Legislature(2005 - 2006)SENATE FINANCE 532


Download Mp3. <- Right click and save file as

* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
Heard & Held
Heard & Held
1:38:10 PM                                                                                                                  
        SB 2004-STRANDED GAS DEVELOPMENT ACT AMENDMENTS                                                                     
CHAIR SEEKINS announced SB 2004 to be up for consideration.                                                                     
BONNIE  HARRIS, Assistant  Attorney General,  Department of  Law,                                                               
introduced Joe Donahue,  who has worked on the  amendments to the                                                               
Stranded Gas  Act; Jim  Baldwin, to explain  the last  portion of                                                               
the  proposed amendments  which  deal with  the Municipal  Impact                                                               
Fund; and Kevin Jardell, to answer policy questions.                                                                            
KEVIN  JARDELL, Legislative  Director,  Office  of the  Governor,                                                               
presented  a  brief history  of  the  Stranded  Gas Act  and  the                                                               
administration's  position regarding  its authority  to negotiate                                                               
the contract.                                                                                                                   
1:43:53 PM                                                                                                                    
He said  the administration has  acknowledged from  the beginning                                                               
that some of  the contract provisions were  outside the authority                                                               
granted to it by the Stranded Gas Act.                                                                                          
1:44:42 PM                                                                                                                    
The  question of  what  authority  would be  needed  to move  the                                                               
project forward was unclear until  the contract was complete. Now                                                               
that there  is an  agreement between  the administration  and the                                                               
sponsor  group, the  administration is  asking for  the grant  of                                                               
authority to allow it to  put the contract before the legislature                                                               
for review.                                                                                                                     
MR.  JARDELL said  that when  the administration  passed out  the                                                               
fiscal interest finding, it detailed  the contract provisions for                                                               
which the  administration needed  authority. The  legislation now                                                               
before  the  committee is  intended  to  give the  administration                                                               
enough authority  to renegotiate contract terms  after the public                                                               
1:47:25 PM                                                                                                                    
SENATOR BUNDE  asked if  Mr. Jardell was  talking about  SB 2004,                                                               
version A [labeled 24-GS2046\A].                                                                                                
MR. JARDELL replied yes.                                                                                                        
1:47:58 PM                                                                                                                    
JOSEPH  DONAHUE,  Preston  Gates  & Ellis  LLP,  Counsel  to  the                                                               
Governor,  explained sections  1-11 of  the bill  as follows.  He                                                               
said  that these  provisions are  primarily driven  by two  major                                                               
policy decisions made by the  administration during the course of                                                               
negotiations of the proposed fiscal contract.                                                                                   
The first decision was for the  state to become a full commercial                                                               
partner in the  project. That decision had  three components: the                                                               
state would  take an  equity position in  the pipeline,  it would                                                               
take royalty  gas in-kind  for the duration  of the  contract and                                                               
convert its production tax payments  to gas in-kind payments, and                                                               
it would take a shipping position on the pipeline.                                                                              
1:49:33 PM                                                                                                                    
The second was  the decision to incorporate  oil fiscal certainty                                                               
into the proposed fiscal contract.                                                                                              
1:49:56 PM                                                                                                                    
MR. DONOHUE  said that Section  1 is  the purpose section  of the                                                               
original Stranded Gas Development  Act (SGDA). The new components                                                               
of  the   fiscal  contract  incorporate  the   revised  Petroleum                                                               
Production  Tax (PPT),  Payment in  Lieu of  Taxes (PILT),  and a                                                               
provision  that  incorporates  oil   corporate  income  into  the                                                               
corporate income PILT provisions.  Therefore, the first provision                                                               
expands the  scope of the fiscal  terms and relates it  to all of                                                               
the sponsors' and other parties'  business activity in the state,                                                               
regardless of whether it is  tied to the actual implementation of                                                               
this project.                                                                                                                   
1:51:42 PM                                                                                                                    
In Section  1, page  2, paragraph (2),  the term  "related party"                                                               
has been added  and is defined in  Section 16 of the  bill as "an                                                               
entity that  is affiliated with  a qualified sponsor that  owns a                                                               
portion of the  project and is an intended  beneficiary of fiscal                                                               
certainty under the proposed fiscal  contract." The related party                                                               
concept  ties  to  the  midstream  entities  that  will  own  the                                                               
