Legislature(2003 - 2004)
03/10/2003 01:40 PM House FIN
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HOUSE FINANCE COMMITTEE
March 10, 2003
1:40 PM
TAPE HFC 03 - 31, Side A
TAPE HFC 03 - 31, Side B
TAPE HFC 03 - 32, Side A
CALL TO ORDER
Co-Chair Williams called the House Finance Committee meeting
to order at 1:40 PM.
MEMBERS PRESENT
Representative John Harris, Co-Chair
Representative Bill Williams, Co-Chair
Representative Kevin Meyer, Vice-Chair
Representative Eric Croft
Representative Richard Foster
Representative Mike Hawker
Representative Carl Moses
Representative Bill Stoltze
Representative Jim Whitaker
MEMBERS ABSENT
Representative Mike Chenault
Representative Reggie Joule
ALSO PRESENT
Representative Hugh Fate, Larry Persily, Deputy
Commissioner, Department of Revenue, Dan Dickinson,
Director, Division of Oil and Gas Audit, Department of
Revenue, Wendy King, Conoco/Phillips, Ken Konrad, Senior
Vice President, BP Exploration, Dave McDowell, BP
Exploration.
PRESENT VIA TELECONFERENCE
Roger Marks, Petroleum Economist, Economic Research Section,
Tax Division, Department of Revenue, Mark Meyers, Director,
Division of Oil and Gas, Department of Natural Resources.
SUMMARY
HB 14 "An Act relating to an absence from the state
while providing care for a terminally ill
grandparent for purposes of determining
eligibility for a permanent fund dividend; and
providing for an effective date."
HB 14 was REPORTED out of Committee with a "do
pass" recommendation and with previously published
fiscal impact note: REV #1.
HB 16 "An Act amending the standards applicable to
determining whether, for purposes of the Alaska
Stranded Gas Development Act, a proposed new
investment constitutes a qualified project, and
repealing the deadline for applications relating
to the development of contracts for payments in
lieu of taxes and for royalty adjustments that may
be submitted for consideration under that Act; and
providing for an effective date."
HB 16 was HEARD and HELD.
#HB14
HOUSE BILL NO. 14
"An Act relating to an absence from the state while
providing care for a terminally ill grandparent for
purposes of determining eligibility for a permanent
fund dividend; and providing for an effective date."
JIM POUND, STAFF, REPRESENTATIVE FATE, SPONSOR, testified in
support of the bill. He noted that currently a Permanent
Fund exemption existed to allow an absence from the state in
order to care for a terminally ill family member. He
pointed out that "grandparent" was omitted from the list of
family members allowable. The bill adds the language "for
grandparents" to allow this exemption.
LARRY PERSILY, DEPUTY COMMISSIONER, DEPARTMENT OF REVENUE
provided information regarding the bill. He confirmed that
several exemptions for allowable absence exist in statute,
including one that pertains to care for terminally ill
family members. He observed that the bill would add
grandparents to the list, which currently includes parent,
spouse, children and stepchildren. He stated that there is
no fiscal impact to the Department of Revenue. He pointed
out that the small number of added eligible applicants might
slightly reduce the size of dividend payments, since a few
more applicants would now qualify. He pointed out that if
ten more applicants became eligible, the dividend payment
would be only pennies lower.
Representative Stoltze asked the Division's position on
adding any legislation pertaining to the Permanent Fund.
Mr. Persily stated that he was not aware of any opposition
to amend existing statute to add allowable absences.
Co-Chair Harris asked if the department was concerned that
other amendments would be added to the bill.
Mr. Persily conceded that the department maintained concern
that no other exemptions would be added to the bill. He
stated that as long as the bill was well written, it would
not present an administrative problem.
In response to a question by Co-Chair Harris, Mr. Persily
noted that an absence of up to 180 days was allowed for any
reason. He noted that a longer absence needed to fall under
allowable absence exemptions. He pointed out that if,
during an absence, residency was severed in some manner,
then the absence was no longer allowable.
Representative Stoltze raised concerns about amendments that
may be added to the bill. He maintained that three people
had recommended amending the bill already. He requested
that the bill be kept specific.
Mr. Pound expressed the Sponsor's commitment to keeping the
bill language as it stands and not to expand it. He
conceded that amendments had been proposed in an earlier
committee, and indicated that the amendments carried a far
broader intent than the original bill. He stated that the
proposed amendments did not pertain to absence exemptions,
and that they had not been passed.
Representative Foster MOVED to report out of Committee with
the accompanying fiscal note and recommendations
There being NO OBJECTIONS, the MOTION PASSED.
HB 14 was REPORTED out of Committee with a "do pass
"recommendation and with previously published fiscal impact
note: REV #1.
#HB16
HOUSE BILL NO. 16
"An Act amending the standards applicable to
determining whether, for purposes of the Alaska
Stranded Gas Development Act, a proposed new investment
constitutes a qualified project, and repealing the
deadline for applications relating to the development
of contracts for payments in lieu of taxes and for
royalty adjustments that may be submitted for
consideration under that Act; and providing for an
effective date."
