Legislature(1999 - 2000)
01/27/2000 10:17 AM House O&G
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* first hearing in first committee of referral
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HOUSE SPECIAL COMMITTEE ON OIL AND GAS
January 27, 2000
10:17 a.m.
MEMBERS PRESENT
Representative Jim Whitaker, Chairman
Representative Fred Dyson
Representative Gail Phillips
Representative Joe Green
Representative John Harris
Representative Brian Porter
Representative Allen Kemplen
Representative Hal Smalley
MEMBERS ABSENT
Representative Tom Brice
COMMITTEE CALENDAR
HOUSE BILL NO. 290
"An Act relating to stranded gas pipeline carriers and to the
intrastate regulation by the Regulatory Commission of Alaska of
pipelines and pipeline facilities of stranded gas pipeline
carriers."
- HEARD AND HELD
PREVIOUS ACTION
BILL: HB 290
SHORT TITLE: STRANDED GAS PIPELINE CARRIERS
Jrn-Date Jrn-Page Action
1/14/00 1924 (H) READ THE FIRST TIME - REFERRALS
1/14/00 1924 (H) O&G, RES, FIN
1/14/00 1924 (H) REFERRED TO O&G
1/27/00 (H) O&G AT 10:00 AM HOUSE FINANCE 519
WITNESS REGISTER
LORALI MEIER, Staff
to Representative Beverly Masek
Alaska State Legislature
Capitol Building, Room 128
Juneau, Alaska 99801
POSITION STATEMENT: Presented the sponsor statement for HB 290
on behalf of the House Resources Standing Committee.
MICHAEL HURLEY
ANS Gas Commercialization Group
ARCO Alaska, Inc.
700 G Street
Anchorage, Alaska
POSITION STATEMENT: Discussed HB 290.
MICHAEL BARNHILL, Assistant Attorney General
Oil, Gas & Mining Section
Civil Division (Juneau)
Department of Law
PO Box 110300
Juneau, Alaska 99811-0300
POSITION STATEMENT: Discussed HB 290.
ACTION NARRATIVE
TAPE 00-4, SIDE A
Number 0001
CHAIRMAN JIM WHITAKER called the House Special Committee on Oil
and Gas meeting to order at 10:17 a.m. Members present at the
call to order were Representatives Whitaker, Dyson, Phillips,
Green, Harris, Porter, Kemplen and Smalley. Representative Brice
was not in attendance.
HB 290-STRANDED GAS PIPELINE CARRIERS
CHAIRMAN WHITAKER announced that the legislation before the
committee is HOUSE BILL NO. 290, "An Act relating to stranded gas
pipeline carriers and to the intrastate regulation by the
Regulatory Commission of Alaska of pipelines and pipeline
facilities of stranded gas pipeline carriers." He noted that HB
393, the stranded gas enabling act, overlaps HB 290.
Additionally, the committee should have a "staff memo" from Roger
Marks, Department of Revenue, who is available on-line.
Number 109
LORALI MEIER, Staff to Representative Beverly Masek, Alaska State
Legislature, presented HB 290 on behalf of the House Resources
Standing Committee, sponsor. She explained that before any
stranded gas pipeline project can proceed, certain amendments to
existing statute are required. Therefore, HB 290 will amend the
Pipeline Act to define a stranded gas pipeline consistent with
existing state statute. House Bill 290 will clarify that the
Regulatory Commission of Alaska has the authority to regulate
only intrastate transportation of stranded gas through a stranded
gas pipeline. Export quantities will be regulated by the federal
government. She further explained that HB 290 defines a fair,
predictable and timely process to identify and dedicate
intrastate capacity in a stranded gas pipeline before one is
constructed. Furthermore, HB 290 establishes the criteria for
needed pipeline system expansions in order to accommodate
increased demand for state gas supplies.
MS. MEIER also pointed out that HB 290 will amend the Public
Utilities Act in order to clarify that stranded gas pipeline
systems are exempt from operating as public utilities. The
Right-of-Way Leasing Act will also be amended in order to limit
the requirement of common carriage for stranded gas pipeline
systems to the transportation of intrastate gas volumes only.
The bill defines the types of intrastate transportation services
that will be available in a stranded gas pipeline system.