mainline,  the gas  treatment plants,  and  the gas  transmission                                                               
1:53:12 PM                                                                                                                    
Section  2.  AS  43.82.020,  revisits  some  primary  negotiation                                                               
topics  identified  by  the  original act  and  expands  them  to                                                               
include express authority  for payment of gas  production tax in-                                                               
kind  [paragraph  (3)]. Paragraph  (4)  authorizes  the state  to                                                               
negotiate acquisition  of and ownership  in the project,  as well                                                               
as terms  relating to collateral  agreements authorized  under AS                                                               
MR. DONOHUE explained that changes  in paragraph (1) of 43.82.020                                                               
are intended to clarify that  oil fiscal certainty can be granted                                                               
regardless of whether  the particular entity is  involved in this                                                               
project, or the earnings being protected arise from it.                                                                         
1:55:23 PM                                                                                                                    
Changes in paragraph  (2) reflect a broadening  of the provisions                                                               
that the Commissioner of Revenue  and the Commissioner of Natural                                                               
Resources  can  negotiate.  Once  negotiated and  in  the  fiscal                                                               
contract, they would supersede any  conflicting provisions of oil                                                               
and gas leases and unit agreements.                                                                                             
1:57:03 PM                                                                                                                    
SENATOR BUNDE  asked if the  agreements in Section 2  are subject                                                               
to legislative ratification.                                                                                                    
MR.  DONOHUE replied  that they  refer  to existing  oil and  gas                                                               
leases  drafted pursuant  to statutory  authority and  subject to                                                               
the contractual relationship with the producers.                                                                                
1:57:46 PM                                                                                                                    
CHAIR SEEKINS asked  whether the terms would have  to be modified                                                               
in the contract.                                                                                                                
MR. DONOHUE replied yes.                                                                                                        
CHAIR SEEKINS asked whether the  final version of the contract is                                                               
still subject to legislative ratification.                                                                                      
MR. DONOHUE replied yes.                                                                                                        
1:58:40 PM                                                                                                                    
SENATOR BUNDE noted that ratification  happens at the very end of                                                               
the process.                                                                                                                    
MR. DONOHUE agreed.                                                                                                             
1:59:52 PM                                                                                                                    
SENATOR DYSON  referenced Section 3  on page  3, and asked  if it                                                               
means  that  the  commissioner  can change  oil  taxes  that  are                                                               
already established in statute.                                                                                                 
MR. DONOHUE replied yes.                                                                                                        
SENATOR  DYSON asked  how long  that  provision has  been in  the                                                               
MR. DONOHUE  said it has  been there for  a couple of  months and                                                               
directed him to the appendix I version.                                                                                         
2:01:52 PM                                                                                                                    
Paragraph  (2)  of  Section  3, line  7,  makes  this  subsection                                                               
conform to the rest of the changes proposed to AS 43.82.220.                                                                    
Paragraph  (6), line  19, repeals  the terms  and conditions  for                                                               
administrative  termination of  a  contract  under AS  43.82.445.                                                               
That  has  been  replaced  with a  purely  contractual  procedure                                                               
(Article 28 and Article 5).                                                                                                     
MR. DONOHUE continued  to paragraph (7), line  21, which broadens                                                               
the commissioner's  authority, providing greater  flexibility and                                                               
less  technical density  than in  the  long-form SGDA  conforming                                                               
amendments bill in appendix I.                                                                                                  
2:05:30 PM                                                                                                                    
SENATOR  ELTON said  his understanding  is that  the language  in                                                               
paragraph (7)  is not  needed for anything  in the  contract now,                                                               
but  is inserted  in the  Stranded  Gas Development  Act in  case                                                               
additional  changes are  made  between  now and  the  time it  is                                                               
presented to the legislature.                                                                                                   
MR.  DONOHUE replied  that it  is  intended to  substitute for  a                                                               
"laundry  list"  of  paragraphs  that  do  reflect  articles  and                                                               
provisions  in  the current  fiscal  contract.  It also  provides                                                               
flexibility in case other changes are necessary.                                                                                
2:06:22 PM                                                                                                                    
