Legislature(2007 - 2008)BARNES 124
03/20/2007 03:00 PM House OIL & GAS
| Audio | Topic |
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| Start | |
| HB177 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | HB 177 | TELECONFERENCED | |
ALASKA STATE LEGISLATURE
HOUSE SPECIAL COMMITTEE ON OIL AND GAS
March 20, 2007
3:06 p.m.
MEMBERS PRESENT
Representative Vic Kohring, Chair
Representative Kurt Olson, Vice Chair
Representative Nancy Dahlstrom
Representative Jay Ramras
Representative Ralph Samuels
Representative Mike Doogan
Representative Scott Kawasaki
MEMBERS ABSENT
All members present
OTHER LEGISLATORS PRESENT
Representative Carl Gatto
Representative David Guttenberg
Representative Craig Johnson
COMMITTEE CALENDAR
HOUSE BILL NO. 177
"An Act relating to the Alaska Gasline Inducement Act;
establishing the Alaska Gasline Inducement Act matching
contribution fund; providing for an Alaska Gasline Inducement
Act coordinator; making conforming amendments; and providing for
an effective date."
- HEARD AND HELD
PREVIOUS COMMITTEE ACTION
BILL: HB 177
SHORT TITLE: NATURAL GAS PIPELINE PROJECT
SPONSOR(s): RULES BY REQUEST OF THE GOVERNOR
03/05/07 (H) READ THE FIRST TIME - REFERRALS
03/05/07 (H) O&G, RES, FIN
03/06/07 (H) O&G AT 3:00 PM BARNES 124
03/06/07 (H) -- MEETING CANCELED --
03/08/07 (H) O&G AT 3:00 PM BARNES 124
03/08/07 (H) -- MEETING CANCELED --
03/13/07 (H) O&G AT 3:30 PM HOUSE FINANCE 519
03/13/07 (H) Heard & Held
03/13/07 (H) MINUTE(O&G)
03/15/07 (H) O&G AT 3:00 PM BARNES 124
03/15/07 (H) Heard & Held
03/15/07 (H) MINUTE(O&G)
03/19/07 (H) O&G AT 8:30 AM CAPITOL 106
03/19/07 (H) Heard & Held
03/19/07 (H) MINUTE(O&G)
03/20/07 (H) O&G AT 3:00 PM BARNES 124
WITNESS REGISTER
MARCIA DAVIS, Deputy Commissioner
Department of Revenue (DOR)
Anchorage, Alaska
POSITION STATEMENT: Presented portions of HB 177 and answered
questions.
PATRICK GALVIN, Commissioner
Department of Revenue
Anchorage, Alaska
POSITION STATEMENT: Presented portions of HB 177 and answered
questions.
BONNIE HARRIS, Senior Assistant Attorney General
Oil, Gas & Mining Section
Department of Law (DOL)
Anchorage, Alaska
POSITION STATEMENT: Answered questions on HB 177.
TOM IRWIN, Commissioner
Department of Natural Resources (DNR)
Anchorage, Alaska
POSITION STATEMENT: Responded to questions on HB 177.
DON BULLOCK, Attorney
Legislative Legal Counsel
Legislative Legal and Research Services
Legislative Affairs Agency
Juneau, Alaska
POSITION STATEMENT: Answered questions on HB 177.
ACTION NARRATIVE
CHAIR VIC KOHRING called the House Special Committee on Oil and
Gas meeting to order at 3:06:19 PM. Present at the call to
order were Representatives Kawasaki, Olson, Samuels, Doogan, and
Kohring. Representatives Dahlstrom and Ramras arrived as the
meeting was in progress. Representatives Gatto, Guttenberg, and
Johnson were also present.
3:06:42 PM
HB 177-NATURAL GAS PIPELINE PROJECT
3:07:09 PM
CHAIR KOHRING announced that the only order of business would be
HOUSE BILL NO. 177, "An Act relating to the Alaska Gasline
Inducement Act; establishing the Alaska Gasline Inducement Act
matching contribution fund; providing for an Alaska Gasline
Inducement Act coordinator; making conforming amendments; and
providing for an effective date."