"Collectively, these changes are intended to provide greater
certainty and predictability in the regulation of stranded gas
pipeline systems. This increased certainty will increase the
marketability of Alaska's North Slope gas and, hopefully,
facilitate expedited construction of a pipeline and related
facilities necessary to transport Alaska's stranded gas to
market." Ms. Meier offered to answer any questions.
Number 287
MICHAEL HURLEY, ANS Gas Commercialization Group, ARCO Alaska,
Inc., read the following statement into the record:
Mr. Chairman, members of the committee, for the record,
my name is Michael Hurley. I work for ARCO Alaska,
Inc., in the ANS Gas Commercialization Group in
Anchorage, and am currently assigned to manage the
commercial regulatory efforts for the Alaska North
Slope LNG Sponsor Group.
I am here today to express the sponsor group's support
for HB 290. The sponsor group, as Steve Alleman
testified to you several weeks ago, has been actively
pursuing the development of an LNG export project;
including the development of a commercial regulatory
regime which will provide the regulatory certainty our
long-term customers require, while at the same time,
meeting the needs of state and federal regulators for
adequate access and commercial oversight. House Bill
290, we believe, strikes that balance, providing the
Regulatory Commission of Alaska, clear and unambiguous
oversight of intrastate gas transportation.
Section 1 of the bill clarifies the current Right-of-
Way Leasing Act common carriage requirement that
exists to apply only to intrastate gas shipments.
The second and third sections of the bill clarify that
a stranded gas pipeline system's intrastate shipments
would be regulated under the Pipeline Act (AS 42.06),
rather than under the Public Utilities Act (AS 42.05).
In Section 4, a new subsection has been added to the
Pipeline Act creating procedures, within the RCA's
existing pipeline certification process, for
determining the amount of pipeline capacity which
should initially be set aside for the intrastate
transportation.
That process sets out distinct criteria for capacity
for Local Distribution Companies (LDCs) which must
submit their gas purchase contracts to the RCA under
the current regulations, and for industrial gas users
who must provide written comments to transport
intrastate gas volumes, supported by take-or-pay
purchase commitments with stranded gas producers.
Likewise, in Section 5 of the bill, expansions of
stranded gas pipeline may be ordered by the Commission
only if such requests for additional intrastate
capacity are supported by firm contractual commitments.
Section 6 allows the RCA to consider allowing a
reservation or similar charge for firm intrastate
transportation in the intrastate tariff.
And then, finally, Section 7 of the bill adds several
definitions with clarifying terms used in other
sections of the bill to increase the clarity.
Mr. Chairman, thank you for this opportunity to express
our support for HB 290, and if you or any members of
the committee have any questions, I'd be happy to
address those at this time, or at your convenience.
Number 511
REPRESENTATIVE GREEN posed a hypothetical situation in which the
gas line is built and the only portions considered common
carriers are those for intrastate use. Assuming the pipeline is
running close to capacity, how would expansion occur if the need
arose for a large metropolitan area or a large volume user?
Furthermore, how does HB 290 affect [such expansion] from an
investor's viewpoint?
MR. HURLEY answered that HB 290 handles the ability to expand and
the RCA to control expansion of intrastate volumes. The existing
RCA statutory authority allows the RCA to order the expansion of
systems for identified incremental use. One of the changes
encompassed in HB 290 is to add a section that limits those kinds
of additions to projects that are actually real and can support
actual volume use. He explained that gas systems, because
compression can be added, are much more expandable than the
traditional oil pipeline systems. He informed the committee that
the initial design being reviewed is around 1.3 bcf [billion
cubic feet] per day for a 7 million ton market viable project.
The expansion capabilities being reviewed are up to 1.8 bcf,
which is significant expansion capability that is already built
into the system.
REPRESENTATIVE GREEN said that satisfied his concern.
Number 667
REPRESENTATIVE KEMPLEN inquired as to the amount of gas being
modeled for state royalty and/or other in-state demand.
MR. HURLEY explained that the royalty piece has not been
differentiated. From the perspective of a sponsor group, he
expected to be buying gas from gas producers and royalty in-kind
gas from the state. He identified that as a royalty issue that
they have to deal with the state. He believed that the royalty
is the traditional 12.5 percent. From [ARCO Alaska, Inc.'s]
perspective, royalty gas would not be treated any differently
from other gas. In further response to Representative Kemplen,
Mr. Hurley explained that within the 1.3 bcf about 100 million
per day is being modeled. That is in-state demand that ARCO
Alaska, Inc. knows about.
