Legislature(2013 - 2014)HOUSE FINANCE 519

04/13/2014 01:00 PM House FINANCE

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* first hearing in first committee of referral
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= bill was previously heard/scheduled
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Heard & Held
+ Presentation by: Dept. of Natural Resources & TELECONFERENCED
Dept. of Revenue
<Pending Referral>
<Bill Hearing Postponed>
+ Bills Previously Heard/Scheduled TELECONFERENCED
Moved CSHB 89(FIN) Out of Committee
<Bill Hearing Canceled>
                   HOUSE FINANCE COMMITTEE                                                                                      
                       April 13, 2014                                                                                           
                          1:05 p.m.                                                                                             
1:05:40 PM                                                                                                                    
CALL TO ORDER                                                                                                                 
Co-Chair Stoltze called the House Finance Committee meeting                                                                     
to order at 1:05 p.m.                                                                                                           
MEMBERS PRESENT                                                                                                               
Representative Alan Austerman, Co-Chair                                                                                         
Representative Bill Stoltze, Co-Chair                                                                                           
Representative Mia Costello                                                                                                     
Representative Bryce Edgmon                                                                                                     
Representative Les Gara                                                                                                         
Representative David Guttenberg                                                                                                 
Representative Lindsey Holmes                                                                                                   
Representative Cathy Munoz                                                                                                      
Representative Steve Thompson                                                                                                   
Representative Tammie Wilson                                                                                                    
MEMBERS ABSENT                                                                                                                
Representative Mark Neuman, Vice-Chair                                                                                          
ALSO PRESENT                                                                                                                  
Joe Balash,  Commissioner,  Department  of Natural  Resources;                                                                  
Michael  Pawlowski, Deputy  Commissioner,  Strategic  Finance,                                                                  
Department   of   Revenue;   Angela   Rodell,    Commissioner,                                                                  
Department of Revenue.                                                                                                          
HB 89     AQUATIC INVASIVE SPECIES                                                                                              
          CSHB  89(FIN) was REPORTED  out of committee  with a                                                                  
          "do  pass" recommendation  and with  one new  fiscal                                                                  
          impact  note from the  Department of Fish  and Game,                                                                  
          one  new fiscal impact  note from the Department  of                                                                  
          Natural  Resources,  one new zero  fiscal note  from                                                                  
          the  Department  of  Revenue,  one new  zero  fiscal                                                                  
          note   from   the   Department    of   Environmental                                                                  
          Conservation,  one  new zero  fiscal  note from  the                                                                  
          Department of Environmental Conservation, and one                                                                     
          new zero fiscal note from the Department of                                                                           
          Natural Resources.                                                                                                    
HB 287    APPROVE TESORO ROYALTY OIL SALE                                                                                       
          HB 287 was SCHEDULED but not HEARD.                                                                                   
CSSB 138(FIN) am                                                                                                                
           GAS PIPELINE; AGDC; OIL & GAS PROD. TAX                                                                              
          CSSB 138(FIN) am was HEARD and HELD in committee                                                                      
          for further consideration.                                                                                            
1:06:29 PM                                                                                                                    
Co-Chair  Stoltze  addressed   the  fiscal  notes  for  HB  89                                                                  
before embarking on the presentation on SB 138.                                                                                 
HOUSE BILL NO. 89                                                                                                             
     "An Act relating to the rapid response to, and control                                                                     
     of, aquatic invasive species and establishing the                                                                          
     aquatic invasive species response fund."                                                                                   
Representative  Costello discussed  the fiscal notes  attached                                                                  
to the  bill. She cited  the new fiscal  impact note  from the                                                                  
Department of  Fish and Game (DFG)  for $299.1 thousand  in FY                                                                  
15 and  $154.9 thousand  in FY  16. She noted  the new  fiscal                                                                  
impact note  from the Department  of Natural Resources  in the                                                                  
amount of  $94.1 thousand in FY  15 and was indeterminate  for                                                                  
FY 16  through FY  20. The  remaining zero  fiscal notes  were                                                                  
from  the   Department   of  Natural   Resources  (DNR),   the                                                                  
Department  of  Environmental   Conservation  (DEC),  and  the                                                                  
Department of Revenue.                                                                                                          
Representative  Costello MOVED to  REPORT CSHB 89(FIN)  out of                                                                  
committee    with   individual    recommendations   and    the                                                                  
accompanying  fiscal notes. There  being NO OBJECTION,  it was                                                                  
so ordered.                                                                                                                     
1:10:35 PM                                                                                                                    
AT EASE                                                                                                                         
1:12:29 PM                                                                                                                    
CS FOR SENATE BILL NO. 138(FIN) am                                                                                            
     "An  Act relating  to the  purposes,  powers, and  duties                                                                  
     of   the   Alaska   Gasline   Development    Corporation;                                                                  
     relating   to  an  in-state  natural  gas   pipeline,  an                                                                  
     Alaska  liquefied  natural  gas project,  and  associated                                                                  
     funds;  requiring state  agencies and  other entities  to                                                                  
     expedite  reviews  and  actions related  to  natural  gas                                                                  
     pipelines  and  projects;  relating  to  the  authorities                                                                  
     and  duties  of the  commissioner  of  natural  resources                                                                  
     relating  to a North Slope  natural gas project,  oil and                                                                  
     gas and  gas only leases,  and royalty gas and  other gas                                                                  
     received   by  the  state   including  gas  received   as                                                                  
     payment  for the production  tax on gas; relating  to the                                                                  
     tax  on oil and  gas production,  on oil production,  and                                                                  
     on  gas  production;   relating  to  the  duties  of  the                                                                  
     commissioner  of  revenue   relating  to  a  North  Slope                                                                  
     natural  gas  project and  gas  received  as payment  for                                                                  
     tax;  relating  to confidential  information  and  public                                                                  
     record  status  of  information  provided  to or  in  the                                                                  
     custody  of the Department  of Natural Resources  and the                                                                  
     Department   of   Revenue;  relating   to   apportionment                                                                  
     factors  of the Alaska Net  Income Tax Act; amending  the                                                                  
     definition  of gross value  at the 'point of  production'                                                                  
     for  gas  for purposes  of  the  oil and  gas  production                                                                  
     tax;  clarifying that the  exploration incentive  credit,                                                                  
     the oil  or gas producer  education credit, and  the film                                                                  
     production  tax credit may not  be taken against  the gas                                                                  
     production  tax paid in gas;  relating to the oil  or gas                                                                  
     producer  education credit;  requesting  the governor  to                                                                  
     establish  an  interim   advisory  board  to  advise  the                                                                  
     governor  on  municipal  involvement  in  a  North  Slope                                                                  
     natural  gas project;  relating to  the development  of a                                                                  
     plan  by  the  Alaska  Energy  Authority  for  developing                                                                  
     infrastructure  to  deliver  affordable energy  to  areas                                                                  
     of  the state  that  will  not have  direct  access to  a                                                                  
     North  Slope natural  gas pipeline  and a  recommendation                                                                  
     of   a   funding   source   for   energy   infrastructure                                                                  
     development;  establishing the  Alaska affordable  energy                                                                  
     fund;  requiring the commissioner  of revenue  to develop                                                                  
     a  plan  and  suggest  legislation   for  municipalities,                                                                  
     regional  corporations,  and residents  of  the state  to                                                                  
     acquire  ownership  interests in  a North  Slope  natural                                                                  
     gas  pipeline  project;  making  conforming   amendments;                                                                  
     and providing for an effective date."                                                                                      
JOE BALASH,  COMMISSIONER,  DEPARTMENT  OF NATURAL  RESOURCES,                                                                  
related  that  SB  138  was  the  enabling   legislation  that                                                                  
supported  all   of  the  concepts  and  documents   that  the                                                                  
committee   had  been   reviewing  the   last  several   weeks                                                                  
regarding a  major natural gas  project. He stated  that there                                                                  
were a  number of  specific concepts  and principles  embodied                                                                  
in  the  Heads  of  Agreement  (HOA)  and  the  Memorandum  of                                                                  
Understanding  (MOU)  that  the  state  would  pursue  in  the                                                                  
Alaska  liquefied Natural  Gas  project (AK  LNG)  agreements.                                                                  
He reported  that  the department  would  provide a  sectional                                                                  
analysis  and  describe  how  the  legislation   provided  the                                                                  
tools  for DNR,  the  Department  of  Revenue (DOR),  and  the                                                                  
Alaska Gasline  Development Corporation  (AGDC) to  accomplish                                                                  
the agreements that had been outlined in the HOA.                                                                               
MICHAEL  PAWLOWSKI, DEPUTY  COMMISSIONER,  STRATEGIC  FINANCE,                                                                  