Committee members were provided with two proposed amendments
as follows:
23-LS0101\Q.2
Chenoweth
A M E N D M E N T #1
OFFERED IN THE HOUSE BY REPRESENTATIVE HARRIS
TO: CSHB 16(RES)
Page 1, line 8, following "terms;":
Insert "providing a statement of intent for the Act
relating to use of project labor agreements;"
Page 1, following line 9:
Insert a new bill section to read:
"* Section 1. The uncodified law of the State of Alaska
is amended by adding a new section to read:
LEGISLATIVE INTENT. It is the intent of the
legislature that, in awarding contracts under the Alaska
Stranded Gas Development Act, a qualified sponsor or
qualified sponsor group and contractors of the qualified
sponsor or qualified sponsor group may develop and enter
into a project labor agreement with appropriate collective
bargaining organizations for each project for which a
contract is entered into."
Page 1, line 10:
Delete "Section 1."
Insert "Sec. 2."
23-LS0101\Q.3
Chenoweth
A M E N D M E N T #2
OFFERED IN THE HOUSE BY REPRESENTATIVE WHITAKER
TO: CSHB 16(RES)
Page 1, line 4, following "group":
Insert "and whether a project plan submitted may be
approved as a qualified project plan"
Page 3, following line 1:
Insert a new bill section to read:
"* Sec. 3. AS 43.82.130 is amended to read:
Sec. 43.82.130. Qualified project plan. A
proposed project plan submitted under AS 43.82.120 may
be approved as a qualified project plan under AS
43.82.140 if the proposed project plan
(1) reflects a proposal for diligent
development of the project on the part of the
applicant;
(2) does not materially conflict with the
obligations of a lessee to the state under a lease or
under a pool, unit, or other agreement with the state;
[AND]
(3) describes satisfactory methods and terms
for making gas available to meet the reasonably
foreseeable demand in this state for gas within the
economic proximity of the project during the term of
the proposed contract; and
(4) does not unreasonably exclude from
participation in the project any person that, in the
judgment of the commissioner, is capable of
participating and willing to participate in the project
substantially on the terms set out in the project plan
as submitted; in evaluating an application for
compliance with this paragraph, the commissioner may
require a qualified sponsor or qualified sponsor group
to amend and resubmit a proposed project plan to
include one or more other interested persons."
REPRESENTATIVE HUGH FATE, SPONSOR, testified in support of
the bill. He highlighted changes from the existing Stranded
Gas Act. He noted that the new bill gives more flexibility
to investigate other products. He also noted that it
expands the area of exploration, and gives a new deadline
for application of March 30, 2005. The original deadline
was June 30, 2004, which he maintained did not allow
adequate time.
Representative Fate pointed out that the current threshold
of participation for a qualified sponsor was 33 percent of
the net worth of a project, which he observed could be a
very significant amount. He gave the example that, with the
new area expansion, the amount could range between nine and
ten billion dollars. He went on to note that the current
bill lowers the level of qualified sponsorship to 15
percent.
Representative Fate pointed out that the bill makes
contractor(s) plural, speculating that the state normally
negotiates with more than one contractor. Finally, he
pointed out language that was added to the section
pertaining to $1.5 million reimbursement to clearly limit
redundancy. He explained that this language was intended to
prevent the filing of lawsuits by making the bill as clear
as possible.
Representative Fate pointed out that the bill would be
submitted to Congress during its examination of an energy
package this month. He stressed that the bill was intended
to communicate that the State of Alaska was active in
getting gas from the North Slope to market.
Vice-Chair Meyer asked about the fiscal note from the
Department of Revenue and whether the $870 thousand figure
was accurate.
Representative Fate speculated that it was the department's
best estimate of cost.
Vice-Chair Meyer maintained that $750 thousand of
contractual and $25 thousand of travel costs seemed high.
Representative Fate briefly addressed the changes proposed
by the amendments. He stressed that, since the changes
proposed by Amendment 1 were intent, the bill would still
remain clean. He also referred to changes proposed in
Amendment 2, pertaining to project plan qualifications. He
stated that he had no objection to the changes, since the
intent language kept the bill specific, while allowing more
activity to occur.
Co-Chair Harris asked for clarification about the Act, and
referred to Section 43.82.510, which pertains to the
municipal advisory group. He recalled community contention
regarding previous agreements. He asked for confirmation
that the Act would be left intact with the bill.
Representative Fate confirmed that the current Act would
remain intact. In response to another question by Co-Chair
Harris, Representative Fate noted that there was no language
that dictated routing. He stressed that the intent was to
develop the resource and get the stranded gas to market.
Representative Croft asked about the nature of the broadened
region, and where it was specified in the legislation.
Representative Fate stated that it was specified in the
original Stranded Gas Act, indicating the region as 64
degrees north.
Representative Croft asked about the nature of qualified
projects as referred to in Section 1 of the bill. He asked
about the function of the "only if the " language.
Representative Fate speculated that the language was
intended to clarify the project qualifications. He noted
that the commissioner retained the final authority, and that
removing the word "only" broadened the authority to the
entire Commission.
Co-Chair Williams suggested that other agency personnel
would provide additional information.
Co-Chair Harris referred to the language in the bill's
fiscal note which pertains to routing, and asked whether in
eliminating the "over the top" route it also eliminated
other routes.