MARCIA DAVIS, Deputy Commissioner, Department of Revenue (DOR),
continued her sectional analysis of the Alaska Gasline
Inducement Act (AGIA). She explained that Section 330 directs
the governor to appoint an AGIA coordinator to oversee
coordination of state agencies involved in the project, to
ensure compliance by state agencies with the provisions of AGIA,
and to coordinate with the federal coordinator of natural gas
projects in the state. This coordinator shall serve until one
year after the gas pipeline commences commercial operation. She
stated that this language is modeled after federal law and that
the coordinator answers directly to the governor.
3:10:13 PM
MS. DAVIS explained that Section 340 is modeled after federal
law and outlines requirements imposed on state agencies.
Essentially, this provision requires expeditious handling of
permits and prohibits inclusion of any discretionary term or
condition that is not required by state law.
MS. DAVIS explained that Section 400 provides a procedural
mechanism to account for matching contributions for the pipeline
inducement fund. Section 410 authorizes the commissioners of
DOR and DNR to adopt regulations to implement AGIA.
3:11:40 PM
REPRESENTATIVE SAMUELS expressed concern with the possibility
that statutory changes may affect the regulatory scheme, and
referenced prior legislative changes regarding qualified
expenditures for the production profits tax (PPT).
MS. DAVIS replied that qualified expenditures are defined in
AGIA and will be incorporated into the license, therefore will
have a contractual basis. That will give that provision
constitutional protection, she explained.
REPRESENTATIVE DOOGAN asked whether the matching contribution
fund is a non-lapsing operating budget fund.
PATRICK GALVIN, Commissioner, Department of Revenue, explained
that the fund is not a capital fund, but is a non-lapsing fund
to be used for purposes established under AGIA.
REPRESENTATIVE DOOGAN queried about the constitutionality of
this provision.
BONNIE HARRIS, Senior Assistant Attorney General, Oil, Gas &
Mining Section, Department of Law (DOL), opined that the fund
proposed by AS 43.90.400 is not unusual and is similar to other
funds for other agencies.
3:16:11 PM
MS. DAVIS explained that Section 420 contains a statute of
limitations provision that requires lawsuits challenging the
constitutionality of AGIA to be filed 90 days from the date a
license is issued. Section 430 sets forth the procedure and
rate to determine interest due the state on delinquent payments.
Section 440, the license project assurance section, provides
fiscal stability to the pipeline builders. Once the state
awards a license and construction begins, the state is limited
in its ability to extend offers to other competing proposals.
This provision contains a section which would require the state
to reimburse the original lessee for up to three times its
reasonable development costs should the state extend favorable
treatment to a competitor, she explained. She indicated that if
the state was to consider a change in the project lessee, this
provision contemplates legislative evaluation of the economic
benefits and costs attributable to extending favorable treatment
to a party other than the original lessee.
3:19:02 PM
REPRESENTATIVE GUTTENBERG asked whether the statute of
limitations contained in Section 420 is authorized by law.
MS. HARRIS opined that it is defensible to put limitations on
rights of action, but that it is uncertain whether a court would
sustain a limitation on the right to bring a constitutional
action.
3:20:44 PM
MS. DAVIS explained that the DOR anticipates some fluidity in
the project participants over the life of the project, therefore
Section 450 allows transfers of licenses in certain situations.
License transfers must be approved by the commissioners, and
transfer of royalty inducements is allowed in conjunction with a
transfer of all the licensee's other assets. Section 460 is a
fairly "boiler plate" provision on conflicting laws.
REPRESENTATIVE SAMUELS asked whether there were discussions
about the possibility of allowing project proposals to grow and
develop before a final exclusive lessee is determined so as to
allow a better examination of which project is preferred.
COMMISSIONER GALVIN replied that initially the state considered
a different method, but explained that the state received
feedback that interested parties wanted assurance that the state
would go with one project. He noted that there were concerns by
interested parties that a party could spend time and money, only
to have the state choose another licensee later in the process.
