risk.
11:06:23 AM
CHAIR SEEKINS asked how long it would take the state to recover
that at-risk capital once gas starts to flow.
SENATOR BEN STEVENS answered it would be four to five years,
from the cash flow this project would generate.
MR. VAN TUYL noted it could be sooner, depending on the price.
SENATOR BEN STEVENS said the question is whether state
participation is the catalyst that leaps it forward.
11:07:20 AM
SENATOR OLSON agreed with Senator Ben Stevens' concern regarding
investment and long-term payoff, but asked how to ensure this
bureaucracy doesn't become "a dinosaur that can't feed itself,"
especially if gas prices go down. He also asked about
safeguards if a situation isn't in the state's best interest.
MR. PORTER noted the legislature has control over the operating
budget. Referring to the legislation and the fiscal note, he
said the intent is to identify that organization as a "non-
operator" organization, primarily responsible for tracking the
operator, ensuring a good job is done and having staff available
so the non-operator's decision is fully supported by information
and documentation. The state entity should never be more than a
dozen people; it's controlled by the amount of money provided in
the operating budget. The operator - probably one of the
producers, unless the decision is to have a third party build or
operate the pipeline - will have the so-called bureaucracy.
SENATOR OLSON pointed out the lack of fiscal restraint this
year.
MR. PORTER replied that from the gas pipeline standpoint, no
personnel have been hired to date, despite the authority to
spend about $1.5 million on personnel. "We felt like it was
appropriate to timely delay that until we had an organization
set in place," he explained. "So we have been trying to be
efficient with your money ... and to spend it wisely."
11:11:06 AM
SENATOR STEDMAN opined that if the oil-tax change is linked with
the gas line, more than the equity-position exposure would
likely be generated by the time the line is constructed, and
certainly by the time the gas first flows. "We don't have near
the exposure that is readily apparent on the surface," he added.
SENATOR WILKEN referred to the payment in lieu of taxes (PILT)
with respect to municipalities, noting it is done presently on
full and true value, whereas now a "20 percent throughput PILT"
is being established to replace it. According to Randy
Hoffbeck, he said, that's established with the valuation at
$3.5 billion; in mid-May, a decision increased that by
20 percent, to $4.3 billion. He asked whether it's proper, in
the amendments or the contract, to go back and adjust the
[20.4]-cents-per-barrel throughput based on the new, increased
valuation of the pipeline, and also to set out that the PILT
payment - whatever it's established on in the future - is
established on the most current valuation of the pipeline.
11:14:00 AM
MR. PORTER deferred to Mr. Van Tuyl for details regarding future
payments, but offered his understanding that the valuation of
the pipeline is established, whether at 4.3 or 3.5, the amounts
coming from the PILT. The contract incorporates an automatic
inflation factor so the amount is certain over time.
MR. VAN TUYL added that the Trans-Alaska Pipeline System (TAPS)
rate in the contract is the 20.4 cents Senator Wilken referred
to. He related his view that all contract terms are part of the
whole: if any one is adjusted, there needs to be consideration
given for the entire contract. He agreed with Mr. Porter that
all rates included in Article 17 have an escalation factor; that
effective rate increases through time for the duration of the
contract.
He pointed out that the value of TAPS has declined virtually
every year, with one exception in addition to this current year;
thus it's a departure from the past to have an escalator. As
part of the balance for the deal, however, to get the desired
certainty, the rate was locked in at an increased value from
what the valuation was last year. "Industry came in at, I
think, $1.4 billion; the actual valuation was set at 3," he
said. "The contract value was established at the 3.5, the 20.4
cents, with an escalator. So, yes, that's how the TAPS rate
works."
SENATOR WILKEN asked whether the 20.4 cents should be escalated
by "the '05 increase of the valuation of the pipeline."
MR. PORTER referred to a resolution passed by MAG in recognition
of the same issue - which, he said, would only become a problem
if there were a decision to attempt to renegotiate those terms.
He noted MAG recommended that if the basis of the pipeline truly
has changed "from 3.5 to 4.3," it would be appropriate to change
the PILT as well. From a procedural standpoint, it is the
commissioner's responsibility during this public hearing process
to review those comments, evaluate them and determine whether
amendments are necessary based on those comments - in essence,
to determine whether renegotiation of those terms should occur
and, if so, to renegotiate them and return to the legislature
with amended terms. He added, "That would be the process under
which ... we'd evaluate that 4.5."
11:17:45 AM
SENATOR WILKEN asked whether the PILT would be flat for nine
years.
MR. VAN TUYL clarified that it escalates right away.
SENATOR WAGONER agreed with Senator Ben Stevens' earlier
remarks, but qualified it somewhat, expressing concern that one
mega-project has been built in Alaska since 1969. Noting the
same companies will build this line, he asked what assurances
exist, or what the companies are doing to ensure there won't be
similar huge cost overruns, since this line will be 2.5 longer
than TAPS, for instance, and there will be similar issues such
as workforce availability, contractors and so forth.
11:19:25 AM
MR. VAN TUYL indicated BP and its board of directors have worked
to learn from the TAPS experience to ensure it isn't repeated.
One reason TAPS overran preliminary estimates is related to
regulatory snags. Calling it a classic example where schedule-
driven mega-projects fail, Mr. Van Tuyl said this is a key
reason they sought clarity on the federal regulatory process.
They've learned a lot about technology, including engineering
for river crossings and designing traverses for passes.
Furthermore, they've learned the importance of lining up
materials and resources, two areas of significant overrun for
TAPS. This includes access to steel and having the right people
identified and trained. Thus Article 6 of the contract includes
subsidizing training for the workforce. Characterizing it as
front-end loading, Mr. Van Tuyl indicated the approach will be
highly disciplined, with the dynamic tension of wanting to get
to the point of producing gas and having a return.
11:23:11 AM
SENATOR BUNDE asked what percentage of the cost would be for
labor.
MR. VAN TUYL said he would find out.
CHAIR SEEKINS offered his experience that it is difficult to
estimate even the cost of a new building four years from now.
SENATOR BUNDE highlighted differing interests of the state and
its citizens: building a pipeline as cheaply as possible versus
wanting high wages.