REPRESENTATIVE KEMPLEN asked from where Mr. Hurley foresees that
100 million cubic feet per day coming.
MR. HURLEY answered that with regard to the actual usage, he
believed there is some demand along the pipeline corridor.
Currently, it is a guess. However, HB 290 establishes a
procedure for the RCA that reviews the different commitments to
gas from various communities. He pointed out that local
distribution companies that purchase gas have to have contracts
on file with the RCA anyway. He explained that when this was
being set up, it attempted to establish an administratively easy
path for the RCA. The RCA would receive contracts from the local
distribution companies, which the RCA would just add up. He
noted that there would also be a process for industrial users,
who want space available, to petition the RCA for space. In the
end, the RCA would be able to add up everything to arrive at the
initial bill for intrastate demand.
REPRESENTATIVE KEMPLEN said he understood that the project will
need some in-kind contributions such as access across state
lands. Therefore, he indicated, there would be quid pro quo such
as a specified percentage of the gas moving through the pipeline
reserve for public use. He asked: Is that something that has
been considered or modeled?
Number 891
MR. HURLEY replied no, not at this point. The state's royalty
gas is a function of the state's leases with producers. To the
best of his knowledge, a right-of-way lease for a pipeline has
not been worked in such a fashion.
REPRESENTATIVE KEMPLEN pointed out that similar types of
arrangements have been worked out with telecommunications firms.
He indicated there may be a similar opportunity with this
transportation system. He asked if Mr. Hurley knew of any other
metro gas pipeline systems in the Lower 48 or elsewhere where the
state has reserved a percentage of natural gas for public use in
exchange for access across state lands.
MR. HURLEY said he was not aware of any such agreements, although
the idea is intriguing and could be reviewed.
CHAIRMAN WHITAKER noted Representative Ogan's presence.
REPRESENTATIVE PORTER presumed that he knew what a take-and-pay
purchase commitment is, but he asked Mr. Hurley to define that
for the record.
MR. HURLEY said a take-and-pay contract is how gas is often moved
in the Lower 48. Basically, it is a commitment between a seller
and a buyer that a certain amount of gas will be taken over time
or that it will be paid for even if the gas is not needed.
REPRESENTATIVE GREEN said he understood that this line could have
common-carrier sections and sections regulated by the federal
government. He asked if Mr. Hurley saw any potential conflicts
that would result with the state's regulation of the common
carrier portion and the federal government's portions.
MR. HURLEY noted that the potential conflict is one of the
reasons for HB 290. Traditionally, there has been split
jurisdiction on lines such as the Trans-Alaska Pipeline System
(TAPS). Such jurisdiction conflicts make long-term purchasers -
in Asia for LNG - nervous. Therefore, "we" want to clarify that
up-front before going to market. He pointed out that in this
case, the Office of Fossil Energy is being looked at instead of
the Federal Energy Regulatory Commission (FERC) or the federal
jurisdiction in this line. In further response to Representative
Green, Mr. Hurley informed the committee that [ARCO Alaska, Inc.]
anticipates it will make an application for an export
authorization, which is necessary from the federal Department of
Energy (DOE) in the future.
Number 1177
REPRESENTATIVE HARRIS said he interpreted HB 290 to speak to any
project, no matter the location or what it involves with natural
gas; is that correct?
MR. HURLEY replied yes and explained that the legislation was
written in such a way to apply to other LNG projects and objects
moving gas to the Lower 48. The legislation was drafted so that
it would not be project-specific and could apply to any project
to commercialize stranded gas.
REPRESENTATIVE HARRIS inquired as to the importance of HB 290 to
the development of any gas project in Alaska.
MR. HURLEY emphasized that it is very important in the view of
ARCO Alaska, Inc. It is important that the reliability of supply
be very clear to the customers before the company approaches
them.
CHAIRMAN WHITAKER requested that Mr. Hurley explain the sense of
urgency with this.