He indicated DOR had considered a staged process, but had
determined to proceed as set out in AGIA.
3:26:35 PM
REPRESENTATIVE DOOGAN observed that the license will become an
economic asset since it is transferable under Section 450.
COMMISSIONER GALVIN explained that as the project moves forward,
the commercial dynamics are going to change. He said that the
state needs to provide opportunities for the dynamic to shape
the project, and noted that the transfer provisions are
structured to protect the state's value.
3:28:14 PM
REPRESENTATIVE DOOGAN asked whether the original licensee can
sell license to another company if the provisions of Section 450
are met.
COMMISSIONER GALVIN agreed with the aforementioned scenario, and
opined that a more likely scenario is that the licensee will
bring in a partner.
3:29:11 PM
MS. DAVIS explained that AS 43.90.900 contains definitions while
Section 990 sets forth the act's short title. Sections 2
through 4 of HB 177 are conforming sections and Section 5
provides for an immediate effective date.
3:29:59 PM
MS. DAVIS explained in response to a question that proposed AS
43.90.440 does not allow the state to take back the project from
a licensee at will, and would only be activated if the state
extended favorable financial treatment to a competing gas
pipeline project. If the state wanted to take the project back
because of concerns about economics, the state would activate
the third-party arbitration clause contained in AGIA, she
explained.
COMMISSIONER GALVIN explained that if the state decided it
wanted to terminate the contract with the licensee, it would
inform that party. It is likely that the licensee would then
attempt to invoke the provisions of AS 43.90.440, and there
would likely be some negotiations. He indicated there would be
a way for the state to recover its maximum costs.
3:31:20 PM
COMMISSIONER GALVIN responded to a query about the process to
resolve differences between the commissioners of DNR and DOR by
explaining that the DOR and DNR would work together to come to a
resolution of disputed issues. If the departments could not
come to a resolution on an issue, the governor would have to
decide, he said.
TOM IRWIN, Commissioner, Department of Natural Resources (DNR)
offered his opinion that the decision making model in AGIA will
provide a healthy tension between the two commissioners and
reminded the committee that the legislature and governor will be
involved.
REPRESENTATIVE DAHLSTROM said she is satisfied with the proposal
that the commissioners of DOR and DNR be the decision-makers.
3:34:29 PM
REPRESENTATIVE RAMRAS asked how the tariff rate would adjust if
the equity shares were adjusted to allow investment by state
entities such as the Permanent Fund Corporation and Alaska
Retirement Management Board (ARMB). He said he would appreciate
further information regarding different methodologies by which
state entities can participate in the gas pipeline revenues
without compromising the state's position as the sovereign.
However, he offered his opinion that other state agencies with
some independence may be able to have some involvement and
reiterated his desire for state participation over and above the
70:30 debt-equity formula. He further reiterated his desire
that constituent groups in the state have the ability to
participate in the project in some manner. He noted that there
are many complexities regarding this issue and that it will
effect different entities in different ways. He went on to say
he also would like to see disclosure of alignment interests
related to the project, perhaps through an amendment.
3:45:06 PM
COMMISSIONER GALVIN responded that DOR will provide different
scenarios based on different tariff rate increases and
adjustments to the debt-equity ratio in order to provide for
possible investment by quasi-state agencies.
3:46:11 PM
REPRESENTATIVE RAMRAS asked for information on whether the
state's share of equity investment is diminished if the pipeline
costs rise from $20 billion to $30 billion. He offered that
interested state entities would like to know how their
investment and tariffs would be effected by rising pipeline
costs and that he would like DOR to provide some further
information on this issue.
REPRESENTATIVE SAMUELS also expressed interest in further
information on the effect of an adjustment in the debt-equity
ratio and the risks associated with participation in the
project.
3:49:14 PM
COMMISSIONER IRWIN offered his opinion that competition for
proposals is a good method to choose a project. However, there
is a risk in letting a parallel competitive process carry on too
far as parties begin to spend money and make commitments.