Representative Fate responded that this language, contained
in the Department of Revenue's fiscal note analysis for the
Resource Committee Substitute was not correct.
In response to a question by Representative Whitaker, Co-
Chair Williams clarified that his comments referred to Page
2 of the fiscal note analysis.
Representative Whitaker concurred that such route
restrictions should not be included in the bill language.
He stressed that the record should reflect route neutrality.
Co-Chair Williams directed that the fiscal note language be
corrected.
Representative Fate stated that the language had been
extracted earlier in the process and had been inadvertently
included in the Resources committee substitute fiscal note
analysis.
DAN DICKINSON, DIRECTOR, DIVISION OF OIL AND GAS AUDIT,
DEPARTMENT OF REVENUE, testified in support of the bill. He
addressed the history of the Division, which had been
combined into what is now called the Tax Division. He read
from prepared testimony as follows:
My name is Dan Dickinson, Tax Division director at the
Department of Revenue. With me is Roger Marks, a
Petroleum Economist with the Tax Division, who will
speak briefly about the history, intent and mechanics
of the Stranded Gas Act. But first I think it is
important to introduce ourselves, as the Department of
Revenue has many responsibilities under the Stranded
Gas Act, and the Tax Division has considerable
expertise and experience in oil and gas matters.
Five years ago we were three divisions - the Oil and
Gas Audit Division, the Income and Excise Audit
Division and the Charitable Gaming Division. We are now
merged into a single division.
What we do can be seen from the FY 2002 Comprehensive
Annual Financial Report for the State of Alaska. You
should have a copy of an excerpt from Table 1 .13. Of
total governmental fund revenues of $3.5 billion:
• $1.6 billion comes from the Feds
• Taxes are $1 billion
• Royalties are $0.9 billion
• Interest and investment income, plus all the other
ways the government raises money (charges for
services, fines and forfeitures and "other"), was
more than offset by investment losses in FY 2002.
The Tax Division administers 19 of the 20 tax types
that comprise $1 billion tax figure. Of the billion
dollars in taxes, all but a couple hundred million were
oil and gas taxes. The state's oil and gas take is
often characterized as four bites of the apple, and we
are experienced at all four bites.
For the first bite: We are charged with auditing
royalties and net profit share leases, and work with
DNR on those matters.
The other three bites of the apple cover the three
areas that we anticipate will be "focus" in any
Stranded Gas Act negotiation.
The second bite of the apple is the oil and gas
property tax. Last Friday, the Tax Division's Oil and
Gas Property Tax assessor and his staff mailed out the
2003 tax roll, showing oil and gas property valued at
about $13.5 billion. As petroleum economist Roger Marks
will explain later, property taxes play a unique role
in determining any natural gas project's profitability.
The third bite of the apple is the oil and gas
corporate income tax. Income taxes are focused on
taxing profits. As Roger will elaborate later on - the
more we focus on taxing profits, the more progressive
our system becomes. This is one of the stated goals of
the Stranded Gas Act. We have a large experienced group
in our division that works these issues and we expect
them to be critical.
The last bite of the apple is the production tax. Like
royalty, the production tax focuses on the commodity
value of the resource at or near the wellhead. We have
lots of experience in this area
- market pricing, inter-company transfer pricing,
how markets work, how energy contracts work, business
practices and cost analysis.
Now, let me add a personal observation - but one that I
think reflects what many of us in the division believe
about what the state should be trying to achieve in any
Stranded Gas Act negotiation.
Taxes - and the government take in general that is the
subject of the Stranded Gas Act - should not distort
commercial realities. The government's take should not
be what is red-lighting this project.
As Roger will explain, our current fiscal system
intensifies some of the risks faced by the producers.
Ironically, not only the producers but the state could
be better off changing those same aspects of its fiscal
system. Stranded Gas Act negotiations should be about
risk sharing, and who among the state and the
commercial entities involved can best handle which
risks. As soon as HB 16 becomes law we can start
discussing how price risk will be shared or how return
on the investment in the pipeline will be taxed, or
really figure out what each party wants to get from
this project - aside from "more." There are lots of
specifics that can be set aside until it is clearer how
our gas will fit in with the market mechanisms that
will be in place when we are ready to market. The
state's role should not be to increase risks. Maybe we
can make the project fly by reducing risk.
On the other hand, we have to make sure that the state
is not naively underwriting a risky project. As the
only ones who will still be around if things go sour,
we don't want to be left holding a bag we didn't quite
understand the dimensions of.
That's my quick overview of the Department of Revenue
Tax Division. The administration strongly supports
reauthorizing the Stranded Gas Development Act. We
believe it creates a great mechanism to work these
difficult issues we face. The Tax Division looks
forward to being able to play our part in that work.
Thank you for the opportunity to testify.
In response to a previous question by Vice-Chair Meyer, Mr.
Dickinson explained that close to $1 billion of revenue
could come to the state from this venture. He stressed that
the Division wished to involve world-class experts to
examine the negotiations. He also pointed out that the
expenses were to be reimbursed. He noted that the $750
thousand was in statutory designated receipts, whereby the
division took authority to have the applicant pay the
expenses.