CHAIR SEEKINS concurred, noting the state is an investor in this
and neither the producers nor the state would want costs to
escalate unreasonably. He recalled ballooning prices during
TAPS construction in the Fairbanks area, in particular, but said
TAPS was a good investment in the end, even though much more
expensive than anticipated. He acknowledged there would be
tension between the best interests of the state and its
citizens.
The committee took an at-ease from 11:27:47 AM to 2:21:43 PM.
^Mark Hanley, Anadarko Petroleum
MARK HANLEY, Public Affairs Manager in Alaska, Anadarko
Petroleum, told members his company is extremely interested in
ensuring a gas line gets built, although official comments on
the contract itself aren't ready yet. Regarding amendments to
the Stranded Gas Act, he encouraged members to review Don
Shepler's June 2, 2006, memorandum and perhaps talk with the
consultant. Mr. Hanley said the memo raises issues Anadarko
also has identified, generally relating to expansion and
regulatory authority, not the contract's fiscal terms. One new
issue raised is the 45-day public comment period, which Anadarko
had planned to be part of; the memo suggests amendments drafted
to address a number of concerns could be included in the
Stranded Gas Act amendments. Mr. Hanley agreed it's better to
address them in statute, rather than just as comments.
2:25:02 PM
MR. HANLEY, in response to Senator Dyson, listed the following
issues raised in Mr. Shepler's June 2 memo that are of like
concern to Anadarko: lack of an LLC available to look at, of
concern since that entity will apply for the FERC certificate,
set the rate and decide who gets to expand the pipe; expansion
issues; absence of commitments regarding voluntary expansion;
rolled-in-price issues; sole-risk expansions on the state's part
as an option, which Anadarko believes is a valuable option; the
weakness of the state-initiated expansion; and that the LLC
agreements aren't there for the legislature to review.
Mr. Hanley said he didn't know about requiring the state to
consent to any material change in the qualified project plan.
SENATOR DYSON noted Mr. Hanley hadn't mentioned the absence of
commitments regarding capital structures for tariff purposes.
MR. HANLEY replied he'd have to look at it. He specified that
the final item, about the net book value, would concern his
company as well. In response to Senator Elton, he said
Anadarko's team members were still going through the contract;
most hadn't read the June 2 memo yet, and they hadn't looked at
specific amendment language. He suggested they could testify
next week. He noted they would have submitted public comments
in another week and a half, but the memo had made him realize it
might be too late at that point.
CHAIR SEEKINS asked whether Mr. Hanley had an opportunity to
discuss any of these points with Mr. Shepler or his staff.
MR. HANLEY replied not since the memo came out. He elaborated
on his contacts with Mr. Shepler over the years, noting Anadarko
hadn't shared an official position on the proposed contract with
him or anyone, although Mr. Shepler's memo is a good
representation of issues Anadarko has dealt with. In further
response, regarding when Anadarko's comments would be available
on the contract, Mr. Hanley said they're aiming for early next
week with respect to issues raised in the memo.
2:31:50 PM
CHAIR SEEKINS noted members had received a complete version of
the Stranded Gas Act that morning, and said he'd received the
information referred to by Mr. Hanley from the Internet. He
asked whether anyone else wished to testify. He then turned
attention to amendments.
The committee took an at-ease from 2:33:44 PM to 2:36:38 PM.
SENATOR DYSON moved to adopt Amendment 1 to SB 2004, labeled 24-
GS2046\A.5, Bailey, 6/3/06, which read:
A M E N D M E N T 1
OFFERED IN THE SENATE BY SENATOR DYSON
TO: SB 2004
Page 3, lines 3 - 4:
Delete "modifications of taxes on oil and gas,
including terms providing for"
Page 3, line 4, following "taxes":
Insert "on oil or gas or both"
SENATOR DYSON objected for discussion purposes. He explained
that this section allows the commissioner to substitute payments
in lieu of taxes. Although it seems clear that the phrase being
deleted on lines 3-4 is superfluous, the administration had
testified that this language or something like it is needed to
clarify there could be a PILT substitute for oil or gas taxes.
Senator Dyson said he thinks this is accomplished, but he is
less confident that adding "on oil or gas or both" is needed.
2:39:06 PM
JIM BALDWIN, Counsel to the Office of the Attorney General,
Department of Law, concurred that Amendment 1 preserves the
ability to agree to establish a payment in lieu of taxes on oil
or gas. While the language being deleted is helpful, to his
belief, the amendment still preserves the aforementioned
ability.
2:40:30 PM
SENATOR DYSON removed his objection.
CHAIR SEEKINS announced that without objection, Amendment 1 to
SB 2004 was adopted.
He confirmed with Senator Dyson that a second amendment wouldn't
be offered.
The committee took an at-ease from 2:41:20 PM to 2:43:01 PM.
SENATOR BUNDE moved to adopt Amendment 1 to SB 2003, labeled 24-
GS2056\A.2, Cook, 6/2/06, which read:
A M E N D M E N T 1
OFFERED IN THE SENATE BY SENATOR BUNDE
TO: SB 2003
Page 5, line 16, following "(c)":
Insert "At least three of the public members of
the board must be state residents. Other public
members need not be state residents."
CHAIR SEEKINS objected for discussion purposes.
SENATOR GREEN also objected.
SENATOR BUNDE recalled discussion of whether members of the new
natural gas advisory group should be Alaskans, and that the
administration wanted the best expertise possible, perhaps even
from Canada. He suggested that having three public members of
the board be state residents gives the administration its
option, while there will be the "buy-in" and institutional
memory with having five total members - including, presumably,
the commissioners - who are Alaska residents.
CHAIR SEEKINS asked whether anyone from the administration
wished to comment.
SENATOR GREEN inquired whether Tam Cook, director of Legislative
Legal and Research Services, believed the second sentence was
necessary. She said it seemed superfluous.
SENATOR BUNDE, noting the amendment was created by Legislative
Legal Services, said he hadn't asked for that specifically.
2:46:30 PM
CHAIR SEEKINS and SENATOR GREEN removed their objections.
Without objection, Amendment 1 to SB 2003 was adopted.
2:47:41 PM
SENATOR BUNDE moved to adopt Amendment 2 to SB 2003, labeled 24-
GS2056\A.3, Cook, 6/2/06, which read:
A M E N D M E N T 2
OFFERED IN THE SENATE BY SENATOR BUNDE
TO: SB 2003
Page 6, line 8:
Delete "or portion of a day spent"
Insert "during which the member spent at least
four hours"
SENATOR GREEN objected.