Furthermore, there can be a duplication of efforts if more than
one party is moving along with the process.
REPRESENTATIVE SAMUELS cautioned that it is difficult to
determine the best proposal at the beginning of a process.
COMMISSIONER GALVIN agreed this is a difficult issue, but
disagreed with any suggestion that the state will have "no idea"
which proposal is best at the beginning of the project. He
noted that the process has been designed to give the state a
very good idea of which project to choose, but agreed there is
no guarantee as to which project is the best one.
REPRESENTATIVE SAMUELS noted that the decision making process
may be difficult as the producers will all have many of the same
attributes, such as experience and costs, at the beginning of
the project. This may make it hard to determine which entity
will do the best job, he indicated.
3:54:47 PM
COMMISSIONER GALVIN opined that it would be favorable if all the
producer proposals are similar. However, he said he believes
that the proposals will likely be somewhat different from each
other. He said the state is trying to create an opportunity for
parties in addition to the producers to come forward with a
proposal. He reiterated his belief that the interested parties
want a commitment at the beginning of the process.
3:56:47 PM
REPRESENTATIVE DOOGAN noted that while there is an extensive
review of an initial licensee's qualifications, the process by
which a license can be transferred appears to involve a less
rigorous examination and questioned whether some provisions of
the original criteria should be added to the transfer process.
CHAIR KOHRING assigned the aforementioned issue to
Representative Dahlstrom's sub-committee. He expressed some
concern about the possible lengthy term of the AGIA coordinator
and asked about the administrative support the coordinator would
receive.
COMMISSIONER GALVIN explained that the position is designated
for life of project. However the person in that position would
serve at the pleasure of the governor. The fiscal note
accompanying AGIA contemplates funding of four positions in the
coordinator's office.
DON BULLOCK, Attorney, Legislative Legal Counsel, Legislative
Legal and Research Services, Legislative Affairs Agency, told
the committee he would be the drafter as HB 177 moves through
committee. He offered that the bill is structured into five
basic articles which address AGIA's purpose, the license process
and cash inventive, the shipper inducements, miscellaneous
provisions, and definitions. He directed the committee to
proposed AS 43.90.110, the section that provides for the state's
matching contributions of $500 million. He explained that the
matching funds are paid in two intervals. The first interval is
from the time the license is issued to the end of the first open
season. During that time, the state will provide a 50 percent
match to licensee funds expended. If there are matching funds
remaining after the first interval, the state can match licensee
funds spent up to 80 percent, he explained. He suggested the
committee may want to consider requiring the license application
to indicate how much the licensee plans to spend through the
first open season. He went on to say that this section also
refers to a state training program for gas pipeline related jobs
and suggested that this reference needs to be clarified as it is
being offered as an incentive category.
4:06:51 PM
MR. BULLOCK suggested that the proposed Section 120 regarding
abandonment of the project be moved to a later section of the
bill. He opined that Section 130, which requires the
commissioners to commence a public process within three months
of the bill's effective date, is problematic if the process does
not begin within the three months. He suggested that wording
this as an intent section at the end of the bill could be
preferable.
REPRESENTATIVE RAMRAS requested some further information
regarding how to take some of the subjectivity out of the
criteria evaluation process. He referred to proposed AS
43.90.130's provisions regarding the evaluation of application
and asked for some guidance as to how to set forth evaluation
criteria.
MR. BULLOCK suggested that this issue is policy driven, and one
criteria may be to maximize the well-head value to provide more
PPT and royalty revenues to the state. He noted that there may
be proposals for two routes, each with different cost overrun
concerns that will be difficult to compare due to the differing
nature of the projects. Another consideration is the
availability of gas for in-state consumers and whether the state
could request that off-take points be specified in the
application. He offered his belief that the committee consider
its priorities for this project, and advised that the bill
contain these provisions in statute so that the commissioners of
DNR and DOR can consider the legislative priorities in
evaluating license applications. He noted that the evaluation
criteria need to be defensible if there is a challenge to the
decision.
