Legislature(2007 - 2008)SENATE FINANCE 532

04/25/2007 09:00 AM Senate FINANCE


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09:04:15 AM Start
09:06:04 AM SB104
10:55:13 AM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+= SB 104 NATURAL GAS PIPELINE PROJECT TELECONFERENCED
Heard & Held
Sectional Analysis Continued:
Administration's Gas Team
+ Bills Previously Heard/Scheduled TELECONFERENCED
                            MINUTES                                                                                           
                    SENATE FINANCE COMMITTEE                                                                                  
                         April 25, 2007                                                                                       
                           9:04 a.m.                                                                                          
                                                                                                                                
                                                                                                                              
CALL TO ORDER                                                                                                               
                                                                                                                                
Co-Chair Bert Stedman convened the meeting at approximately                                                                     
9:04:15 AM.                                                                                                                   
                                                                                                                                
PRESENT                                                                                                                     
                                                                                                                                
Senator Lyman Hoffman, Co-Chair                                                                                                 
Senator Bert Stedman, Co-Chair                                                                                                  
Senator Charlie Huggins, Vice Chair                                                                                             
Senator Joe Thomas                                                                                                              
Senator Kim Elton                                                                                                               
Senator Fred Dyson                                                                                                              
Senator Donny Olson                                                                                                             
                                                                                                                                
Also Attending:  MARCIA DAVIS, Deputy Commissioner, Department                                                                
of Revenue; PATRICK GALVIN, Commissioner, Department of Revenue;                                                                
                                                                                                                                
Attending via Teleconference:  There were no teleconference                                                                   
participants.                                                                                                                   
                                                                                                                                
SUMMARY INFORMATION                                                                                                         
                                                                                                                                
SB 104-NATURAL GAS PIPELINE PROJECT                                                                                             
                                                                                                                                
The Committee heard from the Department of Revenue and the                                                                      
Department of Natural Resources. The bill was held in Committee.                                                                
                                                                                                                                
9:06:04 AM                                                                                                                    
                                                                                                                                
                                                                                                                                
     CS FOR SENATE BILL NO. 104(JUD)                                                                                            
     "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."                                                                                      
                                                                                                                                
                                                                                                                                
This was  the forth hearing  for this bill  in the  Senate Finance                                                              
Committee. The  Committee continued  hearing a sectional  analysis                                                              
of Chapter 90, added by Section 1 of the legislation.                                                                           
                                                                                                                                
9:06:28 AM                                                                                                                    
                                                                                                                                
          Chapter 90. Alaska Gasline Inducement Act                                                                             
     …                                                                                                                          
     Article 2. Alaska Gasline Inducement Act License.                                                                          
     …                                                                                                                          
          Section    43.90.200.   Certification    by   regulatory                                                              
     authority and project sanction. (page 14, line 9)                                                                          
                                                                                                                                
MARCIA  DAVIS,   Deputy  Commissioner,   Department  of   Revenue,                                                              
characterized this  section as "the  stick" that  provides another                                                              
deadline  that the  license  holder must  meet.  She reminded  the                                                              
Committee  of  the "one  firm  deadline"  that would  require  the                                                              
holder  of the  Alaska Gasline  Inducement Act  (AGIA) license  to                                                              
hold an  open season  to obtain  commitments  to ship natural  gas                                                              
through the proposed  pipeline within 36 months from  the date the                                                              
license   was   issued.   Additionally,    the   licensee's   AGIA                                                              
application  must contain a  "date certain"  in which  the license                                                              
would  submit  its  request for  certification  from  the  Federal                                                              
Energy Regulatory Commission (FERC).                                                                                            
                                                                                                                                
9:07:08 AM                                                                                                                    
                                                                                                                                
Ms. Davis  explained that Section  43.90.200(a) on page  14, lines                                                              
10  through  14,  would  require   that  the  applicant,  once  it                                                              
receives   a  FERC   certificate,   must   "actually  accept   the                                                              
certificate and  go forward." She initially deemed  this provision                                                              
"odd"  as  she assumed  that  once  a  party  applied for  a  FERC                                                              
certificate,  it would  accept the  awarded certificate.  However,                                                              
she  learned  that  in  the  consideration   process,  FERC  would                                                              
commonly  impose certain  conditions  requiring  the applicant  to                                                              
change specific  design aspects  or perform other  work. Objection                                                              
and  requests  for  reconsideration  of these  conditions  by  the                                                              
applicant was not infrequent.                                                                                                   
                                                                                                                                