DEPARTMENT  OF REVENUE,  pointed  out that  the House  Finance                                                                  
Committee  had  listened  to  many  hours  of  testimony  from                                                                  
consultants  regarding  the  HOA  and the  MOU.  He  clarified                                                                  
that the  flow chart (copy  on file)  that was distributed  to                                                                  
members should  have been referenced  as originating  from DNR                                                                  
and DOR.                                                                                                                        
Mr.  Pawlowski   relayed  that   during  his  review   of  the                                                                  
legislation,  he would refer to  the flow chart and  sectional                                                                  
analysis  (copy on file)  for HCS CSSB  138 (RES) provided  to                                                                  
the  committee.  He  directed  the  committee's  attention  to                                                                  
Section 1 of the legislation found on page 3, line 2.                                                                           
Co-Chair Stoltze  requested that  during the presentation  the                                                                  
departments  address  prior  concerns  that  had  been  raised                                                                  
during the committee's public testimony on the bill.                                                                            
Mr.  Pawlowski   agreed   and  noted  that   there  were   two                                                                  
particular  areas of concern  that would  be addressed  during                                                                  
the sectional analysis.                                                                                                         
In  response  to   a  question  by  Co-Chair   Austerman,  Mr.                                                                  
Pawlowski  responded that  he would be  referring to  language                                                                  
in  the  bill,  the sectional  summary,  and  the  Summary  of                                                                  
Changes (copy on file).                                                                                                         
Mr.  Pawlowski   explained  that   previous  discussions   had                                                                  
focused on  the three "P's" that  were necessary to  advance a                                                                  
liquefied   natural   gas   (LNG)    project.   The   enabling                                                                  
legislation  had to  allow  the state  to participate  in  the                                                                  
project,  establish  a  process  to  negotiate  the  project's                                                                  
enabling  contracts,   and  define   the  percentage   of  the                                                                  
state's share  of the  project. He pointed  out that  the bill                                                                  
was broken  up into three general  areas; the first  described                                                                  
how the state  would participate  in the project. He  spoke to                                                                  
Section  1  of  the  bill  and  related  that  it  amended  AS                                                                  
31.25.005,  which  were  the  powers  and duties  of  AGDC  as                                                                  
enacted  by  the  prior legislature.   He related  that  HB  4                                                                  
provided  for  narrow  and  targeted   participation  for  the                                                                  
state  in a specific  North  Slope Gas  project. He  explained                                                                  
that  Section 1  expanded  the  powers of  AGDC  to perform  a                                                                  
dual  mission  and  provided  flexibility   to  the  board  to                                                                  
advance  the small  diameter pipeline  project  and the  large                                                                  
scale AK LNG  project. He cited  page 3, lines 2 through  4 of                                                                  
the bill:                                                                                                                       
     …develop    and   have    primary   responsibility    for                                                                  
     developing  natural gas  pipelines,  an Alaska  liquefied                                                                  
     natural    gas   project,   and   other    transportation                                                                  
     mechanisms to deliver natural gas…                                                                                         
Mr. Pawlowski  noted that  it granted  AGDC a broader  purpose                                                                  
as the "lead  agency in developing  the commercial  agreements                                                                  
as a public  corporation." He  related that subsections  2 and                                                                  
3 were added  to Section 1 to  give AGDC further direction  in                                                                  
developing the projects for the purpose of delivering in-                                                                       
state gas  and provide  economic benefits  and revenue  to the                                                                  
Mr. Pawlowski  added  that subsection  3, lines  9 through  11                                                                  
authorized AGDC to:                                                                                                             
     …assist  the  Department  of Natural  Resources  and  the                                                                  
     Department  of  Revenue  to  maximize  the value  of  the                                                                  
     state's  royalty natural  gas, natural  gas delivered  to                                                                  
     the state as payment of tax…                                                                                               
Mr. Pawlowski  referenced  subsection 4,  page 3 beginning  on                                                                  
line  13 and  pointed  out  that subsection  4  contained  the                                                                  
existing  language  from HB  4 related  to  advancing the  in-                                                                  
state  natural   gas  pipeline   and  the   new  language   in                                                                  
subsection  5  advanced  the  Alaska   Liquefied  Natural  Gas                                                                  
Project  (AK   LNG).  He  pointed   to  a  key  provision   of                                                                  
subsection 5 on line 24 through line 28 and read:                                                                               
     …if  the  corporation  provides   a  service  under  this                                                                  
     paragraph   to  the  state,   a  public  corporation   or                                                                  
     instrumentality  of the  state,  a political  subdivision                                                                  
     of  the  state,  or another  entity  of  the  state,  the                                                                  
     corporation  may not charge a  fee for the service  in an                                                                  
     amount  greater than  the amount  necessary to  reimburse                                                                  
     the corporation for the cost of the service…                                                                               
Mr. Pawlowski  elaborated  that the  administration  requested                                                                  
the  language  to  explicitly  prohibit  AGDC  from  profiting                                                                  
from its  services to the state.  He continued with  Section 2                                                                  
on page  4 and  stated that  it provided  conforming  language                                                                  
to  the  structure  of  AGDC  and  recognized  that  AGDC  was                                                                  
acting in  the "best interest"  of the state for the  purposes                                                                  
delineated  in Section  1. In  addition,  on page  4, line  19                                                                  
the language  reiterated that AGDC  would have a dual  mission                                                                  
to advance  an in-state  natural  gas pipeline  or the AK  LNG                                                                  
Mr. Pawlowski  moved to  Section 3 beginning  on page  4, line                                                                  
21, which  was new and removed  a provision from the  original                                                                  
HB   4  legislation   that   allowed   the   Commissioner   of                                                                  
Department  of Natural  Resources (DNR)  and the  Commissioner                                                                  
of Department  of Revenue  (DOR)  to serve  on the AGDC  board                                                                  
after  the project  under the  Alaska Gasline  Inducement  Act                                                                  
(AGIA)  had been abandoned.  The original  language  bracketed                                                                  
on  page 4  lines,  27 through  31  was deleted.  He  detailed                                                                  
that the  prohibition recognized  a potential conflict  in the                                                                  
relationship  between  DOR and  DNR  as gas  owners  utilizing                                                                  
the  services of  the  corporation  [AGDC] that  provided  the                                                                  
services.  He  ensured  the  committee  that  the  legislation                                                                  
contained  language  in  later  sections  that  established  a                                                                  
working  relationship  between  the departments  and  AGDC  in                                                                  
order to advance the project together.                                                                                          
1:24:04 PM                                                                                                                    
Mr. Pawlowski  turned to the  newly added Section  4 beginning                                                                  
on  page  5, lines  1  through  5  and pointed  out  that  the                                                                  
section contained  clarifying language  that "a public  member                                                                  
of  the AGDC  board  was not  required  to be  or  has been  a                                                                  
registered  voter,  and was  not  required  to reside  in  the                                                                  
Mr. Pawlowski  related  that Section  5 beginning  on page  5,                                                                  
lines 6  through 22 was  a new section  related to the  powers                                                                  
of  AGDC and  that it  added some  important  parts. He  noted                                                                  
that the language on page 5, line 8 directed the board to:                                                                      
     …maximize the efficient use of state resources…                                                                            
Mr.  Pawlowski explained  that since  AGDC  was advancing  two                                                                  
projects  the   administration  guided  the  board   to  avoid                                                                  
duplicative   expenditures  for   the  state  when   possible.                                                                  
Conversely,  subsection 2, beginning  on line 9 mandated  that                                                                  
     …establish    appropriate     separation    within    the                                                                  
Mr. Pawlowski  explicated  that the board  needed to  maintain                                                                  
"appropriate  firewalls"  between  the  sensitive  information                                                                  
of  two   projects   "not  governed   under  the   cooperation                                                                  
agreements."  He  furthered that  subsection  (d)  on page  5,                                                                  
lines 15  through 19 authorized  the board to appoint  program                                                                  
directors  for the  two  projects that  reported  to the  AGDC                                                                  
executive director.                                                                                                             
Mr.  Pawlowski examined  Section  6 on  page  5, beginning  on                                                                  
line 22.  He stated  that the section  amended the  provisions                                                                  
regarding  legal  counsel for  AGDC  and Section  7  contained                                                                  
the   "substantive"   changes.   He  acknowledged   that   the                                                                  
Department  of Law  (DOL)  provided the  commercial  attorneys                                                                  
and commercial  and  technical expertise  for the  negotiation                                                                  
process.  He  elaborated that  Section  6  and 7  intended  to                                                                  
recognize  that  the AK  LNG  project  was a  larger  endeavor                                                                  
that required  collaboration between  the different  agencies.                                                                  
The  administration  wanted  unified  legal  counsel  for  the                                                                  
multiple  agreements involved  in the  negotiations. He  noted                                                                  
that AGDC retained the authority  to retain legal  counsel and                                                                  
that Section  7 clarified  that the  attorney general  was the                                                                  
counsel  for  AGDC   when  involved  in  the   development  of                                                                  