SENATOR BUNDE explained that Amendment 2 to SB 2003 was offered
to generate discussion. Although people on this board will have
valuable expertise and deserve adequate compensation, someone
might show up for a teleconference or "15-minute check in and
check out" and get the $400 honorarium. Requesting discussion
of what is an adequate amount of time spent, he said four hours
was chosen because it's the amount of time necessary for a
legislator to claim "long-term per diem."
SENATOR ELTON noted early morning or late-night meetings might
require a member to travel either the previous day or the
following morning. When this is coupled with language saying
the four hours must be spent at a meeting of the board, people
are penalized.
2:50:39 PM
SENATOR BUNDE asked whether Senator Elton was suggesting a board
member would qualify for three days' worth of honorarium if the
person spent one day traveling, one day meeting and then a day
returning.
SENATOR ELTON responded, saying he anticipates that the people
of the caliber desired for the board would deserve the
honorarium. Furthermore, he isn't bothered by providing an
honorarium for the time during which they're away from their
other professional lives.
SENATOR WAGONER concurred, noting $400 a day isn't a lot of
compensation, considering the quality of people who'll be asked
to serve. However, he agreed $400 shouldn't be provided for 15
minutes on teleconference. He suggested looking at providing a
50 percent honorarium for anything less than two hours spent on
the business of the LLC, for example, but pointed out that these
people could be put in a position where their time was taken up
because of scheduling problems and so forth.
SENATOR BEN STEVENS opposed Amendment 2 for multiple reasons:
other members of state boards receive compensation, although
only on a day when a meeting has been called and public notice
sent; there also could be travel per diem, at a different pay
level; and considerable time is spent preparing for board
meetings, and may even result in shorter meetings. Unless it's
applied to all state boards and commissions, he said, it is
unfair to target a single board with such a four-hour
requirement. He pointed out that although legislators have a
four-hour requirement, theirs is a job, not a board position.
2:55:54 PM
SENATOR STEDMAN agreed this isn't the time to be pinching
pennies with respect to the honorarium, and noted that per diem
for transportation is covered by statute.
CHAIR SEEKINS remarked that it's the same amount of honorarium
he received in the early 1990s while serving on the Alaska
Permanent Fund Corporation Board of Trustees.
SENATOR BUNDE withdrew Amendment 2 to SB 2003.
2:56:53 PM
SENATOR BUNDE offered a conceptual amendment to SB 2003, later
labeled conceptual Amendment 4, to add "in-person or face-to-
face" following language beginning on page 6, line 7, of the
bill, relating to the $400 honorarium.
SENATOR GREEN objected. She explained that the time involved
can be the same, regardless of whether the meeting is via
teleconference; she related personal experience. She also
agreed with Senator Ben Stevens' previous comment, on
Amendment 2, that if it applies to this board, it should apply
to all others. She asked about Chair Seekins' experience.
CHAIR SEEKINS recalled that some teleconferencing had been
allowed, and that if the time was spent, the honorarium was
provided.
SENATOR HOFFMAN objected as well. He pointed out that
teleconferencing is encouraged today in order to save time and
money. Such encouragement would disappear with this amendment.
2:59:35 PM
SENATOR BUNDE suggested the need to revisit other boards and
commissions. He expressed concern about spending the public's
money to pay someone who made a 15-minute phone call.
CHAIR SEEKINS indicated he'd have staff member Brian Hove check
with someone from the Alaska Permanent Fund Corporation board.
SENATOR GREEN pointed out that page 6, beginning at line 12,
says the board shall adopt policies and procedures to ensure
compensation isn't paid to a member or other person if the value
would exceed the value of the consideration provided to the
corporation. Thus it is addressed somewhat, with the policy
determined by the board.
SENATOR WILKIN noted he sits on boards, one of which does much
work by teleconference, sometimes requiring six hours in a day.
He said while he appreciates what Senator Bunde is attempting,
it may be a bit misguided because of how the real world works.
Highlighting the cost savings, he said he'd hate to be penalized
because he chose to participate by teleconference.
SENATOR BUNDE withdrew conceptual Amendment 4 to SB 2003.
3:02:17 PM
SENATOR BUNDE moved to adopt Amendment 3 to SB 2003, labeled 24-
GS2056\A.4, Cook, 6/3/06, which read:
A M E N D M E N T 3
OFFERED IN THE SENATE BY SENATOR BUNDE
TO: SB 2003
Page 6, line 29:
Delete "promptly"
Page 6, line 30, following "board":
Insert "within 30 days after the seat becomes
vacant"
SENATOR GREEN objected.
SENATOR BUNDE indicated this relates to the governor's
appointment, saying "promptly" could last for months, possibly
prohibiting action by a group highly important to the state.
3:04:10 PM
SENATOR WILKEN moved to adopt Amendment 1 to Amendment 3 to
SB 2003, deleting "30" and inserting "90".
SENATOR GREEN objected for discussion purposes.
SENATOR WILKEN explained that this board will be one of the
three most important in Alaska. He questioned the governor's
ability to easily find someone with the necessary
qualifications, and said he'd hate to rush that process.
SENATOR BUNDE said he had no objection.
SENATOR GREEN withdrew her objection.
SENATOR ELTON spoke in support of 90 days, noting it also
imposes a deadline for someone who is being asked to serve.
CHAIR SEEKINS asked whether there was any objection to adopting
Amendment 1 to Amendment 3 to SB 2003. There being no
objection, it was so ordered.
3:06:02 PM
SENATOR GREEN withdrew her objection to Amendment 3.
CHAIR SEEKINS asked whether there was any objection to adopting
Amendment 3 to SB 2003 as amended. There being no objection, it
was so ordered.
3:06:27 PM
CHAIR SEEKINS moved to adopt Amendment 5 to SB 2003, on page 6,
line 4, to delete "provided", which he surmised wasn't intended
by the drafters. There being no objection, it was so ordered.
3:07:34 PM
SENATOR WILKEN said he'd misread signals and therefore hadn't
done an amendment to the PipeCo bill - SB 2003 - with regard to
voting on fiscal issues by teleconference. He offered to do a
conceptual amendment or type one for later.
CHAIR SEEKINS agreed to having it typed for later. He returned
attention to SB 2004.