Vice-Chair Meyer questioned whether the fiscal note should
then be zero, since the applicant was absorbing the costs.
Mr. Dickinson clarified that the $750 thousand per year
would be designated program receipts. He noted that the
total general fund expenditure would include travel expenses
incurred with the negotiations. He noted that the state
would pay $117 thousand, with the remainder of the expenses
being reimbursed.
Representative Croft referred to page 2 of the fiscal note
from the Department of Revenue. Mr. Dickinson confirmed
that the routing language in an earlier version of the bill
was more restrictive, but that the current version should
not contain this language.
Co-Chair Harris asked why there was a $4 thousand difference
in costs between FY 04 and FY 05 reflected in the proposed
fiscal note. Mr. Dickinson speculated that the cost
difference would be for equipment.
Co-Chair Williams commended the Division on its plans to get
expertise in negotiations. He asked about the effectiveness
of the current negotiation process.
Mr. Dickinson explained that currently the production tax
and royalties comprised approximately 80 percent of the
state's revenue. He pointed out that the tax is regressive,
due to the relationship between price and the state's
income. He noted that in a regressive system, the
government would accept a higher percentage when prices were
higher, and a lower percentage when prices were lower. He
stressed that with a gas line, the tariff could use up the
majority of the profits. He maintained that the importance
was to focus on income tax and investment return. He
explained that the fiscal system would be devised based on
those issues.
ROGER MARKS, PETROLEUM ECONOMIST, ECONOMIC RESEARCH SECTION,
TAX DIVISION, DEPARTMENT OF REVENUE testified via
teleconference. He read from prepared testimony as follows:
Good afternoon, Mr. Chairman and members of the
committee. My name is Roger Marks. I am a petroleum
economist with the Tax Division of the Department of
Revenue. I worked on the original Stranded Gas Act in
1998 and am familiar with its history, intent, and
mechanics. I would like to provide a very brief
overview of the Act at AS 43.82. A more detailed
synopsis is with the fiscal note.
The Act originated in HB 250 in 1997 which established
a North Slope Gas Commercialization team in the
Administration to research and recommend changes to
state law to encourage commercialization of North Slope
gas. The team concluded that the project faced
considerable risk, namely gas price risk and cost
overrun risk, and that the state's fiscal system
actually exacerbated those risks. Two of the risks of
particular concern were fiscal uncertainty and the
state's regressive tax system.
(A brief comment on the price risk: The cost of the
project is very large: $20 billion. That is a lot of
money to any corporation, even ones the size of Exxon,
BP or Conoco/Phillips. If this project is built and
something goes wrong, such as low prices, the sponsors
face very large losses. And even if these are
relatively low-probability events, the project may not
be built if a company cannot tolerate a loss of that
size. That is why the risk-reduction mechanism proposed
in Congress, which is currently in place for non-
conventional gas in the Lower 48, may be a very
necessary linchpin in making this project a reality.)
By fiscal uncertainty we mean the threat of changes in
fiscal provisions after a project is built, that may
change the project's viability after it is too late to
do anything about it. A project may be feasible under
one tax system. If it is built under the assumption
that the tax system in place will stay in place, but
the tax system changes, the changes could cause heavy
financial losses.
Second, there are two significant elements of the
state's fiscal system that make it regressive. By
regressive we mean that the state's take is a high
percentage of income at low prices, and a low
percentage at high prices. First, the property tax is
based on cost. The higher the cost, the higher the tax.
This is a double whammy to an investor who incurs a
cost overrun. Moreover, the property tax is payable
when construction begins, years before revenues start
accruing. On a time value of money basis this
diminishes the rate of return, and increases the risk
of not recovering the investment.
The second regressive elements are the severance tax
and royalty. They are based on the value at the point
where the gas comes out of the ground, and ignore
upstream costs such as capital and operating costs.
Thus when costs are high and prices are low, the
state's take is a high percentage of low income. Again,
this intensifies the danger of low prices.
I might add that a regressive system also limits the
state's take at high prices. Fixing that could be very
important to the state for securing more revenue when
prices are high, without threatening the viability of
the project.
The Stranded Gas Act was the result of trying to fix
these shortcomings. The law provided a mechanism for
converting the state's fiscal system from a statutory
basis to a contractual basis. This would provide for
greater fiscal certainty. The fiscal system would be
negotiated between the state and the project sponsors,
and approved by the legislature, after a public review
period. Payments to the state would be made in-lieu of
taxes. And per the Act the contract terms would provide
for a more progressive (less regressive) system.
Most of the provisions subject to negotiation are the
tax provisions. Given that the royalty represents the
state's ownership share, there was not interest in
making the royalty rate subject to change. The only
royalty provisions subject to negotiation would be the
gas valuation method, and the timing of royalty in-kind
and in-value notices.
The Commissioner of Revenue would be the primary agent
for negotiating and implementing the contact. However,
the Commissioner of Natural Resources is also
responsible for reviewing the project plan for
acceptability, and for negotiating any changes in those
royalty issues.
There was concern by municipalities that a contract
could compromise their property tax revenues.