contracts  for  AK LNG.  The attorney  general  would  provide                                                                  
legal counsel  to DOR,  DNR, and AGDC  to maintain "a  unified                                                                  
legal voice."                                                                                                                   
Mr. Pawlowski  cited page  5, line  31 to page  6, line  1 and                                                                  
specified  that the attorney  general must  consult with  AGDC                                                                  
when   procuring   outside   counsel   for   legal   services.                                                                  
Typically,  DOL contractually  retained  outside counsel  that                                                                  
were  experts from  exceptional  law  firms to  provide  legal                                                                  
support for negotiations.                                                                                                       
Mr.  Pawlowski related  that  Section 8  contained  clarifying                                                                  
language that  added references for  the powers and  duties of                                                                  
AGDC in relation to the AK LNG project where needed.                                                                            
Mr. Pawlowski  stated that  beginning on  page 8, line  13 the                                                                  
legislation  included the  addition  of a new  power and  duty                                                                  
in subsection  23 that granted  AGDC the power to  be directly                                                                  
involved  in liquefaction.  He stated that  subsequent  to the                                                                  
passage  of  HB 4  there  had  been a  question  whether  AGDC                                                                  
could  be  primarily   involved  in  liquefaction.   The  bill                                                                  
authorized  AGDC  to  convey  "the  state's  interest  in  the                                                                  
liquefaction  plant." Subsection  23 gave  AGDC the  authority                                                                  
to   acquire   an   ownership   or   participation    interest                                                                  
specifically  in the  Alaska  Liquefied Natural  Gas  Project.                                                                  
He related  that subsection  24  on page 8  beginning on  line                                                                  
15  granted  AGDC   the  authority  to  enter   contracts  for                                                                  
services  related to  the  AK LNG  project after  consultation                                                                  
with  the   commissioners  of  DOR   and  DNR.  The   language                                                                  
clarified  that  the  consultative  relationship  between  the                                                                  
agencies   and  AGDC  would   be  maintained   prior   to  the                                                                  
execution  of contracts.  He  noted  that the  bill  contained                                                                  
similar language in relation to both commissioners' powers.                                                                     
In response  to a request by  Co-Chair Stoltze, Mr.  Pawlowski                                                                  
responded  that the  commercial  agreements  AGDC would  enter                                                                  
into  related  to  the  described   sections  would  not  need                                                                  
subsequent   legislative  authorization   but  would   require                                                                  
legislative  appropriations.  He  voiced  that  advancing  the                                                                  
project   required   the   "commitment    of   capital."   The                                                                  
legislative  oversight  for the  commercial  agreements  would                                                                  
be   maintained   through  the   appropriation   process.   He                                                                  
reminded  the  committee  that   AGDC  would  enter  into  the                                                                  
contracts   after  consultations   with  the  state   agencies                                                                  
clarified  on page  8, line 20.  He noted  that the  contracts                                                                  
were  dependent on  the  gas committed  by  the agencies.  The                                                                  
agreements  to  commit the  gas  for the  LNG  plant would  be                                                                  
entered  into  through  the  commissioner  of  DNR  and  would                                                                  
require  legislative  approval  on an  individual  basis.  The                                                                  
administration  attempted  to build  checks  and balances  but                                                                  
the  AGDC  commercial  contracts  were  a  corporate  activity                                                                  
with   board   oversight   and  "not   necessarily   a   state                                                                  
Mr. Pawlowski  spoke to  Section 9 of  the bill and  explained                                                                  
that the  section clarified that  the requirement for  AGDC to                                                                  
submit  a report  to the  legislature  subsequent  to an  open                                                                  
season  specifically  applied  to  the  in-state  natural  gas                                                                  
pipeline  open season  currently  in AGDC  statutes.   The  AK                                                                  
LNG  project  did  not  have  an  open  season.  He  moved  to                                                                  
Section  10  found   on  page  9,  lines  7  through   10  and                                                                  
elaborated   that  AGDC's   authority   to   be  involved   in                                                                  
liquefaction was limited to the AK LNG project.                                                                                 
Mr.  Pawlowski  referenced  Section 11  on  page 9,  lines  11                                                                  
through  15 and  stated  that the  provision  enabled AGDC  to                                                                  
share  information  with  the commissioners   of DOR  and  DNR                                                                  
related to  the AK  LNG project negotiations  "subject  to the                                                                  
limitations  of  confidentiality  agreements."  He  cited  the                                                                  
statute   on    line   15;   AS   38.05.020(b)(10)    and   AS                                                                  
38.05.020(b)(11)  and pointed  out  that the  statute was  the                                                                  
broad reference  that granted  authority to the  commissioners                                                                  
to negotiate  contracts. He  related that  Section 13,  line 9                                                                  
established a  specific fund for  the AK LNG project  as a way                                                                  
to advance  the project  and maintain  legislative  oversight.                                                                  
Therefore,  Section  12  on  page  9,  lines  26  and  27  was                                                                  
necessary  to  clarify  that money  appropriated  to  the  in-                                                                  
state  natural   gas  pipeline   fund  was  used   solely  for                                                                  
advancing  the in-state  gas pipeline  project and  maintained                                                                  
the separation of assets.                                                                                                       
1:37:38 PM                                                                                                                    
Mr. Pawlowski  addressed Section 14  on page 10, line  12 that                                                                  
revised  AGDC's authority  to  create subsidiaries  that  were                                                                  
"used  as   a  corporate  tool"   to  advance  projects.   The                                                                  
bracketed  language  on  page   10,  line  25  that  cited  AS                                                                  
10.20.146  through AS 10.20.166, which  may have been  read to                                                                  
limit subsidiary  formation  to not  for profit  subsidiaries,                                                                  
was removed  from statute.  He related that  AGDC may  use any                                                                  
"subsidiary   mechanism"  that  could   advance  the   AK  LNG                                                                  
project. In  addition, the language  on page 10, lines  17 and                                                                  
18 that related  to the state's  share of royalty  natural gas                                                                  
was  eliminated.   The  amendment  clarified   that  AGDC  may                                                                  
create subsidiaries  for  the advancement  of the project  and                                                                  
provide  infrastructure,  but  the  state  agencies  (DOR  and                                                                  
DNR) "retained  its role  as the  constitutional custodian  of                                                                  
the state's royalty or tax resource."                                                                                           
Mr. Pawlowski  identified Section  15 on page 11, lines  6 and                                                                  
7 and  lines 21  and 22 that  made a  conforming amendment  to                                                                  
AGDC's  budgetary  reporting  to the  legislature  to  include                                                                  
the  AK LNG  project.  He reported  that  Section  16 added  a                                                                  
definition  of  the  Alaska  liquefied   natural  gas  project                                                                  
according to  the HOA and MOU  agreements. He summarized  that                                                                  
Sections  1 through  16 were  the provisions  related to  AGDC                                                                  
which  reflected  how  the  state  would  participate  in  the                                                                  
project; AGDC will act as the state's corporate entity.                                                                         
Mr.  Pawlowski  discussed Section  17  beginning  on page  12,                                                                  
line  28 related  to  exemptions  to  the application  of  the                                                                  
state  procurement   code  AS   36.30.850(b).  The   amendment                                                                  
exempted  contracts for  professional  and technical  services                                                                  
by the DNR  and was added in  support of AS 38.05.020(b)  (10)                                                                  
and  AS 38.05.020(b)  (11)  related to  the  authority of  the                                                                  
commissioners to negotiate contracts.                                                                                           
Commissioner  Balash  related  that  highly  specialized  work                                                                  
would   be   conducted   subsequent   to   adoption   of   the                                                                  
legislation  and required aggressive  timelines. In  addition,                                                                  
the department  needed  some latitude that  was not  contained                                                                  
in  the  procurement  code  when  evaluating  contractors.  He                                                                  
felt  that   under  the  "magnitude   of  the  project,"   the                                                                  
department  did not  want to  be constrained  by choosing  the                                                                  
lowest  bidder in  every  situation. He  pointed  out that  in                                                                  
cases  of some  of the  "upstream  work" related  to off  take                                                                  
and  balancing  agreements  and  "downstream"  work  involving                                                                  
the management  of capacity and  "disposition" of  the state's                                                                  
share  of  natural  gas and  LNG  the  department  needed  the                                                                  
flexibility  to   work  "quickly  and  nimbly"   and  exercise                                                                  
discretion  when  evaluating potential  bidders.  He  believed                                                                  
the  amendment   was  a   "fairly  narrow   crafting   of  the                                                                  
Mr. Pawlowski  noted that  there was  an additional  exemption                                                                  
for DOL on page 13 beginning on lines 1 through 5.                                                                              
Mr.  Pawlowski  reviewed  Section  18  starting  on  page  13,                                                                  
lines  6 through  25 that  established  the Alaska  Affordable                                                                  
Energy  Fund  as  a  special  non-dedicated   account  in  the                                                                  
general   fund  used   to  develop   infrastructure  for   the                                                                  
delivery  of  energy to  areas  in the  state  without  direct                                                                  
access  to a  North Slope  natural  gas pipeline.  He  offered                                                                  
that there  were areas  in the Railbelt  that were  relatively                                                                  
far from  direct access  to the gas.  The language  recognized                                                                  