MR. HURLEY informed the committee that the sponsor group will
approach the end of Stage 1 in mid-summer this year. In Stage 2,
some marketing actually begins. Therefore, as things progress
into Stage 2, [the sponsor group] wants to be able to set the
regulatory regime in place before going out to the markets so
that there will be the understanding that the gas promised can be
guaranteed. If ARCO Alaska, Inc., does not attempt something
this year, it will lose a year before the regime can be put in
place; therefore, the marketing effort is delayed and the project
is slowed.
REPRESENTATIVE KEMPLEN referred to page 3, lines 7-9, of HB 290
and asked Mr. Hurley to explain that language.
Number 1351
MR. HURLEY informed the committee that the language on page 3,
lines 7-9, is the existing Right-of-Way Leasing Act. The only
part of the Right-of-Way Leasing Act that was changed is located
on page 2, lines 15-19. He explained that as the drafters went
through, that section of the existing Right-of-Way Leasing Act
was repeated. In response to Representative Kemplen, Mr. Hurley
agreed that the language was from the existing Right-of-Way
Leasing Act, not HB 393.
REPRESENTATIVE KEMPLEN asked if the state would be required to
build these new connections and energy facilities. Does the
current Act say that?
MR. HURLEY said he understood that if the state requires some
interconnection or interchange facilities to move its royalty
gas, then the state needs to pay for that connection.
REPRESENTATIVE KEMPLEN inquired as to how the intrastate
consumption referred to in HB 290 is actually defined.
MR. HURLEY answered that intrastate consumption is for ultimate
consumption, which would include something like an added-value
process. He noted that he may have to defer to the Department of
Law to define that. However, he understood that when gas is
simply being liquefied it is not being consumed, but if the form
of the gas is be changed through some industrial process then
that is consumption.
REPRESENTATIVE KEMPLEN commented that he was not quite sure how
the notion of interrupt ability worked; he requested
clarification.
MR. HURLEY pointed out that traditionally in Lower 48 pipeline
service or gas service, there is differentiation between firm and
interruptible transportation. Interruptible transportation is
normally the first to be dropped if there are shortages.
Furthermore, it is normally cheaper, on a tariff basis, to get
interruptible transportation versus firm transportation. Firm
transportation usually costs more, as a tariff. Basically, [the
difference] is a question of which is dropped off first. In
further response to Representative Kemplen, Mr. Hurley indicated
that it is a standard procedure in the industry.
CHAIRMAN WHITAKER said he understood that the intrastate usage
calculation does not include Cook Inlet usage at this time. He
asked if that was correct.
Number 1571
MR. HURLEY clarified that in the numbers he had referred to
earlier, which were used for modeling purposes of 100, the Cook
Inlet usage was not included. For the legislation, the Cook
Inlet usage would be included if either the pipeline is located
nearby or a local distribution company wanted to build a
connecting spur line. The Cook Inlet usage would be included if
it was part of the RCA's.
CHAIRMAN WHITAKER said he understood, then, that it would need to
be accounted for separately under the procedure outlined by HB
290.
MR. HURLEY agreed.
CHAIRMAN WHITAKER commented that an in-state user would find it
beneficial to be in early and willing to commit to the take-or-
pay requirements. Beyond that, what is the procedure that late
entrants would face?
MR. HURLEY referred to Section 5, which addresses the expansion
capability of the system and how the RCA can order the expansion
of the system for additional intrastate use when that additional
use has been identified and committed to. He noted that such
expansion would proceed in a manner similar to that in which the
RCA currently orders expansions.
CHAIRMAN WHITAKER requested that Mr. Hurley take the committee
through the steps required for expansion as well as the numbers
of dollars associated with that. How difficult will it be to
enter after the initial take-or-pay commitments are made?
MR. HURLEY began by differentiating between the two different
types of expansions. One type of expansion is the type of
expansion which desires to extend the length of pipe
significantly. The second type of expansion is that which wants
additional capacity, when located near the pipe.
Number 1725
CHAIRMAN WHITAKER interjected and posed a situation in which a
project was built between Prudhoe Bay and Valdez. After such a
line is completed, there is a necessity in Cook Inlet. Under
such a situation, he noted the assumption that the cost of that
spur line would be borne by the users in Cook Inlet. That is not
at question. The question is the expanded capability of the line
in order to accommodate that spur situation.