3:08:25 PM
SENATOR WILKEN moved to adopt Amendment 3 to SB 2004, labeled
24-GS2046\A.4, Bailey, 6/3/06, which read:
A M E N D M E N T 3
OFFERED IN THE SENATE BY SENATOR WILKEN
TO: SB 2004
Page 9, following line 14:
Insert a new subsection to read:
"(f) Before making awards of grants under this
section for a fiscal year, the commissioner of
commerce, community, and economic development shall
provide reasonable public notice of all grant
applications received, the recommendations of the
relevant municipal advisory group, preliminary
determinations made concerning the eligibility of each
municipality or organization for a grant, the
eligibility of each expenditure or proposed
expenditure for a grant, and the proposed allocation
of available money among grant proposals. The public
notice must specify a time and place for a public
hearing during which the commissioner will receive
comments concerning the preliminary determinations and
allocations of the department. The commissioner shall
give reasonable public notice of the final awards of
grants made under this section. Final awards take
effect 30 days after public notice is given and may be
paid to the grantees according to procedures
established by regulation."
Reletter the following subsections accordingly.
Page 9, following line 25:
Insert a new subsection to read:
"(j) In this section, "direct or severe impact"
means a clearly demonstrable effect on a community
that proximately contributes to a material change to
transportation, infrastructure, law enforcement,
emergency services, health and human services,
education, labor force, population, wages,
subsistence, or another sociocultural element brought
about by the construction of a gas pipeline."
SENATOR WILKEN objected for discussion purposes. He noted the
first section of Amendment 3 to SB 2004 relates to public
notice, and the second section defines "direct or severe
impact".
CHAIR SEEKINS invited Mr. Baldwin to give the administration's
perspective on any amendment.
SENATOR WILKEN explained that the first section of Amendment 3
to SB 2004 makes public how the grants are analyzed, validated
and awarded, in a public forum. There was trouble in the past
with a grant process done out of the public eye, without record
or with records that couldn't be obtained. This ensures that
communities know who's getting what, and that Alaska's people
know how this impact money is being divided up.
3:11:11 PM
SENATOR WILKEN noted the second section of Amendment 3 to
SB 2004, instead of saying what impacts are, says what they
aren't, providing sideboards. It combines definitions from the
Alaska Coastal Management Program; the Alaska Surface Coal
Mining Control and Reclamation Act; and Legislative Research,
which rolled in its suggestion and other definitions from
government.
3:12:30 PM
CHAIR SEEKINS began discussion of what later became Amendment 3
to Amendment 3 to SB 2004, relating to the first section of the
amendment, line 13, which says in part, "Final awards take
effect 30 days after public notice". He surmised this refers to
public notice of the final awards, not the notice specifying a
time and place for public hearing. He asked whether it would be
advantageous, after "public notice", to insert "of the final
awards".
SENATOR WILKEN said he'd accept that as a friendly amendment.
3:13:36 PM
SENATOR ELTON began discussion of Amendment 1 to Amendment 3 to
SB 2004. He requested a legal opinion about the inconsistency
between the phrase "or another sociocultural element" in the
second section of Amendment 3 and the phrase "and for
socioculture" on page 9, line 8, of the bill.
MR. BALDWIN suggested making them parallel for consistency
purposes, replacing the language in the amendment with the
language from page 9, line 8, of the bill.
3:15:31 PM
SENATOR ELTON moved to adopt Amendment 1 to Amendment 3 to
SB 2004 as follows, which included his addition of a hyphen to
the word "sociocultural":
Page 1, line 23, of the amendment, following
"subsistence":
Delete "or another sociocultural element"
Insert "and for socio-cultural impacts"
3:16:38 PM
SENATOR OLSON asked about adding "the impact or planning for" to
the list of provisions at the bottom of the amendment because
planning must come up in order to remedy an impact.
CHAIR SEEKINS announced it would be taken up as a separate
issue.
3:18:12 PM
SENATOR DYSON returned to Amendment 1 to Amendment 3. He said
it had been suggested that "and" be used, implying all those
items listed must be taken into account. However, "or" allows
picking from any or all, which he surmised would be the desire.
SENATOR ELTON accepted "or for" to replace "and for" as a
friendly amendment. He noted it would probably mandate a
conforming amendment on page 9, line 8, of the bill.
SENATOR BUNDE spoke against "or", saying it wouldn't allow any
sideboards or limitations. He pointed out that the maker of the
main amendment said it denotes what isn't allowed. Thus he
preferred "and" in order to have it list a totality of impacts.
SENATOR WILKEN supported "or". Highlighting the difficulty of
defining impacts in statute, he suggested impacts are whatever a
group of people think they are when, in good faith, they sit
down to determine whether an impact exists. The decisions of
the commissioner or MAG will be public, and they'll be held
accountable for their decisions. Thus he proposed "or" is
appropriate because it broadens it and yet there is
accountability. He indicated that if "and" were left in, the
community would have to qualify for all those on the list.
3:22:12 PM
CHAIR SEEKINS asked whether Senator Bunde maintained his
objection.
SENATOR BUNDE affirmed that, saying he'd like to strike that
whole last phrase.
SENATOR ELTON clarified that with Amendment 1 to Amendment 3,
including the change to "or", the language to be inserted would
read "or for socio-cultural impacts".
3:23:09 PM
A roll call vote of 10 yeas and 2 nays proved Amendment 1 to
Amendment 3 to SB 2004 passed, with Senators Kookesh, Ben
Stevens, Stedman, Olson, Dyson, Wilken, Elton, Hoffman, Wagoner
and Seekins voting yea and Senators Bunde and Green voting nay.
3:23:52 PM
SENATOR OLSON informed Chair Seekins that he'd like to hold off
on the amendment he'd mentioned earlier, since he didn't see a
good place for it.
CHAIR SEEKINS said it would be kept open until tomorrow.
3:24:18 PM
SENATOR BUNDE moved to adopt conceptual Amendment 2 to
Amendment 3 to SB 2004, second section of the amendment, as
follows:
Page 1, line 23, of the amendment, following "wages":
Insert "or subsistence."
Delete the rest of the amendment
SENATOR BUNDE explained that the preceding are all socio-
cultural impacts. If put in the negative, it would be difficult
to define and would open a loophole he chose not to see opened.
SENATOR OLSON objected.