Accordingly, the Act created a municipal advisory group
to participate in developing contract terms, and the
Act requires that a fair and reasonable share of the
payments due under the contract be paid to affected
municipalities with regard to the size of the tax base
that may be exempted, and the economic and social
burdens imposed by construction and operation.
The Act also has provisions for sponsors to help make
gas available to communities, to promote local hire, to
deal with confidential information provided by the
sponsors, and to reimburse the state for contractors it
may use to assist in the negotiation process.
Finally, there were some questions raised as to whether
this would surrender or contract away the power to tax,
which is forbidden by our constitution. It was the
administration's judgment that this would not preclude
future legislatures from imposing other taxes, but this
contract would represent a solemn pledge, a moral
commitment by the state, and a message to future
legislatures that once it agrees to the terms it will
not change them.
TAPE HFC 03 - 31, Side B
Responding to an observation by Representative Whitaker, Mr.
Marks noted that in Section 43.82.210 of the Act, pertaining
to contract terms of payment in lieu of taxes, eight
principles were outlined. He pointed out that one of the
principals recommended progressivity as an attribute of a
revised fiscal system. He also noted that, since
progressivity reduced the price risk for the sponsoring
entity, it created an alignment of interest for those
crafting a progressive tax system.
Representative Whitaker also noted that another guiding
principal was the necessity for certainty in the process.
Mr. Marks noted that the intent of converting the fiscal
system from a statutory to a contractual basis was to create
certainty.
Representative Whitaker continued by observing that the
culmination of the negotiations between sponsor groups and
the Administration would be contractual. He noted that,
while not possible to restrict future legislatures, there
was an essential responsibility to uphold the arrived upon
contract.
Mr. Marks agreed that a moral responsibility would be handed
on to future legislatures.
Representative Whitaker pointed out that the agreement
between the state and a sponsoring entity was for a limited
period of time, which was that required for amortizing the
financial commitment.
Mr. Marks maintained that per AS 43.82, the contract was
limited to 30 years.
Representative Whitaker asked whether this was a "one time
deal" - a single opportunity for the Administration to
negotiate a deal, and for the legislature to approve that
deal.
Mr. Marks noted that re-opener clauses existed, and stressed
that the future was impossible to predict. He suggested the
benefit of being able to re-negotiate certain contract terms
in the future. However, he stated that it was appropriate
to characterize the situation as a one-time deal.
Representative Whitaker stressed the imperative that the
agreement be negotiated fairly and strongly from both sides
of the equation. He agreed with Mr. Marks' conclusions.
MARK MEYERS, DIRECTOR, DIVISION OF OIL AND GAS, DEPARTMENT
OF NATURAL RESOURCES (DNR) testified via teleconference. He
emphasized the importance of the gas pipeline, enabling the
development of Alaska's gas resources for the next 50 years
or more. He predicted that, just as the Trans-Alaska
Pipeline System (TAPS) had exceeded original expectations,
the Act set the stage for broad-based technical negotiations
between project sponsors and the Administration.
Mr. Meyers noted that, in addition to dealing with issues
involving taxes, the Act addresses major royalty and
resource ownership issues managed by DNR. He credited the
State's sale of royalty in-kind oil for stimulating the
Alaska refinery industry. He further suggested that royalty
sales from gas could be used as a vehicle for a major petro-
chemical business in Alaska, or exploration of potential,
untapped resources.
Mr. Meyers also pointed out the potential for the Act to
open negotiations in other resource management areas with
respect to oil production on state lands. He stated that,
while it was premature to discuss the extent of
negotiations, at least one major producer had expressed
interest in negotiating movement of gas between units,
carbon dioxide treatments, and other technical and economic
issues.
Mr. Meyers stressed the extensive experience in oil
development projects of those in his division. He gave
examples of those with direct experience with oil and gas
projects on the North Slope. He offered this expertise for
use by the Administration.
Representative Croft asked about the level of inaccuracy of
original oil production estimates in Prudoe Bay.
Mr. Meyers stated that the first estimates of oil production
for that area was 9 billion barrels and that current
estimates were for 14 billion barrels.
Representative Croft asked whether, if a similar negotiation
had been used on TAPS employing original estimates and
payments in lieu of taxes, those estimates would also be
largely incorrect.
Mr. Meyers concurred that since original estimates were 12
billion, and that current estimates included 14 billion
barrels, with another 8 billion in known reserves, those
estimates would be off by approximately 50 percent.
Responding to another question by Representative Croft, Mr.
Meyers stated that the gas line was very early in the
exploration stage, and that current knowledge and positive
expectation was similar to that of the initial discovery at
Prudoe Bay. He added that current expectation exceeded a
30-year time period.
Representative Croft referred to the moral vs. legal
obligation of the settlement. He asked whether, if the
legislature ratified an agreement, it would limit future
ability to make tax decisions, or if it would make tax
decisions subject to a lawsuit, allowing companies to
recover an equivalent amount in damages.
Mr. Meyers deferred the question to the Department of Law,
in considering the legal implications of the contract.
WENDY KING, GAS STRATEGIES, CONOCO/PHILLIPS testified in
support of the bill. She outlined a three-pronged strategy
for creating a gas pipeline in Alaska: 1) federal
legislation streamlining the permitting process, 2) federal
fiscal legislation, providing insurance against extreme
price volatility, and 3) state legislation re-authorizing
the Stranded Gas Act.