that not all  parts of the state  would have direct  access to                                                                  
the  resource.  The  fund helped  provide  resources  for  the                                                                  
infrastructure   to  deliver  energy  commensurate   with  the                                                                  
areas  of the  state with  direct  access to  natural gas.  He                                                                  
stated that  the amount  designated in the  fund was  found in                                                                  
subsection  (b), line  14 and  amounted to 20  percent of  the                                                                  
money received  from the  state's royalty  gas after  payments                                                                  
to  the   Alaska  permanent  fund   under  AS  37.13.010.   He                                                                  
reminded the  committee that the  project's deposits  into the                                                                  
permanent  fund resulted from  royalty gas  as a share  of gas                                                                  
that would  be liquefied and  portions would be exported.  The                                                                  
revenues  DNR received  after the  payment of  costs would  be                                                                  
the  royalty  revenue.  Twenty five  percent  of  the  royalty                                                                  
revenue would  be deposited  into the  Permanent Fund  and the                                                                  
Alaska Affordable  Energy  Fund would receive  20 percent  out                                                                  
of  the remaining  75  percent of  the royalty.  He  estimated                                                                  
that the energy fund would receive $180 million per year.                                                                       
Mr.  Pawlowski  remarked that  the  next several  sections  of                                                                  
the legislation  focused on the  process. He moved  to Section                                                                  
19,  beginning   on  page   13,  line   26  that  amended   AS                                                                  
38.05.020(b);  the Alaska  Land  Act and  expanded the  powers                                                                  
of the  commissioner of  DNR. He stated  that the  substantive                                                                  
changes  began  on page  14,  subsection  10.  The  subsection                                                                  
allowed  the  DNR   commissioner  to  enter  into   commercial                                                                  
agreements  of not more  than two years  duration for  project                                                                  
services  related to a  North Slope  Natural Gas project.  The                                                                  
agreements  would   not  require  legislative   approval.  The                                                                  
agreements  were  "operating  agreements"  that  governed  the                                                                  
project  while   the  "firm  agreements"  that   advanced  the                                                                  
project  were   developing.  He   noted  that  the   operating                                                                  
agreements  and  the "precedent  agreement"  with  TransCanada                                                                  
governed  the project  during  the two  years  of the  PreFeed                                                                  
(pre-front-end  engineering and  design work)  phase prior  to                                                                  
the firm  transportation  services agreement,  which  actually                                                                  
was the  full commitment  to  TransCanada. He  added that  the                                                                  
principle  level  agreements  between  DNR and  the  producers                                                                  
relating  to off-take were  interim agreements  and would  not                                                                  
come back to the state for approval.                                                                                            
1:50:54 PM                                                                                                                    
Commissioner   Balash   noted   that  Co-Chair   Stoltze   had                                                                  
instructed  the  department  to highlight  concerns  that  had                                                                  
been previously  raised in public  testimony. He related  that                                                                  
the amendment  granted the department  the authority  to enter                                                                  
into the  agreements in  the near-term.  Once the project  was                                                                  
operational  the  department  retained  the  ability  to  deal                                                                  
with short-term  needs such  as a disruption  in service.  The                                                                  
longer-term  contracts  that  obligated  the  state  for  long                                                                  
periods  of  time, as  specified  in  subsection  11  required                                                                  
legislative  approval.  He pointed  to subsection  12 on  page                                                                  
15,  line 7  and  noted that  the  provisions  allowed DNR  to                                                                  
enter  into  confidentiality  agreements  with  other  project                                                                  
entities    that    required    the    information    remained                                                                  
confidential  until  the  contracts   were  ready  for  public                                                                  
review and  approval. He  cited Page 15,  line 12 and  relayed                                                                  
that  the terms  of a  proposed final  contract  must be  made                                                                  
available  to   the  public  at  least  90  days   before  the                                                                  
proposed effective  date. He added  that beginning on  line 17                                                                  
the confidentiality  agreements  allowed  the commissioner  of                                                                  
DNR  to share  confidential  information during  the  contract                                                                  
negotiation   process  with  the   legislature  in   executive                                                                  
Co-Chair  Stoltze  requested that  the  commissioner  describe                                                                  
for the public what confidentiality agreements were.                                                                            
Commissioner   Balash  replied   that   as  various   contract                                                                  
options    were   considered    with    commercial    entities                                                                  
confidentiality  agreements  would be  entered  into in  order                                                                  
not to avoid  compromising or  exposing the entities  position                                                                  
and  negotiating  strategies  to its  competitors.  He  stated                                                                  
that  the department's  goal was  to bring  forward  contracts                                                                  
that  would be  approved by  the legislature  and  that if  it                                                                  
was  to be  successful,  the  department  had to  confer  with                                                                  
both legislative  bodies regarding  the terms of the  contract                                                                  
to   determine  the   confines   of  acceptability   for   the                                                                  
Mr. Pawlowski  added  that the administration  understood  the                                                                  
need  for guidance  from the  legislature and  the ability  to                                                                  
interact  with the  legislature  and its  agents  in order  to                                                                  
move the  process forward.  He  pointed to  Page 15, lines  17                                                                  
through   21    and   stressed    the   importance    of   the                                                                  
administration's  ability  to  confer  with  the  legislature,                                                                  
its agents,  staff, or  consultants and  keep the  information                                                                  
updated. He  believed the provisions  invited the  legislature                                                                  
to have an  active role in the  development of the  project as                                                                  
it unfolds.  He added  that on  page 15,  lines 22 through  26                                                                  
the provision  directed the DNR  commissioner to consult  with                                                                  
AGDC on  specific contracts  related to  project services  for                                                                  
gas  treatment,   the gas   treatment  plant,  the   pipeline,                                                                  
liquefaction  facility,  marine terminal,  and  transportation                                                                  
Mr. Pawlowski  addressed Section  20 on  page 15, line  29 and                                                                  
noted  that  it amended  Section  19.  He indicated  that  the                                                                  
bill  contained  two series  of  effective  dates.  One is  an                                                                  
immediate   effective   date  that   authorized   confidential                                                                  
negotiations  and  the other  effective  date  was January  1,                                                                  
2015  related  to  tax  provisions.   On  page  17,  lines  29                                                                  
through  31,  Section  20 allowed  the  DNR  commissioner,  in                                                                  
consultation  with the  DOR commissioner,  to take custody  of                                                                  
gas delivered  to the state under  AS 43.55.014(b),  to manage                                                                  
project   services  for   the  gas.   The  provision   created                                                                  
efficiency  in allowing  the DNR  commissioner  to manage  tax                                                                  
gas on  behalf of the  state while  managing royalty  gas. All                                                                  
of the same  precedents and conditions  on tax gas  applied to                                                                  
royalty gas.                                                                                                                    
Commissioner  Balash  interjected that  DOR  would absorb  the                                                                  
management costs of the provision on behalf of DNR.                                                                             
Mr. Pawlowski  reported  that Section  21 contained  additions                                                                  
to   some   of  the   agreements   and   contracts  under   AS                                                                  
38.05.020(b)  (11).   He  reminded  the  committee   that  the                                                                  
statute   referred   to   the  contracts   that   would   need                                                                  
legislative  approval for  a specified  duration  of time.  He                                                                  
delineated  that the section  required  that any agreement  or                                                                  
contract  negotiated  under  38.05.020(b)   (11)  granted  the                                                                  
state  access to  the data  developed under  the contracts  if                                                                  
the  commissioner  of  DNR  determined  the  project  was  not                                                                  
adequately  progressing. The  state's terms  of access  should                                                                  
not  be  more   restrictive  than  any  other   party  to  the                                                                  
agreement.  He  read  the  language   on  Page  18,  lines  13                                                                  
through 15:                                                                                                                     
     (b) A  proposed agreement  or contract associated  with a                                                                  
     North  Slope  natural  gas  project  may  not  include  a                                                                  
     provision  that changes  a  payment in  lieu of  property                                                                  
     tax  on property  that was  previously  taxable under  AS                                                                  
Mr.  Pawlowski  explained that  AS  43.56. was  the  statewide                                                                  
oil and gas  property tax statute.  Article 9, Sections  3 and                                                                  
4 of the  Alaska Constitution  clearly stated that  exemptions                                                                  
to property  tax were  provided  by law not  by contract.  The                                                                  
administration   added  the   limiting   language  to   assure                                                                  
municipalities  that  the administration  was  not  attempting                                                                  
to  make property  tax  changes that  were  prohibited by  the                                                                  
Constitution.  He  added  that  the  governor   established  a                                                                  
municipal  advisory   group  via  administrative   order.  The                                                                  
advisory  group was  comprised of  mayors  or their  designees                                                                  
and would  engage in  an open  public process  to discuss  the                                                                  
property tax  issues related to  the project, such  as payment                                                                  