SENATOR GREEN questioned whether Senator Bunde really meant to
delete "brought about by the construction of a gas pipeline".
SENATOR BUNDE said it was a good catch; he revised conceptual
Amendment 2 to Amendment 3 accordingly. It would read as
follows because of Amendment 1 to Amendment 3, just adopted:
Page 1, line 23, of the amendment, following "wages":
Insert "or subsistence"
Delete ", or for socio-cultural impacts"
CHAIR SEEKINS suggested the original sentence probably included
Senator Bunde's thought when it said "and another socioeconomic
impact", implying all the previous items were included.
3:26:52 PM
SENATOR WILKEN remarked that "proximately" on line 21 of
Amendment 3 means accurately or close to, and thus there must be
a linkage to the socio-cultural impacts. He said it enables
keeping "or for other socio-cultural impacts" in the language
and so he wouldn't support the amendment.
CHAIR SEEKINS clarified it now says "or for socio-cultural
impacts". He suggested it wasn't indicating that the others are
socio-cultural impacts.
SENATOR BUNDE remarked that the definition of "proximately"
probably lies in the eyes of the beholder.
SENATOR GREEN asked Senator Wilken whether this language is
similar to other legislation he has worked on.
SENATOR WILKEN replied that with the exception of tying into the
bill itself, it's essentially the same language. He noted that
on another issue there'd been an attempt to define "impact", and
this was the best they could do. In further response, he said
the National Petroleum Reserve-Alaska (NPR-A) legislation didn't
include "socio-cultural".
SENATOR GREEN opined it is dangerous language.
SENATOR ELTON provided context, stating his understanding from
testimony the previous day that this language was suggested by
MAG, working with the deputy commission of DOR. The
commissioner will make a decision on impact funds after
consulting with the MAG group. Thus thresholds must be crossed
on any decision, whether it relates to transportation or socio-
cultural impacts. Senator Elton said he's comfortable with that
process, especially given that the first part of this amendment
clarifies the process and what is accomplished.
3:30:53 PM
SENATOR GREEN responded that with all due respect to MAG, it
gives her no assurance. It's a self-interest group, and this is
what they want. It will be a direct gift to their village, town
or borough.
SENATOR ELTON acknowledged that point, but suggested there is
also a self-policing element in MAG: the more money that goes
to another community for any kind of interest, the less money
there is for them.
SENATOR BUNDE responded that he also expected to be told there
is honor among thieves. Saying this isn't only directed at
small communities, he provided an example and expressed concern
about Alaskans' creativity in artfully using state money to
their own advantage.
3:32:43 PM
CHAIR SEEKINS asked about the difference between a socio-
cultural impact and a socioeconomic impact.
MR. BALDWIN replied that it was hard to say, but suggested
"socioeconomic" has more to do with actual dollars and cents,
whereas "socio-cultural" relates to almost anthropological
considerations such as lifestyle and perhaps recreation.
SENATOR OLSON spoke in favor of retaining "socio-cultural"
because it relates to impacts from the gas line. He said it
goes far beyond recreation, having to do with a lifestyle that
people either were raised with or have come in to. Looking at
the amendment, he said it addresses a multifaceted element.
3:34:20 PM
SENATOR DYSON spoke in support of conceptual Amendment 2 to
Amendment 3. He suggested "material" on line 21 indicates an
objective change; an example is a new road for which individuals
don't have a choice. Socio-cultural impacts, though important,
are far more subjective and hard to evaluate - they involve
choice and aren't something the government is responsible to
fix; he cited effects from television or impacts on marriages
from "ladies of the night" during TAPS construction as examples.
Voicing hope that affected communities would use good judgment
in responding to changes, he also noted the reference to "health
and human services", surmising the legislature would be
financing remedies for some of the negative social effects.
SENATOR HOFFMAN remarked that it's a bad, bad amendment.
3:38:21 PM
A roll call vote of 3 yeas and 9 nays proved conceptual
Amendment 2 to Amendment 3 to SB 2004 failed, with Senators
Bunde, Dyson and Green voting yea and Senators Ben Stevens,
Stedman, Olson, Wilken, Elton, Hoffman, Kookesh, Wagoner and
Seekins voting nay.
3:39:45 PM
SENATOR GREEN returned to Amendment 3 to Amendment 3 to SB 2004.
She offered the following language beginning on line 13 of the
amendment:
Thirty days after such public notice is given, final
awards take effect and may be paid to the grantees
according to procedures established by regulation.
She pointed out that this makes it refer to the final award of
grants in the previous sentence.
SENATOR WAGONER suggested it could be simplified further by
saying "final grant awards".
SENATOR GREEN explained that this is designed to specify which
public notice it refers to.
CHAIR SEEKINS asked whether there was any objection to adopting
Amendment 3 to Amendment 3 to SB 2004. There being no
objection, it was so ordered.
3:41:52 PM
CHAIR SEEKINS asked whether there was any objection to adopting
Amendment 3 to SB 2004 as amended. There being no objection, it
was so ordered.
The committee took an at-ease from 3:42:08 PM to 3:55:38 PM.
SENATOR BEN STEVENS moved to adopt Amendment 4 to SB 2004, which
read:
A M E N D M E N T 4
AS 43.82 is amended by adding a new section to read:
Sec. 43.82.255. Term of contract provisions
related to oil. (a) The provisions of this section
apply to a contract developed under AS 43.82.020 that
provides for periodic payment in lieu of taxes on oil
under AS 43.55.
(b) For the part of the contract term beginning
immediately after the date of full project funding or
the date of issuance of a certificate of public
convenience and necessity for construction and initial
operation of the Alaska Natural Gas Pipeline,
whichever date is later, and ending 14 years after
that date, the commissioner may develop a term for the
contract that provides for payments in lieu of the
taxes on oil set out in AS 43.55. For the part of the
contract term covered by this subsection, the payments
in lieu of taxes may be established with as much
certainty as the Constitution of the State of Alaska
allows.
(c) For the part of the contract term beginning
immediately after the period described in (b) of this
section, and ending on a date not later than 25 years
after the effective date of the contract, the amount
of the payment in lieu of tax on oil under AS 43.55
must be equal to the amount of the tax levied by law.