Ms. King credited current statute as providing a framework
for negotiating an agreement between the State and other
parties. She noted the importance of modifying the current
Act with the bill in order to apply the Act to other
products and to extend its application deadline. She
maintained that, were these two limitations not contained in
current statute, corporations such as Conoco/Phillips could
already be further along in the negotiation process. Ms.
King stated that her company supported the bill in the
cleanest form possible, simply addressing the two
limitations.
Co-Chair Williams asked Ms. King to comment on Amendment #1.
Ms. King stated that Conoco/Phillips would oppose the
current amendment. She noted that the size of the project,
along with Conoco's belief in organized labor, would
necessitate use of a project labor agreement. She
maintained, however, that mandates would add undue cost to
the project. She suggested that if the amendment read
"agreement(s)", in the plural, it might be more palatable.
Ms. King also addressed Amendment 2, noting that she had
only briefly reviewed the amendment. She stated that her
company was not supportive of mandates limiting contracts,
which the amendment appeared to do.
Vice-Chair Meyer asked about Conoco's position on local
hiring.
Ms. King noted that her company had always been a supporter
of Alaska hiring, and in support of requirements in existing
statute (AS 43.82.230).
Vice-Chair Meyer asked about the progress of the federal
energy bill. Ms. King stated that she did not have current
information on this legislation.
Representative Croft asked about the legally binding nature
of the agreements contemplated under the Stranded Gas Act.
Ms. King speculated that Concoco's position was that it must
be addressed during the negotiation process. She suggested
that the Department of Law should be consulted.
MARK SCHULTZ, ASSISTANT ATTORNEY GENERAL, OIL GAS AND MINING
SECTION, DEPARTMENT OF LAW, commented via teleconference.
Responding to the question reiterated by Representative
Croft, he referenced the Alaska State Constitution, Article
9, Section 1, saying, "The power of taxation shall never be
surrendered. This power shall not be suspended or contracted
away, except as provided in this article."
Mr. Schultz commented that, regarding the Stranded Gas Act
itself, it did not raise the issue of binding future
legislatures, but could potentially become a hurdle to the
form of the contract developed under the Act. He summarized
that it was not an impediment to the Act itself, but a
potential legal obstacle, depending on the contract.
Representative Croft asked if a contract would be crafted
that allowed for some form of damages if tax structure was
changed during the terms of the agreement.
Mr. Schultz responded that if a contract were for multiple
years, it would be possible to include language that gave
each legislative session the opportunity to ratify the
contract.
Representative Croft asked if the negotiations were public
or confidential.
Mr. Schultz noted that portions of the negotiations were
made private under the Act.
Representative Croft asked why a simple debate for a less
regressive tax structure could not be publicly arrived at in
committee, rather than through a private negotiation
procedure.
Mr. Schultz conceded that the same results could perhaps be
arrived upon, but that private negotiations were more
flexible.
Representative Croft also asked if the legislature would
vote on the contract in its entirety.
Mr. Schultz confirmed that this was true, and added that the
contract would also be presented for public comment, and
information would be provided to the legislature throughout
the negotiations.
KEN KONRAD, SENIOR VICE PRESIDENT, BP EXPLORATION, testified
in support of the bill. He observed that a gas pipeline
project was an enormous opportunity with tremendous risk and
uncertainties.
Mr. Konrad noted that BP viewed four key areas to address,
one of which was cost. He stated that BP was looking for
cost saving opportunities, and was identifying areas through
a technology program. He noted that the other three areas
required government cooperation in order to reduce risk: 1)
an efficient and predictable regulatory process in Canada,
2) federal legislation to clarify the regulatory process and
fiscal terms, and 3) simple, clear and predictable fiscal
terms surrounding the pipeline in Alaska.
Mr. Konrad noted BP's support of the Act since its
inception. He cautioned against adding amendments that may
inadvertently increase risk and costs of the project. He
stressed the importance of a clean bill.
In response to a question by Co-Chair Williams, Mr. Konrad
briefly addressed Amendment 1. He noted that, although
organized labor would certainly be used in a project of this
size, he felt that apparent mandates would better be handled
in negotiations between industry and unions. He speculated
that a labor agreement would not occur until governmental
and permitting discussions were completed.
Regarding Amendment #2, Mr. Konrad observed that the
language was fairly broad. He noted concern as to whether
specific ownership was mandated by the legislature.
Co-Chair Harris asked about BP's plans for development of
natural gas in Alaska.
Mr. Konrad noted that the first step was to create a viable
pipeline project. He projected a bright future for
additional gas, but noted that without establishing
government actions, no pipeline and therefore no exploration
was possible.
Co-Chair Harris asked about BP's position on a Gas-to-
Liquids (GTL) project.
Mr. Konrad noted BP's view that a gas pipeline was the
leading opportunity for commercialization of Alaska gas. He
acknowledged that the GTL facility was developing technology
to be used around the world.
Co-Chair Harris asked if BP believed in a Canadian route.