MR. HURLEY said:
The additional compression that would be required along
the system to move that additional volume of gas would,
quite likely under the RCA, ... because it would be
something that the RCA would decide how to apportion
costs. Part of their [RCA] function would be to
determine the allocation of costs and how most fairly
folks should be bearing those for the intrastate
movements.
MR. HURLEY said he expected, in a situation in which additional
compression is required, that the costs of the entire system
would decrease because more volume would be moved. He explained
that those wanting an expansion would have to petition the RCA,
which would approve the expansion. Then an amended tariff would
have to be filed and approved by the RCA in order for any
intrastate movement to occur.
CHAIRMAN WHITAKER surmised that the intrastate portion would have
an effect on the interstate or export portion as well.
MR. HURLEY replied yes. An expansion would impact the cost
structure of the exports. He agreed with Chairman Whitaker that
the impact would, hopefully, be positive.
CHAIRMAN WHITAKER emphasized the importance of understanding HB
290 because communities in Alaska will be dramatically affected
by this bill.
Number 1850
MICHAEL BARNHILL, Assistant Attorney General, Oil, Gas & Mining
Section, Civil Division (Juneau), Department of Law, informed the
committee that he'd assisted the administration in identifying
some of the legal implications encompassed in HB 290. Although
he did not find anything that is legally impermissible, he did
find many legal implications that everyone should be aware of and
consider. He offered to go through those and address
Representative Kemplen's question about consumption.
REPRESENTATIVE KEMPLEN inquired as to what constitutes
consumption in terms of natural gas.
MR. BARNHILL asked where in HB 290 it refers to consumption
versus transportation. He said he did not recall consumption of
the gas being addressed in the bill.
CHAIRMAN WHITAKER commented that he believed it would be a fair
extrapolation that consumption is related to the ability to
transport that is "capacity."
MR. BARNHILL agreed with Mr. Hurley's characterization of
consumption that actual use of the gas is consumption, as opposed
to transforming it into another form for shipment.
REPRESENTATIVE KEMPLEN asked if it would preclude someone's
coming in and building an added-value processing facility.
MR. BARNHILL answered that HB 290 would not preclude someone from
building a factory in Valdez and using natural gas in-state.
However, to the extent that use was not bid in the initial open
season and there was not initial capacity reserved for it, the
entity would have to avail itself of the expansion capacity
procedures provided by HB 290. He indicated the expansion
capacity procedures can be found in Section 5.
Number 1980
CHAIRMAN WHITAKER asked at what point ultimate use of the gas is
determined. Is gas utilized in a manufacturing process
considered ultimate use, or is it simply the burning of the gas
as an energy source?
MR. BARNHILL said he was not sure to what extent HB 290 addresses
or attempts to clarify ultimate use. He believed HB 290 attempts
to provide procedures under which folks that want to use gas in-
state can approach the RCA and present take-or-pay contracts, and
therefore receive a commitment for intrastate capacity.
Additionally, HB 290 provides procedures so that those that do
not act during the initial open season can seek expansions of
intrastate capacity.
CHAIRMAN WHITAKER expressed concern in the delineation between
intrastate and interstate and the regulatory procedures adherent
to each. He referred to page 8, lines 5-7, which is the
definition of intrastate. He expressed concern with the language
"for ultimate consumption of the stranded gas within the state."
He asked if it would apply to a nitrate facility.
MR. BARNHILL stated, in his preliminary review, that if the gas
is used in a manufacturing context, in an iron ore reduction
plant, that would be an ultimate consumption of the gas. The
value-added product, the iron, would be different and could be
transported out of state. Although it could be transported out
of state, it would not transform the intrastate shipment of that
gas to an interstate shipment.
REPRESENTATIVE GREEN commented that the aforementioned definition
is not uncommon in other states. However, he understood that in
the past there was a company that had necessary rights-of-way to
get the pipeline to tidewater. He asked if Mr. Barnhill saw
anything that would lead to problems if those [rights-of-way] are
not picked up. He acknowledged that sometimes the right of
eminent domain works with a common carrier, but this proposal is
not necessarily a common carrier.
MR. HURLEY explained that the Alaska Right-of-Way Leasing Act, AS
38.35, provides for the Department of Natural Resources (DNR) to
issue rights-of-way over state land for oil and gas pipeline
purposes. He noted that the Right-of-Way Leasing Act has been
used to issue rights-of-way for gas pipelines in Alaska.