However, the commissioner may develop a contract term
that, in the event of a material change in the taxes
enacted after the effective date of the contract,
establishes a procedure for restoring the parties to
substantially the same economic position they had as
of the end of the period described in (b) of this
section immediately before the change.
(d) Implementation of a contract provision
authorized in this section may be made subject to the
dispute resolution procedures of the contract.
SENATOR BEN STEVENS objected for discussion purposes. He
explained that Amendment 4 to SB 2004 adds a new section under
terms of the contract related to oil. He paraphrased subsection
(a), indicating he believes it validates the portion discussed
yesterday afternoon, AS 43.82.210(a)(1), "oil and gas production
taxes and oil surcharges under AS 43.55". Noting subsection (b)
is complex, he pointed out the contract term is from the
effective date to some future point; other provisions in law say
it cannot be longer than 45 years.
3:58:15 PM
SENATOR BEN STEVENS read from the first sentence of (b), saying
it relates to the term beginning when: a project is fully
funded, with commitments by the corporations' boards; a FERC
certificate of public convenience has been issued and permits
are in order; and there is certainty that a pipeline will be
constructed. The 14-year period, derived from contemplation, is
a time of capital-cost recovery, defined as "total revenues
minus corporate income tax equals total expenditures." The
project will have moved forward and substantial money will have
been spent, he said, going beyond the time of first gas.
He explained that there is some leniency because of
uncertainties about delays, cost overruns and so forth. During
that time, the terms in AS 43.55, which would be incorporated
into the contract related to oil, shall be part of a payment in
lieu of taxes and be established with as much certainty as the
state constitution allows. With subsections (a) and (b),
certainty begins on oil when a project is funded, permitted and
committed to by all sponsor members to move forward, and shall
last 14 years "in firm certainty."
He turned to subsection (c), which addresses the period after
the 14 years has expired, ending no later than 25 years after
the effective date of the contract. He highlighted three time
periods: 1) the effective date, 2) the project sanction or full
project funding and 3) this uncertain date 14 years after
sanction.
4:02:06 PM
SENATOR BEN STEVENS read from (c). He noted payments due in the
PILT during the above-described period must equal what's in the
tax law at that time. However, if there's a change that the
legislature has the authority to effect, there is an agreement
to go back and look at those terms with regard to "substantially
the same economic position."
He proposed thinking in terms of timing. The overall picture is
25 years from the effective date. Phase one is anticipated to
be 4 years, although the time until project sanction isn't
known; during that time, there is no certainty and oil is not
locked in. For phase two, from the point of sanction - once the
project is permitted and there's an issuance from FERC - there
will be firm certainty on taxation for 14 years; the legislature
will agree not to change the terms during that time, which is
the period of capital-cost recovery. Phase three is 7 years.
He recalled that the industry and financial presenters advocated
certainty for the term of the first firm shipping commitments;
he indicated FERC will require such FT commitments during the
open season. He proposed that the 21 years following sanction
is ample time to cover this period of concern.
4:06:46 PM
SENATOR BEN STEVENS said he anticipated a lot of reaction from
Amendment 4. However, he suggested it's not unreasonable to
have the right to modify a new petroleum tax regime - which it's
anticipated will be enacted - between now and the period for the
project when the desire is to lock it in. He acknowledged
technical corrections may be required. Thus he didn't believe
it unreasonable to request the state's ability to make
modifications during that time. Nor did he believe it
unreasonable for the industry to demand certainty regarding cash
flow during the period of "cash outflow to a capital-cost
recovery." It's a normal industry practice and standard, he
said. He reiterated details from subsection (c).
CHAIR SEEKINS suggested it provides for a balancing clause.
SENATOR BEN STEVENS concurred. With regard to why the balancing
clause isn't included, he said there was a lot of deliberation
about it. The balancing clause won't be needed for a minimum of
18 years, and then only if a future legislature changes the
contract materially. He asked why the legislature would want to
tell the commissioner what balancing clause the commissioner is
supposed to use, 18 years from now, when trying to balance
elements and dynamics of market conditions for which they cannot
make an accurate forecast.
4:10:35 PM
SENATOR ELTON drew attention to subsection (b) in Amendment 4,
"and ending 14 years after that date". He inferred it allows
for the period up to commencement of the project and then
recovery of capital costs. He said it seems capital costs could
be recovered after 12 years or 16 years. Rather than having a
firm 14 years, he therefore asked about using language such as
"and ending after capital costs are recovered".
SENATOR BEN STEVENS replied he'd thought about it a lot.
Subsection (b) is phase two, from sanction to some point in the
future. His original intention was to say "from sanction date
that covers through capital expenditure and then through a
period of revenue generation to capital-cost recovery." Delays
and pricing considerations are unknown factors. He said he'd
concluded that in order to try to meet those three timelines -
4 or 5 years for permitting, 10 to 14 years for capital-cost
recovery, and 20 years for FT commitment - he'd wanted to give
certainty for some period, and had ended up at 14 years.
4:12:58 PM
SENATOR ELTON turned to subsection (c) in Amendment 4. He asked
what the commissioner's responsibility is in developing a
contract term that, in the event of material change in the taxes
enacted after the effective date of the contract, establishes
the procedure for restoring parties. He asked whether the
legislature is ceding some authority to the executive branch in
the establishment of payments in lieu of taxes.
SENATOR BEN STEVENS answered "no" to the last question. He
paraphrased the first sentence in (c), adding "or by the
contract" after the written phase "the payment in lieu of tax on
oil under AS 43.55 must be equal to the amount of tax levied by
law". He said they have to be equal in the law at "the end of
(b), which is the terms of fiscal certainty."
SENATOR ELTON observed that the next sentence seems to modify
the first, however.
SENATOR BEN STEVENS said the next sentence in (c) gives latitude
to future legislators to change it. He paraphrased a portion,
which begins, "However, the commissioner may develop a contract
term that, in the event of a material change in the taxes
enacted after the effective date of the contract". He
interpreted this to say that if the legislature changes that tax
structure between the effective date and the end-date mentioned
in (b) - which could be 17 or 20 years from now - the agreement
is to allow the commissioner to enter into a contract term that
is essentially a rebalancing agreement. He emphasized that it
has to be a "material change on the contract."
SENATOR ELTON asked the purpose of "may" in the second sentence
of (c) and whether it could say, "However, the commissioner
shall develop a contract term".