Section 4,  page 3, proposes  a new subsection (b)  to 43.82.200.                                                               
It relates  to Article 26 of  the fiscal contract, exhibit  C and                                                               
provides mandatory dispute resolution procedures.                                                                               
2:07:54 PM                                                                                                                    
CHAIR  SEEKINS   asked  Mr.  Donohue  to   describe  the  state's                                                               
sovereign immunity.                                                                                                             
MR.  DONOHUE answered  that sovereign  immunity  is a  common-law                                                               
concept going  back to the  sovereigns of England.  It originally                                                               
meant that you could not sue  the king, but changed eventually so                                                               
that  you could  sue him  in a  special court  of equity.  It has                                                               
evolved  into a  doctrine that  says the  legislature can  define                                                               
those actions that can be brought against the state by citizens.                                                                
2:10:07 PM                                                                                                                    
CHAIR SEEKINS  asked if,  by waiving  our sovereign  immunity, we                                                               
are allowing  someone to sue the  state on issues related  to the                                                               
MR. DONOHUE  replied no, that  it relates only to  the producers'                                                               
rights to sue the state if  it fails to pay an arbitration award.                                                               
If an  award is unpaid  365 days after  an attempt to  collect in                                                               
the  State of  Alaska,  the producers  can file  the  award as  a                                                               
judgment  in  another state  and  pursue  the state's  assets  to                                                               
satisfy the judgment.                                                                                                           
CHAIR  SEEKINS asked  Mr.  Donohue to  confirm  that waiving  the                                                               
state's sovereign  immunity is a  different thing from  giving up                                                               
the state's sovereignty.                                                                                                        
MR. DONOHUE replied that it is different.                                                                                       
MR. JARDELL interjected that, every  time the state allows itself                                                               
to be sued, it technically waives its sovereignty.                                                                              
MR.  DONOHUE   continued  with  Section   5,  page   4,  amending                                                               
43.82.210(a).  These changes  are part  of a  pattern to  make it                                                               
clear that  oil fiscal certainty  can be considered  and proposed                                                               
in a contract  and submitted to the legislature  for final review                                                               
and authorization.                                                                                                              
2:11:02 PM                                                                                                                    
He said Section  6, page 4, amends 43.82.220(a)  to clarify that,                                                               
in  the  event  of  a  conflict, the  provisions  of  the  fiscal                                                               
contract preempt the conflicting provisions  in oil and gas lease                                                               
or unit agreements.                                                                                                             
He pointed  to the article  [Article 23] in the  current contract                                                               
that  relates to  Point Thomson,  as  an example  of a  potential                                                               
2:12:45 PM                                                                                                                    
SENATOR  DYSON  asked if  this  provision  applies only  to  SGDA                                                               
applications that met the deadline a year or two ago.                                                                           
MR.  DONOHUE   said  yes,  with  few   exceptions,  the  proposed                                                               
amendments  would   be  retroactive  to  the   beginning  of  the                                                               
application  process January  1, 2004.  If this  contract is  not                                                               
approved  however, then  these will  be the  new standards  going                                                               
forward  and the  legislature  will  have to  amend  this act  to                                                               
create a new filing deadline.                                                                                                   
2:14:15 PM                                                                                                                    
Senator  Wagoner commented  that will  be  true only  if the  new                                                               
contract is negotiated under the Stranded Gas Development Act.                                                                  
MR. DONOHUE agreed.                                                                                                             
2:15:57 PM                                                                                                                    
MR. DONOHUE explained that page  5 contains further amendments to                                                               
43.82.220(a), which  reflect a move away  from long-term purchase                                                               
and sales  agreements. Instead,  the state  is making  a shipping                                                               
commitment for 20  percent of the gas, the combined  total of RIK                                                               
and PTP.                                                                                                                        
2:17:13 PM                                                                                                                    
Paragraph (2),  line 18,  makes it clear  that the  provisions of                                                               
the  fiscal  contract dealing  with  some  of the  upstream  cost                                                               
allowances  the  state has  agreed  to  pay,  and which  are  not                                                               
allowed under  statute or  in the oil  and gas  lease agreements,                                                               
will be authorized.                                                                                                             
2:18:52 PM                                                                                                                    
MR. DONOHUE  said that  Section 7  broadens 43.82.220(c)  to deal                                                               