in lieu  of tax and  impact payments  designed to address  the                                                                  
infrastructure  impact on municipalities.  The  administration                                                                  
would bring  the advisory  group recommendations  back  to the                                                                  
legislature  for   authorization  of  any  necessary   statute                                                                  
changes   before    engaging   in   property    tax   contract                                                                  
2:06:29 PM                                                                                                                    
Mr. Pawlowski  related that Section  22 on page 18,  beginning                                                                  
on  line  16 was  conforming  language  to  a DNR  exploration                                                                  
incentive credit.  The broad production  tax (AS 43.44)  cited                                                                  
on line  28 was deleted  and replaced  with AS 43.55.011  (the                                                                  
traditional   payment   of  production   tax).   The   section                                                                  
clarified   that  a  credit   could  be   levied  against   AS                                                                  
43.55.011  but   not  against  a   payment  where   the  state                                                                  
received  a share of  gas as royalty.  The situation  appeared                                                                  
in  several other  sections  throughout  the bill  related  to                                                                  
the  film   tax  credit   and  some   education  credits.   He                                                                  
summarized  that if  a producer  was paying  its tax with  gas                                                                  
the credits could not be used to offset a tax payment.                                                                          
Mr.  Pawlowski turned  to  Section 23  beginning  on page  19,                                                                  
line 1.  He pointed  out that  the section  permitted the  DNR                                                                  
commissioner  to  propose  modifications  to  existing  leases                                                                  
that related to switching  between taking royalty gas  in kind                                                                  
or in  value, provided  a method  to establish  a fair  market                                                                  
value,   and   clarified   what   must   happen   before   the                                                                  
commissioner  can make  changes to  the lease.  He noted  that                                                                  
page  18, lines  21 through  24  allowed the  modification  of                                                                  
net profit  sharing and  sliding scales  unless they  transfer                                                                  
value.  The   commissioner  must   determine  that   the  rate                                                                  
yielded the  same value under  the terms the state would  have                                                                  
received before a modification.                                                                                                 
Commissioner  Balash emphasized  that the  section of  statute                                                                  
was giving  the commissioner  of DNR  the authority to  modify                                                                  
leases.  He reported  that DNR  had leases  in place for  over                                                                  
50 years  and a great  many of those  involved in the  project                                                                  
had  been  in  place  since  the  original  sale  in  1969  at                                                                  
Prudhoe Bay.  The department could  only go as far as  the law                                                                  
allowed in  making changes  to the leases.  He voiced  that AS                                                                  
38.05.180  (hh)  [Section  23  of  the  bill]  authorized  the                                                                  
commissioner  of  DNR to  modify  leases under  very  specific                                                                  
circumstances  following the  determination process  specified                                                                  
in   AS  38.05.180   (ii).   The   authorities   granted   the                                                                  
commissioner  needed to  be broad  enough  to accommodate  any                                                                  
variety  of circumstances.  The department  could not  predict                                                                  
what other projects would present themselves in the future.                                                                     
Commissioner  Balash referenced DNR's  ability to switch  back                                                                  
and forth  between  in kind and  in value.  He explained  that                                                                  
LNG  was sold  under very  specific long-term  agreements.  He                                                                  
expected  that the AK  LNG contracts  would be long-term.  The                                                                  
state's  ability to switch  options needed  to be  constrained                                                                  
in  order  to avoid  commercial  instability  that  created  a                                                                  
lower  price climate.  Currently,  the state  had  90 and  180                                                                  
day  options  to  switch.  He  believed   that  under  certain                                                                  
circumstances  the  state   wanted  to  retain  the  right  to                                                                  
switch  albeit, under  longer  periods of  time  and in  other                                                                  
circumstances  the  state  would want  to  permanently  modify                                                                  
the right  to switch.  He noted that  Section 24 repeated  the                                                                  
modifications   to  the  commissioner's  authority   on  lease                                                                  
changes  related  to  gas  delivered  to the  state  under  AS                                                                  
43.55.014 found on Page 20, line 21.                                                                                            
Commissioner  Balash spoke to Section  25 on page 21,  lines 4                                                                  
through 12  that amended AS 38.05.182.  He expounded  that the                                                                  
original  statute  directed  DNR to  take  all of  the  states                                                                  
resource  royalties  in  value  except  for oil  and  gas.  He                                                                  
observed  that the statute  directed DNR  to take its  gas in-                                                                  
kind unless  the commissioner  finds that  taking the  royalty                                                                  
in value  was in  the state's  best interest.  He mentioned  a                                                                  
study  DNR conducted  last year  that determined  a number  of                                                                  
risks  were  associated with  taking  gas  in kind  and  could                                                                  
eventually  lead to  a finding  that  taking gas  in kind  was                                                                  
not  in the  best interest  of the  state.  He qualified  that                                                                  
the department  was  aware of the  issues with  taking gas  in                                                                  
kind and  held discussions  with the  counterparties  involved                                                                  
in the  project. The issue  was viewed  as a "major  stumbling                                                                  
block".  He   expressed  major   concerns  with  the   state's                                                                  
ability to  manage capacity, market  LNG, and receive  a price                                                                  
equal   to  the   state's   counterparties.   The  issue   was                                                                  
addressed in  the HOA in 8.3.1  wherein each of the  companies                                                                  
individually  agreed to  negotiate disposition  agreements  at                                                                  
the  state's request.  The  agreements  allowed  the state  to                                                                  
leverage   the  producers   marketing   expertise  and   sales                                                                  
agreements to sell the state's share of the LNG.                                                                                
2:17:00 PM                                                                                                                    
Commissioner  Balash stated  that in some  instances it  could                                                                  
be  more   beneficial  for  the   state  to  market   its  LNG                                                                  
independently.  He cited the  new language  on page 21,  lines                                                                  
8 through 12 that read:                                                                                                         
     It  is not  in the  best interest  of the  state to  take                                                                  
     royalty  on gas in money  from a lessee transporting  gas                                                                  
     in  the North  Slope natural  gas project  if the  lessee                                                                  
     has  committed  to  dispose  of  or  market  the  state's                                                                  
     royalty  gas  taken   in  kind  on  the  same  terms  and                                                                  
     conditions as the lessee markets or disposes of the                                                                        
     lessee's gas.                                                                                                              
Commissioner  Balash reported that  the language was  added in                                                                  
the previous  committee  in an  attempt to  add limits to  the                                                                  
circumstances  under  which the  state  takes  its royalty  in                                                                  
kind.  He thought  that the  issue might  be better  addressed                                                                  
or improved  through the House  Finance Committee  process. He                                                                  
pointed   out  that  the   HOA  contemplated   the  risk   and                                                                  
addressed mechanisms  to mitigate  the risk for the  state. He                                                                  
thought that  better language could  be crafted that  provided                                                                  
"sideboards"   and  established   a  comfort  level   for  the                                                                  
legislature  and  public  regarding  the  circumstances  under                                                                  
which the state would take its gas in kind.                                                                                     
Mr. Pawlowski  turned  to Sections  26, 27,  28, and 29,  that                                                                  
added language  that referenced  AS 43.55.014(b); the  statute                                                                  
that  allowed   production  tax   to  be  paid  in   kind.  He                                                                  
explained  that  each section  governed  how DNR  disposed  of                                                                  
royalty  gas. The disposition  and  sale of  tax gas would  be                                                                  
governed  exactly the  same  as the  disposition  and sale  of                                                                  
oil. The  bill was  leveraging the  same statutory  precedents                                                                  
regarding the disposition of gas in kind.                                                                                       
Mr.  Pawlowski  moved  to  Section  30 on  page  22,  line  26                                                                  
through page  23, line 6 and  reported that the section  added                                                                  
definitions  employed  throughout  the  section.  He  directed                                                                  
attention to  the definition for  "project services"  found on                                                                  
page 23,  line 4. He  explained that  the definition  was used                                                                  
in the  definition  of "consultation"  between  DNR and  AGDC.                                                                  
He read  the language, "services  provided by a gas  treatment                                                                  
plant, pipeline,  liquefaction facility…"  and noted  that the                                                                  
language  reflected  the  types  of agreements  such  as,  the                                                                  
firm  transportation  services  agreement   with  TransCanada;                                                                  
subject  to legislative  approval for  use of  a pipeline.  He                                                                  
interjected  that the  contract  allowing the  state's use  of                                                                  
the  LNG plant  would occur  between  the state  and AGDC  and                                                                  
was also subject to legislative review and approval.                                                                            
Mr.  Pawlowski  related that  Sections  31,  32, and  33  were                                                                  
conforming  amendments  to  DNR. He  explained  that  agencies                                                                  
must expedite  a review on permit  applications from  any AGDC                                                                  
Mr. Pawlowski  indicated that  Section 34  dealt with  DOR. He                                                                  