4:16:01 PM
MR. BULLOCK reviewed the bill sections that relate to the
evaluation criteria. First, he noted that the license
application requirements are in proposed AS 43.90.140. Second,
section 170 contains the application evaluation criteria. Last,
he stated there is some uncertainty with the timing contained in
Section 180, which requires notice and review in a 60 day
period. He said that the notice for public comment comes after
the evaluation criteria, but queried whether the intent was for
the public to see all the applications the commissioners deemed
as qualified, or whether the commissioners will submit only
their favored application for public review. He suggested this
be clarified. He went on to discuss the issue regarding the
"30th legislative day" and the problem that arises if an
application is submitted with fewer than 30 days left in the
regular legislative session. As the bill is written, an
application will carry over into the next year's legislative
session if submitted when there are fewer than 30 days of the
session remaining. He explained that the timing is in the hands
of the commissioners and that he is considering this issue,
especially in conjunction with its relationship to special
legislative sessions.
REPRESENTATIVE DOOGAN asked what would happen if the legislature
had a 60 day review period.
MR. BULLOCK reminded the committee that special sessions are
limited to 30 days, although the legislature has discretion to
call more than one special session. He noted that the issue is
how many legislative days will be available to review an
application.
4:18:31 PM
REPRESENTATIVE GATTO asked if the language could be changed to
accommodate timing concerns.
MR. BULLOCK said that he understands that the intent of HB 177
is to get the gas pipeline project started in an expeditious
manner, and that intent may effect the timing provisions in the
statute so that applications can be submitted without the
applicant having to wait until the next regular or special
session.
REPRESENTATIVE DAHLSTROM asked for clarification as to whether a
submitted, but incomplete, application will be considered.
MR. BULLOCK replied that some applications will be weeded out as
non-responsive, while others may require additional information.
The commissioners will review all responsive applications to
choose the one they deem best for presentation to the
legislature. If the legislature does not disapprove, the
application will go forward. In response to a question, he
agreed there are ways to word these provisions so as to express
a preference for a particular date or time period.
REPRESENTATIVE DOOGAN asked whether the provision giving the
legislature 30 days to disapprove the license is a standard
approach.
MR. BULLOCK replied that an issue that arose in prior gas
pipeline discussion was the issue of executive power and
legislative power. He offered that some consider the type of
contractual agreement contemplated by AGIA as an executive
function. In that case, the decision of who to award the
license to would be subject to legislative review. He opined
that by enacting AGIA, the legislature would be consenting to
allow the executive branch to take the lead, while reserving for
itself the right to review the license award. He went on to say
that proposed AS 43.90.210 covers licenses for the in-state and
out-of-state portions of the line and suggested that there may
be further review of this by persons experienced in tariff
matters.
MR. BULLOCK discussed the possibility that the section
authorizing the AGIA project coordinator be moved to section two
of the bill. He went on to say that there are issues to
consider when a person is appointed to a position by the
governor, such as whether the governor has the ability to remove
that person from the appointed position. He also suggested that
there be minimum qualifications required for this position and
that the coordinator be authorized to hire additional experts.
He suggested the bill be amended to reflect that the AGIA
coordinator is under the governor's authority.
4:26:10 PM
MR. BULLOCK said he is unsure how the royalty inducement
provisions of AS 43.90.310 operate, but said that his
expectation is that the producer will not want to commit gas
that cannot go into the gas pipeline. He opined that this
provision was intended to give some security as to how much gas
the producer will have available for the gas pipeline.
MR. BULLOCK reviewed the gas production tax exemption in Section
320. There may be a constitutional issue if the tax rate is
locked into the contract, and the legislature later changes the
tax rate, since Article I, Section 15 of the Alaska State
Constitution prohibits impairment of contracts, he explained.
This bill does not attempt to lock a tax rate into the contract,
but provides a remedy through an exemption if the tax rates
increase. He opined that the exemption is in reality a tax
credit. He suggested that another option would be to exempt a
portion of the production commodity from taxation. He offered
his opinion that an exemption approach is more in accord with
examples of exemptions in Article 9, Section 4, of the Alaska
State Constitution. He opined that AGIA is a general law which
the legislature has the ability to reconsider.