with more than just Royalty issues.                                                                                             
Section 8 adds  a new subsection (e) that  says decisions related                                                               
to taking royalty  gas in-kind are not subject  to the provisions                                                               
of AS 38.                                                                                                                       
2:20:10 PM                                                                                                                    
Section 9 amends language in AS  43.82.250 related to the term of                                                               
the contract,  but the  underlying term limit  is still  35 years                                                               
and may not exceed 45 years from the effective date.                                                                            
SENATOR HOFFMAN arrived at 2:21:22 PM.                                                                                        
MR. DONOHUE  continued to Section  10, page 6, which  is intended                                                               
to  make the  actual operation  of the  work commitments  article                                                               
consistent with the underlying statute.                                                                                         
Section 11 adds a new  section 43.82.437, which authorizes a type                                                               
of collateral  agreement called a coordinating  arrangement, that                                                               
would tie  the overall fiscal  agreement with  qualified sponsors                                                               
who are the production subsidiaries,  to the parent organizations                                                               
and the affiliates that will actually implement the project.                                                                    
2:24:00 PM                                                                                                                    
This  section  also  deals  with   the  establishment  of  Alaska                                                               
Pipeline  Corporation (a.k.a.  Alaska Pipe,  PipeCo, AK  Pipe), a                                                               
public corporation  that would finance  and own various  parts of                                                               
the  project.   In  order  to  make   the  corporation  effective                                                               
immediately, it  authorizes a modified  quorum rule  allowing the                                                               
two commissioner  members to act on  behalf of the board  for the                                                               
first 120 days.                                                                                                                 
2:26:19 PM                                                                                                                    
SENATOR SEEKINS asked who the commissioner members are.                                                                         
MR. DONOHUE responded  that they are the  Commissioner of Revenue                                                               
and  the Commissioner  of Transportation  and Public  Facilities.                                                               
Five public members  are provided for in the  legislation and, as                                                               
they are appointed, will have an equal vote.                                                                                    
2:26:50 PM                                                                                                                    
SENATOR ELTON  quoted a portion of  Section 43.82.437, subsection                                                               
(a), page 6, beginning on line 20, which reads:                                                                                 
    The Commissioner of Revenue, with the concurrence of the                                                                    
  Commissioner of Natural Resources, may negotiate collateral                                                                   
He  asked if  that means  the Commissioner  of Natural  Resources                                                               
must  concur  to  negotiate,  or must  concur  in  the  agreement                                                               
reached by the Commissioner of Revenue.                                                                                         
MR. DONOHUE replied  that this relates to  agreements between the                                                               
state and any  other entity, unlike subsection  (b), which refers                                                               
to agreements  between a public  corporation and  other entities.                                                               
So,  the answer  is that  the Commissioner  of Natural  Resources                                                               
would have  to concur with any  agreement reached as a  result of                                                               
2:28:05 PM                                                                                                                    
JIM BALDWIN, Counsel to the  Attorney General's Office, explained                                                               
that  Section 12,  page  7,  gives the  parties  to the  contract                                                               
assurance that  municipal taxes and  assessments can  continue to                                                               
be paid directly to the municipalities.                                                                                         
2:29:24 PM                                                                                                                    
Section  13 provides  for the  accounting and  custody of  impact                                                               
payments amounting to $125 million.                                                                                             
Section 14  establishes a  "Grant Fund", which  is an  account in                                                               
the General Fund,  to receive those monies.  Subsection (e), page                                                               
9,  lines 6-10,  outlines the  purposes for  which grants  can be                                                               
Section 15  extends the life  of the Municipal Advisory  Group to                                                               
cover  the  period throughout  which  grant  funds will  be  made                                                               
Section 16 was discussed earlier.                                                                                               
2:32:36 PM                                                                                                                    
MR.  BALDWIN   said  that   Section  17   makes  it   clear  that                                                               
arbitrations within the  state are provided for  under the Alaska                                                               
Uniform  Arbitration  Act,  but   carves  out  an  exception  for                                                               
arbitrations that are authorized under the SGDA.                                                                                
Section 18 repeals AS 43.82.445.                                                                                                
Section 19 is  a technical change correcting  the section heading                                                               
of 43.82.220.                                                                                                                   