Ms.  Davis  stated  that  once  the  reconsideration  process  was                                                              
completed,  FERC "is  done with  you and  it's as  good as  you're                                                              
gonna get it."  In this instance, an applicant  could maintain its                                                              
objection and  file a  challenge with the  U.S. District  Court of                                                              
Appeals, and subsequently  with the U.S. Supreme  Court, and which                                                              
could result in a lengthily process.                                                                                            
                                                                                                                                
9:08:35 AM                                                                                                                    
                                                                                                                                
Ms. Davis  relayed that  the provision  of subsection  (a) "struck                                                              
balance"  to  stipulate   that  the  applicant  must   accept  the                                                              
certificate once all administrative appeals were exhausted.                                                                     
                                                                                                                                
9:08:50 AM                                                                                                                    
                                                                                                                                
Senator Elton  asked the consequences  if the licensee  refused to                                                              
comply with the provision of subsection (a).                                                                                    
                                                                                                                                
9:08:59 AM                                                                                                                    
                                                                                                                                
Ms. Davis responded  that the party would have violated  a term of                                                              
its AGIA  license and  the State  would activate  the default  and                                                              
violation provisions.                                                                                                           
                                                                                                                                
9:09:17 AM                                                                                                                    
                                                                                                                                
Senator  Elton  understood  that   the  most  stringent  violation                                                              
provision  would  allow  the  State  to  attempt  to  recover  any                                                              
portion of the $500 million incentive payments made to date.                                                                    
                                                                                                                                
Ms. Davis  added that  the license could  be revoked  and reissued                                                              
to a  different party  and the property  and data collected  could                                                              
be seized.                                                                                                                      
                                                                                                                                
9:09:41 AM                                                                                                                    
                                                                                                                                
Senator Elton asked if this would require a court ruling.                                                                       
                                                                                                                                
Ms. Davis  answered that  ultimately the  matter would  be decided                                                              
in court; however  only after a 90-day informal  "talk-it-through"                                                              
process between  the Executive Branch  and the licensee  failed to                                                              
bring consensus and resulted in the State revoking the license.                                                                 
                                                                                                                                
9:10:08 AM                                                                                                                    
                                                                                                                                
Co-Chair Stedman  asked the commonality  of provisions  similar to                                                              
the stipulation  that the licensee "shall accept  the certificate"                                                              
in business relationships involving the FERC.                                                                                   
                                                                                                                                
9:10:35 AM                                                                                                                    
                                                                                                                                
Ms. Davis  was unsure and indicated  she would provide  a response                                                              
at a later time.                                                                                                                
                                                                                                                                
9:11:26 AM                                                                                                                    
                                                                                                                                
Ms.  Davis  continued  the  sectional  analysis  summarizing  that                                                              
Section  43.90.200(b) and  (c) related  to the  obligation of  the                                                              
applicant   to  proceed   and  sanction   the  pipeline   project.                                                              
"Sanction" was  defined in AGIA  as the commitment by  contract of                                                              
$1 billion  and "moving toward the  pipeline" and pertains  to the                                                              
construction phase.                                                                                                             
                                                                                                                                
9:11:52 AM                                                                                                                    
                                                                                                                                
Ms.  Davis   explained  that   subsection   (b)  related   to  the                                                              
obligation of the  applicant if it had credit  support to sanction                                                              
the project  within one year of  receipt of the  FERC certificate.                                                              
Ownership of the  gas reserves, commitments to  transport gas, and                                                              
private  or government  financing  necessary to  proceed with  the                                                              
project would be considered "credit support".                                                                                   
                                                                                                                                
9:12:28 AM                                                                                                                    
                                                                                                                                
Ms. Davis  noted subsection  (c) would require  that in  the event                                                              
the licensee  did not have credit  support, the State  would allow                                                              
the license  up to five years  to obtain that  support. Therefore,                                                              
regardless of the  financial circumstances, the licensee  would be                                                              
required to sanction the project within five years.                                                                             
                                                                                                                                