4:30:14 PM
MR. BULLOCK explained that a special fund is not a dedicated
fund and that this can be made clear in the language of the
bill.
REPRESENTATIVE RAMRAS asked about the remedies for state if a
qualified applicant does not show commitment at the time of open
season.
MR. BULLOCK replied that this would likely come under the
abandonment section of the bill, and noted the purpose of open
season is for the applicant to show commitment to the project.
REPRESENTATIVE RAMRAS asked about the remedies available to the
state if the process does not go beyond open season and what
type of inducement components apply to the open season time
period.
MR. BULLOCK indicated that the current litigation surrounding
the Point Thompson lease termination litigation may set
precedent in this area as those leases were withdrawn by the
state due to lack of development. He said that AGIA provides
incentives for shippers to commit to the gas.
REPRESENTATIVE RAMRAS expressed serious concern as to how the
state will induce the producers to proceed with development upon
reaching open season.
REPRESENTATIVE DAHLSTROM expressed some skepticism with the
likelihood that the producers will walk away from the project.
REPRESENTATIVE SAMUELS opined that there is a significant
difference between taking away an undeveloped area such as Point
Thompson, and taking away a lucrative and developed area such as
Prudhoe Bay from a producer. He expressed concerns as to the
remedies and options available to the state if there were
difficulties during the second open season. He noted that
economic incentives can change and make a planned project less
lucrative.
MR. BULLOCK noted that leases are a matter of contract and can
be renegotiated.
REPRESENTATIVE DOOGAN expressed concerns as to whether there
would be enough gas committed at open season to go forward with
the gas pipeline.
COMMISSIONER IRWIN relayed his opinion that it was important for
the state to act to encourage gas pipeline development. He
opined that the business world will be likely to desire
participation in a project of this size.
4:47:54 PM
REPRESENTATIVE RAMRAS reiterated his concern as to the
inducement component of AGIA at the critical period of time
surrounding open season. He also expressed concern about
inducement to actually connect to the gas pipeline.
COMMISSIONER GALVIN said that the state cannot anticipate today
exactly what the dynamics will be at the time of open season.
Therefore, there has been much consideration as to how to make
the producers commit to this project in light of the many
unknowns. The approach of AGIA is to move through and eliminate
the uncertainties as much as possible, he explained. That is
why the state is providing support through the risky period
before open season. He said that at that point more will be
known about the project costs. He opined that given the
options, the best approach for the state is to get to the point
of open season.
REPRESENTATIVE RAMRAS opined that the legislative process is
designed to anticipate and correct problems. He expressed
concern regarding the lack of inducement at the time of open
season and suggested that the legislative process address this.
COMMISSIONER IRWIN cautioned that the aforementioned approach
can cause some difficulties.
4:58:24 PM
REPRESENTATIVE GATTO opined that the free market is an incentive
for development, particularly in Prudhoe Bay because non-
development of gas affects the ability to remove and ship oil.
He opined that if the state gives the producers enough of a
reason, the gas development will happen.
5:00:34 PM
REPRESENTATIVE SAMUELS noted that one approach is to use the
open season to provide a tax break, but that there are many
complexities in how to use a tax as leverage.
COMMISSIONER GALVIN set forth that AGIA has been designed to
allow commercial forces to be the primary drivers of
development. The hope is that by creating a project, the
producers can make their own decision as to whether to
participate or not, he explained. If the project is not
developed despite favorable economics, the state's approach may
depend on the details of the situation because at present there
are unknowns, he indicated.
REPRESENTATIVE GATTO reminded the committee that the federal
government also wants the gas pipeline project to happen and it
may provide some assistance in the area of inducements.
[HB 177 was held in committee.]
ADJOURNMENT
There being no further business before the committee, the House
Special Committee on Oil and Gas meeting was adjourned at 5:06
p.m.
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