MR. BALDWIN went  on to Section 20, page 10,  which provides that                                                               
Sections 1-12,  15, 16,  and 18  of this  act are  retroactive to                                                               
January 1,  2004, and that  Section 17 is retroactive  to January                                                               
1, 2005.                                                                                                                        
Section 21 makes this act effective immediately.                                                                                
2:33:58 PM                                                                                                                    
SENATOR  ELTON went  back to  Section  14, page  8, lines  20-21,                                                               
which  says that  the department  "shall adopt  regulations under                                                               
which   economically   affected  municipalities   and   nonprofit                                                               
organizations may apply  for and be eligible  to receive grants".                                                               
He  said that  "nonprofit organizations"  is not  defined in  the                                                               
definition section,  and wondered if  it is defined  elsewhere in                                                               
2:34:40 PM                                                                                                                    
MR. BALDWIN replied that the  intention is to make eligible those                                                               
nonprofit organizations  that act  in a  quasi-municipal capacity                                                               
in the unorganized borough. There  are such organizations and the                                                               
state contracts with  them regularly, so the intention  is not to                                                               
write a  particular region  out of  the state  out of  getting an                                                               
impact grant provided they can document a sufficient impact.                                                                    
SENATOR ELTON  noted that Mr.  Baldwin is talking about  a subset                                                               
of  nonprofit  organizations   that  provides  quasi-governmental                                                               
duties, and asked  if there is a reason the  language of the bill                                                               
does not  speak to that  subset rather than the  broader category                                                               
of nonprofits.                                                                                                                  
MR.  BALDWIN replied  that he  thinks it  would be  beneficial to                                                               
amend the language to make that  clearer and offered to help with                                                               
2:36:28 PM                                                                                                                    
SENATOR  BEN  STEVENS pointed  out  that  on  page 9,  lines  5-6                                                               
specifically  identify   "nonprofit  organizations   serving  the                                                               
unorganized borough".                                                                                                           
2:37:00 PM                                                                                                                    
SENATOR WILKEN directed Mr. Baldwin's  attention to page 7, lines                                                               
29-31, which  amend the  term "revenue-affected  municipality" to                                                               
read "economically  affected municipalities", and asked  if there                                                               
is a difference between those terms.                                                                                            
MR. BALDWIN  replied that the  terms are defined in  the Stranded                                                               
Gas   Development  Act.   He   said   that  a   "revenue-affected                                                               
municipality"  can  also  be  "economically  affected",  but  the                                                               
reverse may not be true.                                                                                                        
SENATOR WILKEN then directed him to  page 8, line 24 and asked if                                                               
any  thought has  been given  to defining  the phrase  "direct or                                                               
severe impact".                                                                                                                 
MR. BALDWIN  answered that he  hoped it would be  further defined                                                               
in regulation.                                                                                                                  
SENATOR  WILKEN  asked  if  it  would be  appropriate  to  add  a                                                               
requirement  into the  bill that  a definition  of the  phrase be                                                               
included in the regulations.                                                                                                    
MR. BALDWIN answered that would be a policy call.                                                                               
2:39:35 PM                                                                                                                    
SENATOR WILKEN  asked Mr.  Baldwin how  the process  described in                                                               
subsection  (e), page  9,  lines  2-14, would  work.  He said  it                                                               
appears that the grant request would  be submitted in a report to                                                               
the  legislature during  the first  10 days  of the  session, and                                                               
then go  through the  department to  the municipal  action group,                                                               
which  would  advise  the commissioner  whether  the  request  is                                                               
appropriate. He asked if that is correct.                                                                                       
MR. BALDWIN responded yes, the  relevant Municipal Advisory Group                                                               
makes a  recommendation that the  proposed expenditure  meets the                                                               
needs of the section.                                                                                                           
SENATOR WILKEN asked  where the report due to  the legislature is                                                               
MR. BALDWIN directed him to subsection (d) on page 8, line 27.                                                                  
SENATOR WILKEN asked  if the grant request first  surfaces in the                                                               
first 10 days of every session.                                                                                                 
CHAIR SEEKINS said  that he thinks the legislature  gets a report                                                               
of where grants have been given.                                                                                                
MR.  BALDWIN  confirmed  that  the report  is  submitted  to  the                                                               