9:12:57 AM                                                                                                                    
                                                                                                                                
Co-Chair  Stedman opined  that this section  could potentially  be                                                              
problematic  to the State  given the  projected revenue  declines.                                                              
He asked if the  Department had considered the impact  of this and                                                              
whether  a plan  was devised  to avoid  a situation  in which  the                                                              
Alaska Permanent  Fund or  other funding  sources would  be needed                                                              
to address a revenue and expenditures imbalance.                                                                                
                                                                                                                                
9:13:37 AM                                                                                                                    
                                                                                                                                
Ms.  Davis deemed  revenue  planning  over the  next  15 years  as                                                              
"probably  the  most  important   issue  facing  the  State".  She                                                              
cautioned as follows.                                                                                                           
                                                                                                                                
     In  terms of  assessing where  the potential  cash flows  are                                                              
     going  to  come,  obviously  …  even  if  …  a  project  were                                                              
     sanctioned   within   one  year   of   having  received   the                                                              
     certificate  the State  cannot envision  cash flows  actually                                                              
     coming to the  State for the pipeline construction  period of                                                              
     time,  which has been  estimated anywhere  from seven  to ten                                                              
     years.  …  It   obviously  depends  upon  which   project  is                                                              
     selected.  Obviously  the  revenues  will  depend  upon  what                                                              
     project is selected.                                                                                                       
                                                                                                                                
     But   clearly,   once   an  application   is   selected   and                                                              
     identified,  the revenue  flow  that could  be expected  from                                                              
     that  project is  going  to have  to be  mapped  out and  the                                                              
     Department  of Revenue  will be  doing so.  That is going  to                                                              
     give clearer  definition to where  revenue gaps are  and what                                                              
     measures or  means are going to  need to be taken  to address                                                              
     that gap.                                                                                                                  
                                                                                                                                
9:14:41 AM                                                                                                                    
                                                                                                                                
Co-Chair Stedman asked why a period of five years was selected,                                                                 
as opposed to seven, three or other period of time.                                                                             
                                                                                                                                
9:14:47 AM                                                                                                                    
                                                                                                                                
Ms. Davis gave the following response.                                                                                          
                                                                                                                                
     Five  years was  identified as  a period  of time that  would                                                              
     enable  a reasonably  prudent pipeline  company that  has the                                                              
     FERC  certificate  in hand  to  address the  likely  problems                                                              
     that  we  could envision  that  would  have impaired  or  not                                                              
     enabled  a pipeline  company to  have financing  in place  by                                                              
     the time a certificate were issued.                                                                                        
                                                                                                                                
     Clearly  the  pipeco  [pipeline   company]  would  have  been                                                              
     working on  financing long  before having the  certificate in                                                              
     hand.  Namely at  the first  stage  addressing their  initial                                                              
     open  season  because clearly  that's  their  first and  best                                                              
     shot at  lining up financing for  the project in the  form of                                                              
     firm transportation commitments.                                                                                           
                                                                                                                                
     If  they  have  not  succeeded  in  gaining  sufficient  firm                                                              
     transportation  commitments  at  that  open  season,  they're                                                              
     going  to  be  going through  and  working  through  whatever                                                              
     technical  issues, whatever economic  issues are  facing them                                                              
     in terms of moving toward that FERC certificate.                                                                           
                                                                                                                                
     As  they  work  through  that  process  -  again  we  try  to                                                              
     calculate  how long  it takes  to do  reasonable field  work,                                                              
     reasonable  engineering work,  in  satisfying what  shippers'                                                              
     needs  would be  to  lining  that up.  That's  one path.  The                                                              
     other parallel  path is the pathway for  addressing obtaining                                                              
     the  federal loan  guarantees if  for some  reason they  were                                                              
     unable to  obtain the proper firm transportation  commitments                                                              
     for  reasons   beyond  their   control  and  that   were  not                                                              
     indicative of  an uneconomic project. They would  be pursuing                                                              
     the federal loan guarantee.                                                                                                
                                                                                                                                
     So again,  we sort  of mapped out  the procedural  process of                                                              
     helping - that  it would take a reasonably  prudent pipeco to                                                              
     work  along that  pathway and  we felt that  five years  gave                                                              
     them  enough time to  reasonably have  exhausted those  means                                                              
     of  establishing   loan  support,  credit  support   for  the                                                              
     project.                                                                                                                   
                                                                                                                                