reiterated  the  process of  the  agreements outlined  in  the                                                                  
legislation.  He  exemplified  the  relationship  between  the                                                                  
state  and TransCanada  and detailed  that if  SB 138  passed,                                                                  
the state  would  enter into  a precedent  agreement using  AS                                                                  
38.05.020b  (10), which  limited the  agreement's duration  to                                                                  
two years.  Subsequently,  a term sheet  attached as  "Exhibit                                                                  
C" to  the MOU would  be used to  create operating  agreements                                                                  
between  the state  and  TransCanada.  He addressed  some  key                                                                  
items in  the MOU. He  detailed that  the state would  approve                                                                  
the work  plan and  budgets according  to the terms  contained                                                                  
in  the  term  sheet  and  the  relationship  set  up  by  the                                                                  
precedent agreement.  The initial  PreFEED stage of  the joint                                                                  
venture  agreement was  a cost  sharing  activity. The  state,                                                                  
in consultation  with  AGDC would  review  plans submitted  by                                                                  
TransCanada  and approve or  deny expenditures. The  precedent                                                                  
agreement  would   also  commit   the  state  to   paying  for                                                                  
development  costs plus  the AFUDC (allowance  for funds  used                                                                  
during  construction) [a  rate of  7.1 percent].  He  reminded                                                                  
the committee  that the development  costs were the  costs the                                                                  
state  would  have encumbered  if  it  developed  the  project                                                                  
alone.  A  comparable  agreement  would be  struck  with  AGDC                                                                  
over the  LNG portion  of the  project. The  next step  in the                                                                  
process  was development  of  a firm  transportation  services                                                                  
agreement  between  TransCanada  and AGDC  lasting  more  than                                                                  
two  years  and  governed  under  AS  38.05.020b  (11),  which                                                                  
required  legislative  approval.   He  restated  that  as  the                                                                  
agreements  were   developing  the  legislation   granted  the                                                                  
administration    authority   to    consult   directly    with                                                                  
legislators.  He believed that when  the final contracts  were                                                                  
presented  to the  legislature  for  approval  90 days  before                                                                  
the  effective date,  the  agreements would  withstand  public                                                                  
2:27:30 PM                                                                                                                    
Mr.   Pawlowski   communicated    that   the   rest   of   the                                                                  
legislation's  focus  was on  the  state's percentage  of  the                                                                  
project related  to the tax sections  under DOR. He  indicated                                                                  
that  the legislation  was establishing  a tax  rate up  front                                                                  
which   provided  predictability   for   investors.  How   the                                                                  
contract  terms related  to the  tax rate  would be  developed                                                                  
with  the  legislature  and the  public  through  the  process                                                                  
established in the legislation.                                                                                                 
Mr.  Pawlowski turned  to  Section 34  beginning  on page  23,                                                                  
line  28 that  exempted DOR  from confidentiality  related  to                                                                  
information  under AS  38.05.020(b)  (12),  which enabled  DNR                                                                  
to share  information with  DOR. He  reported that Section  35                                                                  
on  page 24,  line 11  required  public notifications  on  any                                                                  
taxes  paid  as  gas and  would  be  noticed  in  the  Revenue                                                                  
Source Book.  The administration  believed that receiving  gas                                                                  
in kind needed to be a transparent process.                                                                                     
Mr.   Pawlowski  addressed Section  36  on page  26, lines  26                                                                  
and  27 that  contained  conforming  confidentiality  language                                                                  
under   AS  38.05.020(b)   (11)  and   AS  38.05.020(b)   (12)                                                                  
relating to the commissioner of DOR.                                                                                            
Mr.  Pawlowski  observed  that   Section  37  related  to  the                                                                  
duties of  the commissioner of DOR.  He cited page 28,  line 1                                                                  
that  modified  the  powers  of the  commissioner  of  DOR  to                                                                  
consult  with  the  DNR  commissioner  on  the  management  of                                                                  
contracts and the management of tax as gas.                                                                                     
Mr.  Pawlowski  spoke  to Section  38  on  page 29,  lines  11                                                                  
through  14 relating  to  AS 43.55.014(b),  the  reference  to                                                                  
tax  as   gas,  which   was  a  conforming   amendment   to  a                                                                  
previously  amended  section.  He noted  that  throughout  the                                                                  
legislation,  there were  two core  sections; AS  38.05.020(b)                                                                  
(10) and  AS 38.05.020(b)  (11) concerning  the powers  of the                                                                  
DNR   commissioner   to   negotiate,   and   AS   43.55.014(b)                                                                  
providing  for gas in kind.  The majority  of the rest  of the                                                                  
sections  were   conforming  to  the  two  concepts   and  the                                                                  
references  to  the  statutes  were  repeated  throughout  the                                                                  
Mr.  Pawlowski moved  to Section  39,  page 29,  line 15  that                                                                  
exempted   the   taxpayer   confidentiality   provisions   and                                                                  
allowed  the  department  to  disclose   the  taxpayer's  name                                                                  
paying  the production  tax  in gas,  the amount  of gas,  and                                                                  
the lease the production came from.                                                                                             
Mr.  Pawlowski   addressed   Section  40   that  amended   the                                                                  
corporate  income tax  statutes to  conform to  paying tax  in                                                                  
gas. He  cited page 30,  lines 1 through  6 that affected  the                                                                  
sales  factor   of  the  state's  corporate  income   tax  and                                                                  
explained  that subsection  (ii)  clarified  for the  taxpayer                                                                  
that  DNR would  not  "deem" the  payment  of tax  as a  sale.                                                                  
Similarly,   the   state   does   not   tax    "inter-company"                                                                  
transactions  as  sales. He  noted  that subsection  (iii)  on                                                                  
page 30, line  4 clarified that  the fees on the project  were                                                                  
not sales on corporate income tax.                                                                                              
Mr. Pawlowski  drew attention  to Section  41, page 31,  lines                                                                  
2 through  3 that  clarified gas  paid as  a tax was  included                                                                  
in the extraction  factor. He  elucidated that the  payment of                                                                  
gas  as tax  was still  produced  gas and  the  administration                                                                  
wanted  the  gas   included  in  the  corporate   income  tax.                                                                  
Section  41 "ensured  an  adequate  and appropriate  share  of                                                                  
corporate  income  tax  for  the  state."  He  commented  that                                                                  
Section   42   amended    the   actual   production   tax   AS                                                                  
43.55.011(e),  on page 31,  line 31, and  read "…on and  after                                                                  
January 1,  2022…" He shared that  after 2022, the tax  on oil                                                                  
remained  at 35 percent  provided for  in SB  21 [OIL AND  GAS                                                                  
PRODUCTION  TAX  - Adopted  2013]  but the  tax  on gas  would                                                                  
change  to 13  percent  of the  gross value  at  the point  of                                                                  
production.   He  delineated  that   the  administration   had                                                                  
selected  2022  in order  to  allow  the  tax ceiling  on  gas                                                                  
produced  on the  North Slope  and used  in-state and  subject                                                                  
to the  same tax ceiling  as Cook Inlet  gas tax to  expire as                                                                  
specified in  statute. Taxes on  gas were transferred  through                                                                  
the  sales  contract  on  to  rate  payers.  Currently,  North                                                                  
Slope gas  was contractually involved  to supply the  Interior                                                                  
energy project.  The administration  did not want  to increase                                                                  
the cost  of the  contracts. In  addition, the  administration                                                                  
wanted  to  provide a  predictable  planning  environment  for                                                                  
both  the   in-state  and   AK  LNG   project  so   investment                                                                  
decisions would  not be affected  in the future. He  qualified                                                                  
that  the  13  percent  production   tax  established  in  the                                                                  
legislation  was in  value and  not in  kind. The  legislation                                                                  
established   limited   circumstances   where   in  kind   was                                                                  
authorized to pay tax as gas.                                                                                                   
Mr. Pawlowski  spoke to Section  43 beginning on page  32 that                                                                  
adjusted the  minimum tax. He cited  page 33, lines  3 through                                                                  
35 that  provided that  the minimum  tax would  only apply  to                                                                  
oil on and after  January 1, 2022.  The tax on gas  production                                                                  
would  be  13 percent  of  the  gross value,  well  above  the                                                                  
minimum set at 4 percent of gross value.                                                                                        
2:40:17 PM                                                                                                                    
Mr. Pawlowski  pointed  to Section  44 on page  33 that  added                                                                  
AS 43.55.014,  related  to the  payment of  production tax  in                                                                  
gas  and  page 33,  line  28  that specified  the  option  was                                                                  
available after January 1, 2022. He read the following:                                                                         
     "…the  department  shall  allow  a producer  to  make  an                                                                  
     election,  under regulations  adopted by the  department,                                                                  
     to  pay  in  gas  the  production   tax  levied  by  this                                                                  
     section  in lieu  of  the tax  otherwise  levied for  the                                                                  
Mr. Pawlowski  emphasized the importance  of page 33,  line 31                                                                  
to page 34, and read:                                                                                                           
     …An election under this subsection applies only to gas                                                                     
     produced from oil and gas leases modified under AS                                                                         