legislature after the fact.                                                                                                     
SENATOR WILKEN  questioned the  language on  page 8,  lines 29-30                                                               
which  reads  "a list  of  all  municipalities and  organizations                                                               
determined by the department to be eligible for further grants".                                                                
MR.  BALDWIN  responded  that  the  report  includes  a  list  of                                                               
meritorious requests that were not funded due to a shortfall.                                                                   
2:41:29 PM                                                                                                                    
SENATOR WILKEN  asked if the  committee could get  a step-by-step                                                               
description  of  how  the  grant  process  works,  including  how                                                               
decisions are made regarding impacts.                                                                                           
2:42:36 PM                                                                                                                    
SENATOR HOFFMAN asked  why page 9, subsection  (f), restricts the                                                               
use of grants to retire municipal debt.                                                                                         
MR. BALDWIN  said that  it is  a policy  call, but  the rationale                                                               
behind it  is that  it does  not further  the public  interest to                                                               
incur new debt to pay preexisting  debt. Grants should be used to                                                               
cover new impacts, but obligations  initiated after the beginning                                                               
of the  grant program might be  covered at the discretion  of the                                                               
SENATOR  HOFFMAN countered  that the  language seems  to prohibit                                                               
both previous and future debt.                                                                                                  
MR. BALDWIN agreed,  but said that the language is  modeled on an                                                               
existing  grant  program  in  response  to  the  request  of  the                                                               
Municipal  Advisory  Group. He  reiterated  that  it is  open  to                                                               
policy determination by the legislature.                                                                                        
2:45:11 PM                                                                                                                    
SENATOR WILKEN  said the  total amount  of grant  money available                                                               
over  6 years  is $125  million,  and if  it were  used to  cover                                                               
existing municipal debt, it would be eaten up very quickly.                                                                     
At ease from 2:45:58 PM to 2:55:24 PM                                                                                       
2:56:30 PM                                                                                                                    
SENATOR WILKEN  directed Mr.  Baldwin to  a handout  [Chapter 82.                                                             
Alaska   Stranded  Gas   Development  Act],   Section  43.82.520,                                                             
subsection  (b),  paragraph  (1),   which  reads  "the  share  of                                                               
payments  to  revenue-affected  municipalities  should  be  given                                                               
priority  over payments  to economically-affected  municipalities                                                               
with due  regard to the  anticipated size  of the tax  base", and                                                               
asked if he  could explain the differences between  the two types                                                               
of municipality.                                                                                                                
2:58:19 PM                                                                                                                    
STEVEN  B. PORTER,  Deputy Commissioner,  Department of  Revenue,                                                               
responded   that  economically-affected   refers  to   unexpected                                                               
impacts to  the communities during  the construction  phase, when                                                               
there  is  no revenue  being  generated.  These are  the  impacts                                                               
addressed  by the  $125  million impact  funds  in the  contract.                                                               
Revenue-affected   communities  are   those   that  have   taxing                                                               
SENATOR WILKEN thanked  Mr. Porter for his  explanation and asked                                                               
whether he could provide it in writing.                                                                                         
MR. PORTER said  that he would have the lawyers  elaborate on his                                                               
CHAIR SEEKINS  said that  SB 2003  and SB 2004  will be  open for                                                               
public testimony over  the weekend, so he  would close discussion                                                               
on SB  2004 for now  and open discussion  on the PipeCo  bill, SB
He asked whether the members of  the committee would like to hear                                                               
from  anyone in  particular  on these  matters  when they  return                                                               
after the weekend.                                                                                                              
3:01:25 PM                                                                                                                    
SENATOR WAGONER  requested that the  Chair ask Legal  Services to                                                               
have Jack  Chenoweth review the  document and report back  to the                                                               
committee on Friday.                                                                                                            
SENATOR  ELTON  suggested  that  the  Chair  ask  Kevin  Ritchie,                                                               
Executive  Director  of the  Alaska  Municipal  League (AML),  to                                                               
provide the  committee with the municipalities'  reaction to some                                                               
of the provisions.                                                                                                              
MR.  PORTER said  that  Steve Thompson,  Chair  of the  Municipal                                                               
Advisory  Board,  might  be  willing  to  attend  or  to  send  a                                                               
SENATOR OLSON suggested that the Chair invite Kathy Wasserman.                                                                  
CHAIR SEEKINS Closed discussion on SB 2004.                                                                                     

Document Name Date/Time Subjects