Mr. Konrad noted that BP had been focused on an Alaskan
route for some time, since the cost difference between
routes was not a factor. He stated that the company would
not participate in a project that was not supported by
government. Therefore, a southern route was the focus since
Alaska had stated it did not support an over the top route.
Co-Chair Harris MOVED to ADOPT Amendment 1. Co-Chair
Williams OBJECTED.
Co-Chair Harris proposed an AMENDMENT to the Amendment. He
suggested that the Amendment be changed to read, "enter into
project labor agreement(s)".
Vice-Chair Meyer suggested that the word "may" on line 9
carried the intent proposed by Co-Chair Harris. He asked if
the Sponsor's position had been affected by industry
testimony in opposition to the amendments.
Representative Fate noted indicated that the original intent
of the bill had been to improve the availability of equity.
He maintained that Amendment #1 requires the Commissioner to
qualify the sponsor/sponsor groups. He speculated that the
amendment might forward this intent.
Representative Fate agreed with the producers that certain
mandates were better left to negotiations. He noted that he
did not believe that the intent language would compromise
the negotiations.
Representative Hawker expressed his difficulty in supporting
the amendment. He felt that language was vague and clouded
the intent of the Act. He proposed that the language would
be more appropriate in the hiring or contract sections.
Responding to an inquiry from Co-Chair Williams, Ms. King
reiterated that she must consult her company before
commenting more specifically on the amendments.
Co-Chair Harris asked for clarification on the intent of
Conoco/Phillips to negotiate with organized labor in the
project.
Ms. King confirmed the likelihood of working with organized
labor in a project of this size, but took exception to any
mandate.
Co-Chair Harris asked whether the company perceived a
mandate in the amendment as it was stated. He pointed out
that Line 9 stated that sponsors "may develop and enter into
project labor agreements".
Co-Chair Harris expressed his personal commitment to
organized labor. He conceded that producers did not wish to
be bound by any legislation. However, he noted a desire to
ensure a place in the project for organized labor, and
stated that this amendment simply added intent.
Ms. King acknowledged the changes to the amendment and its
intent, but once again reiterated the need to consult with
her company before making definitive comment.
Representative Whitaker commented on the language in
Amendment 1, and its apparent simplicity. He observed that
the amendment simply indicated that the legislature had no
objection to the sponsor groups entering into agreements
with a project labor group.
Co-Chair Williams noted the producers' desire for a clean
bill. He also pointed out that the intent language should
send a clear message. Co-Chair Williams suggested that
perhaps a Letter of Intent would be more appropriate.
Co-Chair Harris suggested that such a letter would have the
same effect as legislation.
TAPE HFC 03 - 32, Side A
Vice-Chair Meyer acknowledged Representative Whitaker's
observations, but questioned the need for amendment, since
producers have already stated their intent to work with
labor groups. He suggested that a Letter of Intent might be
the best vehicle.
DAVE MCDOWELL, BRITISH PETROLIUM EXPLORATION (BP), testified
against amendment 1. He expressed BP's desire to create the
most certainty surrounding the project, and contended that
the amendment did not contribute to that certainty.
Representative Whitaker questioned how the amendment
detracted from certainty.
Mr. McDowell pointed out that, as the Committee was debating
the meaning of the amendment, others might also question its
meaning.
Representative Whitaker stated that he did not understand
the uncertainty contained in the amendment. He contended
that the intent language was not so vague as to limit his
support of the amendment.
Representative Croft suggested that an amendment was the
most constitutional way to add intent to the legislation.
He expressed concern about the statement sent if the
Committee was not able to support such a simple amendment.
He speculated that the intent supported the right of Alaskan
workers to be considered in the negotiations.
Vice-Chair Meyer maintained that local hiring was already
included in statute.
Representative Croft contended that few Alaska-hire laws
contained strong terms due to constitutional concerns. He
suggested that simply adding a contract provision requiring
adherence to all existing laws did not send a strong enough
message.
Vice-Chair Meyer suggested that the amendment might be
amended to include stronger language pertaining to local
hiring.
Representative Croft reiterated his belief that project
labor agreements were the most constitutionally defensible
way to ensure local hiring. He suggested that stronger
language could also be added in a House Floor amendment. He
expressed his support of the amendment.
A roll call vote was taken on the motion.
IN FAVOR: Stoltze, Whitaker, Croft, Foster, Meyer, Williams,
Harris
OPPOSED: Hawker
Representatives Chenault, Joule, and Moses were not present
for the vote.
The amendment PASSED on a VOTE of 7-1.
Representative Whitaker MOVED Amendment 2. Co-Chair William
OBJECTED for discussion.
Representative Whitaker expressed his support of the
amendment. He pointed out the extreme difficulties inherent
in the negotiation process and stressed the importance of
providing the Administration with tools for the process. He
referred to questions surrounding the fairness of the TAPS
tariff and suggested that making equity positions available
to certain key groups would prevent such contentions in the
future. He stated that the intent was to give every
opportunity for the free market to work, and proposed that
this would benefit the state to the maximum extent possible,
as constitutionally obligated.
Representative Fate added that the original intent of the
legislation was not to disallow any groups from equity
opportunity. He speculated that the burden of negotiation
was placed upon the Commissioner and the negotiating team,
and that it would stimulate the economy. He proposed that,
rather than being a detriment to negotiations, it may in
fact benefit them.