Mr.  Pawlowski  explicated that  the  option to  take  royalty                                                                  
gas in  kind was only  available for  leases modified  by DNR.                                                                  
The   provision  had   two   important  effects   from   DNR's                                                                  
perspective;  it was consistent  with the HOA. The  commitment                                                                  
to accept  in kind was subject  to the development  of project                                                                  
enabling  contracts   and  satisfactory  agreements   for  the                                                                  
disposition  of the state's gas.  Secondly, it allowed  DNR to                                                                  
participate  with DOR at  the negotiation  table. The  state's                                                                  
production  tax   applied  to  more  than  just   state  land,                                                                  
without  the  commitments  to  produce  gas  and  without  the                                                                  
ability  to interact  with  the  leaseholder the  state  would                                                                  
not  be   able  to  obtain  the   contracts  to  provide   the                                                                  
certainty  to take  gas in  kind. The  administration  limited                                                                  
the  provision solely  to  leases the  commissioner  modified.                                                                  
He noted  that the  provision did  not apply  to the  National                                                                  
Petroleum  Reserve  Alaska,   which  were  federal  lands  and                                                                  
Mr. Pawlowski  turned  to page 34,  line 4  that set the  rate                                                                  
and  page 34,  line 9,  which allowed  DNR to  manage the  gas                                                                  
["the custody   and  disposition  of  gas  delivered   to  the                                                                  
Mr.  Pawlowski relayed  that  page 34,  line  12 through  page                                                                  
35,  line 10  established how  DOR  would deal  with the  over                                                                  
payment  or underpayment  of taxes and  in particular  allowed                                                                  
the interest  rate to be  paid in value  or in kind.  Sections                                                                  
45  and  46  were  amendments  to  the  education  credit.  He                                                                  
stated  that the language  on page  35, line  20 was  specific                                                                  
to  the  production  tax since  credits  could  not  be  taken                                                                  
against gas  in kind.  The provision  included an addition  of                                                                  
qualified   expenditures   for  the   education  credit   that                                                                  
included nonprofit  regional  training centers  recognized  by                                                                  
the  Department   of  Labor  and  Workforce  Development.   He                                                                  
stated  that Section  46  contained  similar language  due  to                                                                  
the repeal and reenactment of the education credit.                                                                             
Mr.  Pawlowski  addressed  Section 47  on  page 36,  line  30,                                                                  
which clarified  that the  production tax  was to be  taken in                                                                  
value for the purposes of the credit.                                                                                           
Mr. Pawlowski  spoke to Section 48  and related that  it was a                                                                  
long section  because the  state had  multiple production  tax                                                                  
segments;  the  North Slope,  middle  earth, Cook  Inlet,  gas                                                                  
produced  and  used in  the  state,  and  Cook Inlet  Gas.  He                                                                  
noted  the section  directed the  taxpayer on  how to pay  the                                                                  
tax.  He delineated  that the  state currently  collected  tax                                                                  
in monthly  installments based on  estimates and were  settled                                                                  
at the  end of  each year.  On page  42, line  4 through  page                                                                  
44, line  19 the language specified  that the tax  ceiling for                                                                  
middle  earth applied  beyond  January  1, 2022  and  directed                                                                  
the taxpayer on how to pay the monthly tax.                                                                                     
Mr. Pawlowski  discussed Section  49 and Section 50  that were                                                                  
conforming   changes  related   to  the  monthly   installment                                                                  
payments on  the calculation of  interest on underpayments  or                                                                  
Mr.  Pawlowski pointed  out  that Section  51  and Section  52                                                                  
were  conforming  amendments  related to  a  private landowner                                                                  
royalty  owner. The state  was not  amending production  taxes                                                                  
for private landowners.                                                                                                         
Mr.  Pawlowski  spoke  to Section  53  on  page 47,  lines  22                                                                  
through  24 that  required reporting  by the  taxpayer on  the                                                                  
amount of gas produced from a lease for which tax is levied.                                                                    
Mr.   Pawlowski    commented   that   Section    54   required                                                                  
calculation  of annual  production tax  values to clarify  the                                                                  
levy  of  tax  under  AS  43.55.011(e)  (2) for  oil  and  gas                                                                  
produced before January 1, 2022.                                                                                                
Mr. Pawlowski  stated  that Section  55 was  related to  lease                                                                  
expenditures.  He  delineated that  lease  expenditures  would                                                                  
still  be deductible  under  the  legislation  because it  was                                                                  
extremely  difficult to  determine  which portion  of a  lease                                                                  
expenditure  was made  for gas  or and  which expenditure  was                                                                  
made  for  oil.  Lease  expenditures   would  most  likely  be                                                                  
deducted from  the 13 percent  tax on  the gross value  of the                                                                  
gas. The  language would allow  for the deduction.  The result                                                                  
impacted the  oil tax revenue in  the near term but  benefited                                                                  
from  production   and  revenue  when  the  production   comes                                                                  
online.  "Lease  expenditures  were still  deductible  in  the                                                                  
calculation  of an oil  tax whether  the calculation  was made                                                                  
for gas or oil."                                                                                                                
Mr. Pawlowski  remarked that  Section 56  and Section  57 were                                                                  
related  to the  gross value  reduction established  in SB  21                                                                  
for certain  oil and  gas produced  and did  not apply  to the                                                                  
value of gas produced after January 1, 2022.                                                                                    
2:52:05 PM                                                                                                                    
Mr. Pawlowski  directed the  committee's attention  to Section                                                                  
60 and  Section 61  beginning on  page 56.  He explained  that                                                                  
the   "point  of   production"   was   the  main   factor   in                                                                  
determining  lease expenditures.  Any  expenditure  "upstream"                                                                  
of the  point of production  was a  lease expenditure  and the                                                                  
costs  were written  off. Any  expenditure  downstream of  the                                                                  
lease   expenditure  were   recovered   through  tariffs.   He                                                                  
emphasized  that  determining  the  point  of  production  was                                                                  
significant  in  order to  demark  where  deductible  expenses                                                                  
occurred  and  where the  expenses  that  were rolled  into  a                                                                  
tariff  occurred. He  cited Section  61 on  page 57, lines  25                                                                  
through  30 which  deleted  the definition  of  "the point  of                                                                  
production"  as defined  in  existing statute.  He  elaborated                                                                  
that  the  administration  wanted   to  establish  clarity  on                                                                  
where  the point of  production  for the AK  LNG project  was.                                                                  
He revealed  that the  point was "the  entrance where  the gas                                                                  
was  leaving Pt.  Thompson into  the transmission  line."  The                                                                  
administration  did not want the  point of production  to move                                                                  
downstream  so  that the  pipelines  and  portion  of the  gas                                                                  
treatment  plant  were included  as  a lease  expenditure.  He                                                                  
illuminated  that the effect of  the amendments were  to place                                                                  
the point of production upstream.                                                                                               
Mr.  Pawlowski   summarized  that   the  first  part   of  the                                                                  
legislation  guided  how the  state  would participate  in  AK                                                                  
LNG  by expansion  of the  powers  of AGDC.  The second  piece                                                                  
described  how  DNR would  lead  the process  of  negotiations                                                                  
along  with AGDC  and  work with  the legislature  to  develop                                                                  
the  contracts  slated for  legislative  approval.  The  third                                                                  
part   dealt  with   the  13   percent  tax   rate  on   gross                                                                  
production.  He noted  that after  royalty  the state's  share                                                                  
was approximately  25 percent.  He offered that the  following                                                                  
sections  were concerned  with other issues  that were  raised                                                                  
during the  bills deliberations.  He related that  Section 65,                                                                  
page  59,  lines 14  through  25  amended  the powers  of  the                                                                  
Alaska    Competitiveness     Review    Board    to    include                                                                  
recommendations  to the  legislature before  January 15,  2017                                                                  
regarding  the state's  tax structure,  rates, and  incentives                                                                  
for  oil  and  gas  production  south   of  68  degrees  North                                                                  
latitude.  The  date allowed  time  for  potential  developers                                                                  
and investors  to plan  for any potential  changes before  the                                                                  
existing incentives expired.                                                                                                    
Mr.  Pawlowski  reported  that section  66  repealed  an  AGDC                                                                  
statute  that   directed  AGDC  to  cooperate   with  a  large                                                                  
project  as long  as  it did  not delay  progress  on the  in-                                                                  
state  project.  The  statute  was  unnecessary  since  ADGC's                                                                  
purpose had been broadened to both projects.                                                                                    
Mr. Pawlowski  reported that Section 67 required  DNR to report                                                                 
to the legislature  on how to  make North Slope gas  available                                                                  
for  delivery and  use  in the  state  and recommend  ways  to                                                                  
address any risks identified in the report.                                                                                     
Commissioner   Balash  voiced   that   Section  67   addressed                                                                  
concerns  that had  been identified  centered  on the  state's                                                                  
long  term gas  needs.  The  gas project  was  anticipated  to                                                                  