Therefore, nothing will change in that respect. With regard to
eminent domain, the Public Utilities Act delegates the power of
eminent domain to a public utility. One effect of HB 290 is that
it exempts a stranded gas pipeline carrier from the Public
Utilities Act, and therefore the stranded gas pipeline carrier
will not have the right of eminent domain. However, under the
Right-of-Way Leasing Act the pipeline builder can petition DNR
for a delegation of that power, if necessary. In further
response to Representative Green, Mr. Barnhill reiterated that
under the Right-of-Way Leasing Act a pipeline builder can seek
permission to receive a delegation of the power of eminent domain
from DNR. He informed the committee that the only time that has
been done, is in the TAPS context in 1974.
Number 2215
REPRESENTATIVE PHILLIPS asked if that right comes directly from
the department [DNR].
MR. HURLEY replied yes.
REPRESENTATIVE PORTER turned to Mr. Marks' memorandum, which he
understood to relate a concern regarding having to commit to
buying gas without knowing the prices. Why would a municipality
commit to an open-ended contract?
MR. HURLEY said that he was not sure he could answer that
question. He explained that HB 290 contemplates that in the
initial open season any municipalities or any other in-state
users would come forward with at least a three-year commitment to
transport intrastate gas. He believed that the Administration's
concern is that, "they may not be ready to make those commitments
at the time the pipeline schedules its open season for initial
commitments." He also mentioned that they may not be aware of
the full extent of the costs and transportation.
REPRESENTATIVE PORTER asked, "Isn't it up to the party of the
contract, to know what the contract terms are?"
MR. HURLEY emphasized that they may not have the contract yet.
He explained that the bill provides for a process. When a
pipeline company applies for a certificate of public convenience
and necessity, then it is left to the in-state users "to get
their act together." He did not specifically know the timeline
once the application for certificate is filed and when the
deadline for the commitments would be; those have not been
defined in this bill. He said the intention would be to resolve
that through regulation. He indicated the possibility that the
regulators may decide that it will be a one-year time line from
the date the certificate application is filed and the date the
in-state users have to get together their contracts. For some
municipalities, that will not be enough time.
REPRESENTATIVE GREEN returned to Chairman Whitaker's concern with
regard to the increase 1.3 [bcf] an to 1.8 [bcf]. That is about
a 40 percent increase, which was indicated may result in a lower
overall cost. If there had been long-term contracts at a
specified price, is there any benefit to the state?
[A new tape was inserted, and therefore Side B of Tape 00-4 is
blank.]
TAPE 00-5, SIDE A
[There are approximately three minutes of blank space at the
beginning of Tape 00-5, Side A.]
Number 0024
MR. HURLEY noted that pipeline owners have to go back to the RCA
and obtain a certificate for their expansion. Therefore, it is
not a one-time deal; it occurs whenever the system is expanded.
He noted that any party can approach the RCA and request
expansion.
CHAIRMAN WHITAKER asked whether it is correct that the economic
threshold of entry will never be lower than at this initial
point.
Number 0330
MR. HURLEY replied no, not necessarily. For example, if there is
a line from which one wanted to take more gas from an existing
cut-off in Fairbanks and the expansion only required additional
compression, the incremental cost of that compression is going to
be less than the original bill to the system.
CHAIRMAN WHITAKER said he understood. He asked if the user
making the application would pay the initial cost plus the
expansion cost.
MR. HURLEY explained that the RCA would have to review the
incremental cost and the benefit to the existing shipper in order
to ensure that the cost and benefits are fairly apportioned
between them. He could envision a case in which it would be
less.
CHAIRMAN WHITAKER commented that he could envision a case in
which it would be more. He noted that generally, the logic is as
follows: cost causer, cost payer. Therefore, he found it
difficult to entertain circumstance in which [expansion] would
not increase the cost of entry. [HB 290 was held over.]
ADJOURNMENT
The House Special Committee on Oil & Gas meeting was recessed at
11:15 a.m. in order to hear the scheduled presentations. [For
the presentations from the AK Gasline Port Authority/Plans for
Commercialization of AK North Slope Gas and the Peninsula Group
North Slope Gas Commercialization, see the 11:20 a.m. minutes for
this same date.]
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