SENATOR BEN STEVENS indicated it could be changed to "shall",
but "may" allows the commissioner, at a future date, to deal
with uncertain market conditions; there might be no need to
change it for that last 7-year period.
4:16:18 PM
SENATOR ELTON observed it's a different way of looking at the
certainty issue. Rather than locking it in for 30 years, at the
end of (b) there still is a constitutional issue being
addressed, but the lock-in is for a shorter period of time.
SENATOR BEN STEVENS agreed it's a significant shift from locking
in taxation immediately after ratification of the contract.
This says certainty isn't locked in until there is a commitment
from all parties, as well as validation that all permits are in
place and everything is active to move forward. "At that point,
in my mind, the reason why I came up with that is because that
is when a firm business commitment ... has been signed," he
added, noting at that point the financial markets and investors
will want to have certainty during that period of time.
He told members he'd spent a lot of time looking at comparisons
of what other nations do with respect to forgiveness on taxes.
For example, Alberta's system forgives all taxes until full
capital-cost recovery on the oil sands and has a 1 percent
royalty during that time, which may take years. With Alaska's
project, he stated the intent of providing certainty without
locking it in over a period of time that isn't necessary.
4:18:57 PM
SENATOR ELTON returned to subsection (b), noting he has assumed
project funding cannot be finalized until issuance of a
certificate of public convenience and necessity. He asked
whether funding may possibly occur before that.
SENATOR BEN STEVENS said "full project funding" is defined in
the Stranded Gas Act, AS 43.82.900(7), which states:
(7) "full project funding" means full approval by
a party to a contract under AS 43.82.020 for the
expenditure of the capital necessary for construction
and operation of the approved qualified project that
is subject to the contract;
He explained that he'd inserted the issuance of the certificate
of public convenience. He suggested it's almost a redundant
requirement because the FERC certificate cannot be issued until
the authorization for expenditure has been approved by the board
of directors of the sponsor groups. He said he believes the
issuance of that certificate is the later of the two "because
they could make approval and then there would be a period of
time that it locks in." He opined that the FERC issuance is the
real marker for when the project moves forward or doesn't, which
is why he'd included that.
4:21:41 PM
SENATOR WILKEN asked whether there is a general definition of
"material change" in the industry.
SENATOR BEN STEVENS said it's a good question. He gave his
personal understanding that it's anything with an impact over
3 percent, "plus or minus 3 percent on annual forecasted
revenues."
CHAIR SEEKINS called it a GAAP (generally accepted accounting
principles) term.
SENATOR BEN STEVENS said he wasn't sure whether it was defined
in statute, but noted it wasn't defined in the Stranded Gas Act.
MR. BALDWIN said not to his knowledge, but he'd seen the term
used in international agreements.
CHAIR SEEKINS requested confirmation that the intent here is "an
effective plus or minus 3 percent."
SENATOR BEN STEVENS affirmed that, specifying it would be a
change that had a material effect on the revenues generated
under the contract, plus or minus 3 percent.
4:22:46 PM
SENATOR WILKEN asked whether firm transportation commitments
normally are in 20-year blocks.
SENATOR BEN STEVENS affirmed that as his understanding. He
indicated his understanding that the open season under the FERC
timeline occurs 2 years before sanction; from first gas forward,
FERC wants a commitment for 20 years.
SENATOR WILKEN requested confirmation that if it took 4 years to
get to sanction, the legislature could come back in 2 years, if
it so chose, and do a whole new petroleum production tax (PPT).
SENATOR BEN STEVENS agreed there'd be such freedom, but said he
believed there'd have to be the caveat that it would materially
impact the contract and put it in jeopardy. "But there's
nothing that says that we would have to make the change," he
added.
4:24:02 PM
CHAIR SEEKINS suggested it would put the project at risk.
SENATOR BEN STEVENS said it could. In response to Senator
Wilken, he added, "We would have the consequences of that
decision, but ... the industry does not get the certainty of our
decision to move forward on ratification until they show us
there is a project."
CHAIR SEEKINS summarized, "Show us the money, show us the
project - you get certainty."
SENATOR BEN STEVENS cautioned that future legislators would have
to be aware of the jeopardy that they may cause to the future
diligence of pursuit of the project.
4:24:47 PM
SENATOR DYSON said he'd been intrigued by this concept since
first hearing about it. He referred to (c), however, where it
talks about "substantially the same economic position" as at the
end of (b). If the oil industry were struggling and losing
money on the pipeline at the end of the period described in (b),
he said, it appears under (c) the state couldn't fix it for
them. Or if the people of Alaska weren't getting a fair share,
that couldn't be fixed either, because of the requirement to
stay in that plus-or-minus-3-percent range discussed earlier.
4:26:29 PM
SENATOR BEN STEVENS clarified that capital-cost recovery is
"total revenues minus corporate income tax equals total
expenditures," whereas full debt retirement would occur much
further into the future and is unknown because the debt
instruments and amounts would vary from company to company. "We
looked at that in terms of saying that maybe it should be a
period of certainty through debt retirement," he noted, but said
that date is hard to pick because of the uncertainty with
respect to each company.
He continued, saying "same economic position" to him means "the
same distribution of economic rent." As the state is an
economic participant and takes its gas in value, it bears both
the high side and the low side with the industry; therefore, it
has nothing to give back, under the way the contract has been
developed, unless there is a decision to give back the gas.
There is no severance tax. "The only thing we could give back
would be royalty in terms of the gas economics," he added. "But
the oil economics is another element, and that's why it's
unpredictable ... how those two will interact into the future."
Thus he said he hadn't known how to phrase it.
4:28:51 PM
SENATOR DYSON asked whether his main point was still true, that
if there is a real problem - either for the state or the
producers at the end of the period in (b) - it cannot be fixed.
SENATOR BEN STEVENS suggested that's encompassed in Senator
Elton's statement about "shall" versus "may".
SENATOR DYSON said that wasn't his reading of it.
SENATOR BEN STEVENS replied, "If we say 'shall', then they would
not be able to make any changes. If it says 'may' - if there is
something that is so dramatic at the end of period (b) - they
may do it, they may not do it. But certainty ends at the end of
period (b)."
SENATOR DYSON asked whether the initiation of the remedy is only
at the discretion of the commissioner.