last twenty  to thirty  years. He delineated  that the  demand                                                                  
for gas  in the state  was expected to  grow over time.  Since                                                                  
the   state   would   own  a   certain   percentage   of   the                                                                  
infrastructure  and gas,  the concern focused  around  how the                                                                  
states  growing gas  needs  would be  met,  who would  provide                                                                  
the  gas, and  whether  the  infrastructure's  capacity  would                                                                  
need to  be expanded or reallocated,  which created  increased                                                                  
capacity  downstream.  The  decisions   around  who  would  be                                                                  
responsible   or   how  the   gas   would  be   allocated   or                                                                  
reallocated   amongst    the   parties   currently    remained                                                                  
undecided  in negotiations.  He thought  that when the  issues                                                                  
were  addressed   in   contracts  the   required  report   and                                                                  
analysis  would   help  the   overall  process  and   contract                                                                  
ratification.  He  noted  that   DNR  supported  but  did  not                                                                  
initiate  the  reporting  provision in  the  legislation.  The                                                                  
department would  have the responsibility  for the  report and                                                                  
would  consult with  AGDC. He  felt that  the bill's  language                                                                  
left  out  some  matters that  the  committee  might  want  to                                                                  
consider.   The  questions  around   the  size  and   ultimate                                                                  
capacity  of  the pipeline  after  compression  was  added  to                                                                  
increase  capacity   needed  to   be  addressed.  A   42  inch                                                                  
pipeline  allowed  for  additional  capacity  with  additional                                                                  
compression.  A  key question  was  how much  more  additional                                                                  
capacity  the  pipeline  could handle  efficiently  until  the                                                                  
need  for  more costly  pipeline  was  necessary.  He  offered                                                                  
that there  needed to be a set  of terms and mechanisms  built                                                                  
into the  legislation that allowed  for future exploration  in                                                                  
the areas  beyond Prudhoe  Bay and  Pt. Thompson.  Discussions                                                                  
with  the   producers   concluded  that   building  a   larger                                                                  
diameter   pipeline   might  be   warranted.   The   questions                                                                  
addressing  need, cost,  and capacity needed  to be  answered.                                                                  
He  recommended  addressing  the  issue  in  the  same  report                                                                  
since some  of the same  issues linking  back to the  question                                                                  
of capacity would be examined.                                                                                                  
3:03:17 PM                                                                                                                    
Mr.  Pawlowski   spoke  to   Section  68   on  page   61  that                                                                  
established an  interim advisory board to advise the  governor                                                                  
on  municipal  involvement  as  requested   by  Mayor  Hopkins                                                                  
[Fairbanks  North Star  Borough].  The board  was  established                                                                  
through  executive  order.   He  noted  the  reference  to  AS                                                                  
44.19.028 on  page 61, line 9  that established the  board and                                                                  
felt that  the statute  was not  as "durable"  as the  statute                                                                  
employed  in the  executive order.  He noted  that the  bill's                                                                  
language    was   specifically    designed   to   match    the                                                                  
administrative   order   developed    in   consultation   with                                                                  
municipal  mayors. The  Department of  Revenue was  designated                                                                  
as  the lead  agency for  recommendations  regarding  property                                                                  
taxes in relation to the AK LNG project.                                                                                        
Mr.  Pawlowski interjected  that  the administration  did  not                                                                  
request  an  additional   appropriation  in  support   of  the                                                                  
advisory  board.  He  related  that  when  DNR  initiated  its                                                                  
royalty  study  last summer  DOR  joined  in to  leverage  the                                                                  
allocation  for  consultants  therefore,   additional  funding                                                                  
was  not  necessary.  He  notified   the  committee  that  the                                                                  
departments were creating efficiencies whenever possible.                                                                       
Mr. Pawlowski  spoke to  Section 69 and  pointed out  that the                                                                  
section  addressed the  development of  regional energy  plans                                                                  
to benefit  areas of  the state  not expected  to have  direct                                                                  
access to  a natural gas pipeline  at the direction  of Alaska                                                                  
Energy  Authority  (AEA), in  consultation  with  AGDC,  other                                                                  
energy  groups [including  Alaska Industrial  Development  and                                                                  
Export Authority (AIDEA)], and DOR.                                                                                             
Mr.  Pawlowski   stated   that  Section   70  instructed   the                                                                  
commissioner   of  DOR   to  identify   and   report  to   the                                                                  
legislature  on  financing  options for  state  ownership  and                                                                  
participation  in  a  North  Slope  natural  gas  project.  He                                                                  
noted  that  DOR was  requesting  an  additional  fiscal  note                                                                  
appropriation for the effort.                                                                                                   
ANGELA   RODELL,   COMMISSIONER,    DEPARTMENT   OF   REVENUE,                                                                  
reiterated  that  Section 70  mandated  the development  of  a                                                                  
financing options  plan. The  provision required two  reports;                                                                  
an interim  report due  before the beginning  of next  session                                                                  
to  guide   the  legislature  through   the  session   and  in                                                                  
preparation  for a  special  session and  a  final report  due                                                                  
prior  to submitting  contracts  for approval.  She  expounded                                                                  
that the  purpose of  the comprehensive  financing report  was                                                                  
to outline  all of the financing  and investment options.  The                                                                  
report   would  consider   all   of  the   state's   financial                                                                  
resources   as   well   as   investment   opportunities   from                                                                  
individuals,  regional corporations,  and municipalities.  The                                                                  
report  would  also  examine  all of  the  risks  involved  in                                                                  
financing   the  project   for   the  state   and   individual                                                                  
investors,  and  any potential  impacts  on the  state's  bond                                                                  
rating.  She informed  the committee  that  tax attorneys  and                                                                  
financial   consultants   were  needed   to   assist  in   the                                                                  
preparation  of  the report  and  required  additional  fiscal                                                                  
note appropriation.                                                                                                             
Mr.  Pawlowski noted  that the  previous  committee wanted  an                                                                  
in-depth  investigation regarding  the financing  alternatives                                                                  
in consideration  of the time  when the project advances  past                                                                  
the Pre-FEED stage.                                                                                                             
Mr. Pawlowski  moved to Section  71 beginning on page  65 that                                                                  
required  the  parties  to  the  AK  LNG  project  to  provide                                                                  
briefings   to interested   legislators,   their  staff,   and                                                                  
consultants  on the  progress  of the  project  at least  once                                                                  
every  four months  and a report  from DNR  specified on  page                                                                  
65, lines 13 through 15:                                                                                                        
     …A  briefing under  this section must  be accompanied  by                                                                  
     a written  report provided  by the Department  of Natural                                                                  
     Resources  of  the  amount  of  money the  state  may  be                                                                  
     obligated  to pay  a third  party under  an agreement  or                                                                  
     contract under AS 38.05.020(b)(10) or (11)…                                                                                
Mr.  Pawlowski reminded  the committee  that  within the  next                                                                  
two years  the precedent agreement  required the state  to pay                                                                  
development  costs  which represented  the  relationship  with                                                                  
TransCanada  and the AFUDC.  The provision  mandated that  DNR                                                                  
would  report the  amount  expenditures  at every  four  month                                                                  
briefing.  He reiterated  that the bill  contained three  main                                                                  
areas;   participation,   which    expanded   AGDC's   powers;                                                                  
process,   DNR  leads  contract   negotiations  developed   in                                                                  
consultation  with   the  legislature  requiring   legislative                                                                  
approval; and  finally, the percentage  of the state's  share;                                                                  
a 13 percent tax on gas after 2022.                                                                                             
3:12:51 PM                                                                                                                    
Co-Chair Austerman instructed the committee members to                                                                          
submit their questions in writing.                                                                                              
Mr. Pawlowski pointed out that all of the questions and                                                                         
answers from previous committee hearings were included in                                                                       
the members' bill packets (copy on file).                                                                                       
CSSB 138(FIN) am was HEARD and HELD in committee for                                                                            
further consideration.                                                                                                          
HOUSE BILL NO. 287                                                                                                            
     "An  Act approving  and  ratifying  the sale  of  royalty                                                                  
     oil  by the  State of  Alaska to  Tesoro Corporation  and                                                                  
     Tesoro   Refining   and  Marketing   Company   LLC;   and                                                                  
     providing for an effective date."                                                                                          
HB 287 was SCHEDULED but not HEARD.                                                                                             
3:15:07 PM                                                                                                                    
The meeting was adjourned at 3:15 p.m.                                                                                          

Document Name Date/Time Subjects
SB 138 Updated 4.13.14 AKLNG Project Flow Chart TC letter.pdf HFIN 4/13/2014 1:00:00 PM
SB 138
HB 197 Testimony.docx HFIN 4/13/2014 1:00:00 PM
HB 197