Co-Chair Harris referred to Line 18 of the Amendment and
asked how "unreasonably exclude" was defined [by law].
Representative Whitaker maintained that the meaning was
straightforward.
Co-Chair Harris suggested that the language gave latitude
for legal interpretation.
Mr. Schultz did not provide a specific legal definition, but
pointed out that the term "unreasonably" was routinely used
without further definition in a number of statutes.
Co-Chair Williams asked whether the language "any person
that" excluded, for example, a legislator from
participating.
Representative Whitaker responded that "in the judgment of
the commissioner" placed participation at the discretion of
the commissioner, to be judged according to the financial
terms of the contract.
Co-Chair Williams suggested that the language might be
interpreted differently in the future.
Representative Whitaker responded that the bill proposed
extending the time period through 2005 and speculated that
one could forecast the players at that point.
Vice-Chair Meyer asked about the intent of the bill.
Representative Fate stated that the bill was intended to
increase participation. He cited the example of the Port
Authority project, which required financial qualifications
that excluded many businesses from participating. He
proposed that the bill would allow more Alaskan businesses
or groups to benefit from the venture, while still upholding
high standards at the determination of the Commission. He
maintained that, without the bill, businesses or groups
might be excluded as they had been in the Port Authority.
He conceded that to have too broad a participation would
limit the benefits to each.
Responding to a question from Co-Chair Harris, Ms. King
reiterated that Conoco/Phillips supports a clean
reauthorization of the Act. She questioned whether the
amendment added a potential barrier to an economically
challenged project. She stated that her company opposed the
amendment, and maintained that it did not add value to the
project.
Representative Whitaker voiced his disagreement and asked
for specific reference to mandates.
Ms. King referred to line 22, which states, "may require",
implying a requirement of the Commission to mandate parties
to a contract.
Representative Whitaker suggested that the word "may"
mediated the requirement.
Ms. King noted that the word "require" was objectionable.
Representative Whitaker suggested that the amendment be
changed to read "may negotiate with a qualified sponsor"
(line 22).
Ms. King noted that the Act itself did not appear to contain
restrictions regarding sponsoring qualifications, and
questioned how adding "may negotiate" might impact its
meaning.
Co-Chair Harris referred to AS 43.82.110 of the Act, which
pertains to qualified sponsor or sponsor groups. He
observed that a qualified sponsor must meet two separate
criteria, with the second criteria having several possible
financial criteria. He maintained that the amendment was
intended to allow those organizations that do not meet the
criteria to participate to a lesser degree, upon the
determination of the commissioner.
Ms. King responded that the amendment still contained the
word "require".
Mr. McDowell expressed BP's welcome of any group whose
participation in the project added value. He referred to
amendment sponsor's desire to see the bar kept at a
"reasonably high level". He observed that the placement of
"the bar" was left to the commissioner. He speculated that
the amendment would increase risk for the project, create
uncertainty, and would not be helpful in moving the project
forward.
Responding to a question from Representative Whitaker, Mr.
McDowell reiterated his discomfort with Amendment #2. He
maintained that since the Commission set the requirements
for project participation, this allowed for a lack of
clarity about those requirements.
Representative Whitaker contended that the language was
explicit, stating, "in the judgment of the commissioner, is
capable of participating". He maintained that this inferred
the commissioner's belief that a participant was financially
capable. He commented that to imply that a participant
would not "add value" was a very subjective statement, since
the determination of value might vary depending on the
perspective.
Co-Chair Williams noted that he also had questions regarding
the amendment.
Mr. McDowell clarified that he did not mean to imply that a
participant "would not have value". He maintained that a
competitive marketplace is the best indicator of project
participation and hoped that the players in the marketplace
would position themselves using their ability to add value
by playing a role.
Representative Whitaker reiterated that this was a
subjective conclusion. He pointed out that if a participant
was disadvantageous to another sponsor, they might be deemed
of no value to that sponsor. He contended that the
amendment might provide the commissioner and State the
opportunity to include another competitor. He suggested
that this encouraged a free market, rather than one subject
to the internal dynamics of a single company or group of
companies. He proposed that it was inherent upon the
legislature to provide the Governor with leverage to
negotiate a free market play with North Slope gas.
Co-Chair Williams asked for clarification on: the meaning of
participation, the qualifications for participation, and the
right to appeal denial in participation. He recommended
that these questions be further investigated.
Co-Chair Williams stated that the bill would be HELD so the
parties could work together on the amendment.
Representative Whitaker stated his belief that it is
imperative that not only the three major producers be heard
on these issues, but also independents who might
significantly benefit from a free market play. He suggested
that the perspective of independent producers might reveal
the advantage of a free market.
Co-Chair Harris suggested that smaller, independent
producers, or others who are interested in participating in
the project, be encouraged to testify.
Co-Chair Williams stated that testimony at the next hearing
would be by invitation only. He requested that interested
parties contact his office. He noted that his office would
work with the sponsor, committee members and industry
representatives.
HB 16 was heard and HELD in Committee for further
consideration.
ADJOURNMENT
The meeting was adjourned at 4:08 PM
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