SENATOR BEN STEVENS replied no, it's at the discretion of the
legislature under AS 43.55, because the legislature changes
taxes. He indicated this doesn't go into the changes of the
terms of the contract as a whole. Rather, it only relates to
how oil interacts with the contract. He said he hadn't ventured
into the economics of the gas in the future.
4:30:07 PM
SENATOR DYSON said he was still charmed by this, but asked for
time to think about it overnight.
CHAIR SEEKINS suggested there'd never be an objection to "the
downward change in the economic burden from the producers."
SENATOR DYSON expressed concern that it's precluded by this, and
added he wanted to think about putting into statute something
he'd thought would be in the contract.
CHAIR SEEKINS pointed out that the contract needs to be
developed in concert with the requirements and purposes of the
Act.
4:31:23 PM
SENATOR BEN STEVENS replied to Senator Dyson, saying the
development of Section 43.82.255 is in response to terms in
Exhibits P and R of the contract, which are based on terms that
will be incorporated from passage of a final PPT. Those
exhibits are oil terms and credit terms of the PPT. This says
those exhibits can be part of the contract for this specific
period of time, to his understanding.
SENATOR BUNDE agreed these are things he'd expect to see in the
contract, but opined that the legislature's only guarantee of
getting something into the contract is through this bill.
Whether it's a good idea, on this or any issue, is worthy of
discussion, but it's one of the few sure routes the legislature
has with respect to affecting the contract.
4:33:13 PM
SENATOR ELTON referred to (c), line 2, "ending on a date not
later than 25 years". Assuming 4 years before construction and
then another 14 years, he said the plain language suggests it
could end after 19 years.
SENATOR BEN STEVENS replied that is theoretically correct. The
flexibility is intentional because the length of phase one isn't
known. It could be 7 years before project funding and final
FERC certification. There could be permit challenges or U.S.
Supreme Court challenges, for example. He acknowledged it could
say, for instance, "A date certain 25 years after effective
date, it ends."
CHAIR SEEKINS requested clarification about the effective date.
4:35:15 PM
MR. BALDWIN specified that the Act says the contract takes
effect 60 days after signature.
CHAIR SEEKINS surmised that after approval by the legislature
there is 60 days to execute the contract; the effective date is
60 days after the date of full execution.
SENATOR BEN STEVENS said that's correct.
4:36:03 PM
SENATOR ELTON turned to subsection (d) in Amendment 4,
"Implementation of a contract provision authorized in this
section may be made subject to the dispute resolution procedures
of the contract." He said he'd assumed it would have been
covered by arbitration without this, but this specifies that the
dispute resolution process in the contract will govern the
provisions of this. He surmised the Alaska Supreme Court could
have had jurisdiction, for example, rather than using this
process.
SENATOR BEN STEVENS said the only contract provision authorized
under this section is the balancing provision whereby the
commissioner may develop a contract term in the event of a
material change. If there is disagreement, it will go to
arbitration under the terms of the contract; eventually, a court
would determine it. He said this balancing provision won't be
in use for 18 years, and thus the attempt was to be as flexible
as possible.
SENATOR ELTON noted that in anticipation of a lawsuit over
locking in the tax regime, today the Senate adopted legislation
providing that the Alaska Supreme Court is the first court of
jurisdiction. This provision in the Stranded Gas Act would lock
in tax terms, and yet, in this case, any disputes will be
decided by an arbitrator, rather than the Alaska Supreme Court.
4:38:39 PM
SENATOR BEN STEVENS replied that the difference between the two
- the locking in or the creation of fiscal certainty under a
PILT - is given in (b), where it says taxes may be established
with as much certainty as the constitution allows; that's the
piece where a supreme court challenge is anticipated. The
second piece would be a renegotiation of contract terms through
a balancing clause in the contract. It would be contractual
terms, not statutory terms. Therefore, the provision in (d),
"implementation of a contract provision," would be the provision
established under the authority of (c), which says the
commissioner may develop a contract term.
4:39:40 PM
SENATOR ELTON suggested it should say "in the above subsection",
rather than "section", since section includes subsection (b).
SENATOR BEN STEVENS agreed with the need to look at that,
although he opined that only one contract provision is
authorized under this section, AS 43.82.255, and all the rest
just give allowances for the contract to be part of it.
4:40:25 PM
SENATOR WAGONER noted the first time period could be shorter
than 4 years, perhaps less than 44 months as far as FERC review.
He said he hadn't been willing to commit to locking this in for
an extended period of time; this provides more comfort than
earlier, and is a good attempt at solving the problem.
CHAIR SEEKINS said under Amendment 4 it appears there is a 14-
year period of certainty, after which the commissioner may
activate a balancing clause for a period of time up to 25 years
from the contract's effective date. Although there is something
approximating certainty beyond that 14 years, it is
discretionary.
SENATOR BEN STEVENS agreed, but said this tries to address a lot
of different needs: meeting the needs of the financial
community and investors, securing cash flow that won't be
interrupted by legislative action, and meeting the needs of
legislators who are concerned about locking in fiscal certainty
on a project that isn't certain to happen. For the legislature,
the need is for the front end. For industry, the financial
world, and the federal government with respect to the loan-back
guarantee, the need is for the capital-cost recovery component
as well as the recovery period that will be demanded from FERC
with respect to the duration of a shipping commitment. Thus he
suggested it's 20 years, not 14 years.
4:44:18 PM
CHAIR SEEKINS remarked that he hadn't yet talked to a rational
Alaskan who wants to materially adversely affect the economics
of a project. His constituents seem to understand giving
certainty for a period of time to recovery capital expenses,
rather than having the legislature be able to change the
economics of the deal at the end of the construction period, for
example, before first gas. However, there also is the risk that
the legislature will destroy the project in that first 4 years
if the structure is changed. Beyond that, he said this meets a
lot of the needs of the people with whom he has discussed it.
4:45:30 PM
SENATOR WAGONER echoed Senator Dyson's request to take up
Amendment 4 to SB 2004 tomorrow, in order to have more time.
SENATOR BEN STEVENS said he wouldn't object, but asked that
members try not to conceptually amend the provisions. He said
it hadn't gone through Legislative Legal Services for a
multitude of reasons, but he would ask them now to draft it in
regular format.
4:47:08 PM
CHAIR SEEKINS agreed it would be good to get such a draft and
their input. He thanked participants and held SB 2003 and
SB 2004 over.
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