     We  wanted to  pick something  that  wasn't so  short that  a                                                              
     pipeline  company would  look at  the risk  of having  put in                                                              
     all the money,  because that's what all the  money is getting                                                              
     the  FERC certificate.  If  you've got  the FERC  certificate                                                              
     that means this  company has probably expended  anywhere from                                                              
     $500  million  to $1  billion.  That's a  lot  of money  that                                                              
     they've  put at  risk in the  hope of  getting the  financial                                                              
     support.  So we  wanted  to  stick with  that  partner for  a                                                              
     prudent period of  time and we felt five years  was the right                                                              
     mark that  we could at that  point say everything  that could                                                              
     be done has been done and it's time to split up.                                                                           
                                                                                                                                
     That's  not  to say  we  can't  break  it up  sooner  because                                                              
     certainly the  State at any point in the  juncture could look                                                              
     at  the project  and say this  is an  uneconomic project,  we                                                              
     need to  cut it  right now -  cut our losses  - you  walk, we                                                              
     walk. Both  parties could pursue  that under  the abandonment                                                              
     clause, which  would provide for arbitration  to determine if                                                              
     in fact the project's uneconomic.                                                                                          
                                                                                                                                
9:17:49 AM                                                                                                                    
                                                                                                                                
Co-Chair Stedman asked the cost of an abandonment to the State.                                                                 
                                                                                                                                
9:17:53 AM                                                                                                                    
                                                                                                                                
Ms. Davis replied  that the State's portion of  a determination by                                                              
arbitration  would be the  cost of  one and one-half  arbitrators,                                                              
plus State  experts to testify  as to whether  or not  the project                                                              
was  uneconomic. Typical  litigation  costs could  be expected  to                                                              
reach $200,000.                                                                                                                 
                                                                                                                                
Co-Chair Stedman asked if "triple damages" would be included.                                                                   
                                                                                                                                
Ms.  Davis  answered  this  process   would  not  activate  triple                                                              
damages. "Triple  damages" would  pertain in  the event  the State                                                              
was to give  preferential treatment to a competing  project during                                                              
the  period that  the initial  licensee was  attempting to  secure                                                              
credit support.                                                                                                                 
                                                                                                                                
9:18:43 AM                                                                                                                    
                                                                                                                                
Co-Chair Stedman  assumed the Department would present  a timeline                                                              
of  "optimistic   development  schedule  and  a   less  optimistic                                                              
development  schedule including  the five  year extension  and the                                                              
potential  revenue and  expense  are that  the State  going to  be                                                              
facing along that timeline."                                                                                                    
                                                                                                                                
9:19:31 AM                                                                                                                    
                                                                                                                                
Ms. Davis  assured the Department  would endeavor to  provide this                                                              
information,  as the  Committee  could benefit  from knowing  best                                                              
and worst case scenarios and the subsequent revenue impacts.                                                                    
                                                                                                                                
9:19:47 AM                                                                                                                    
                                                                                                                                
Senator  Thomas  expressed  concern that  consideration  would  be                                                              
given to an application  that proposed that the  project might not                                                              
be sanctioned  for five years. Given  the time required  to secure                                                              
a FERC  certification, sanctioning could  be up to eight  years in                                                              
the future.                                                                                                                     
                                                                                                                                
9:20:33 AM                                                                                                                    
                                                                                                                                
Senator  Elton   assumed  that   any  entity  that   invested  the                                                              
significant funding  into the project  necessary to obtain  a FERC                                                              
certificate  would have  already  secured  financing with  "almost                                                              
100 percent certainty."  Therefore, a five year  allowance between                                                              
final   certification  and   sanctioning   of   the  project   was                                                              
excessive.   Instead  two  or   three  years   would  be   a  more                                                              
appropriate period  of time  and would be  more beneficial  to the                                                              
State.                                                                                                                          
                                                                                                                                
9:21:39 AM                                                                                                                    
                                                                                                                                
Ms. Davis  responded that  in considering  the situation  from the                                                              
standpoint  of  an  applicant, the  reasons  that  credit  support                                                              
might not be achieved  and methods to secure that  support must be                                                              
identified.  From the standpoint  of the  State, the  alternatives                                                              
must be  also considered in the  event the licensee  obtained FERC                                                              
certification but had yet to secure credit support.                                                                             
                                                                                                                                
Ms.  Davis admitted  that most  likely  just a  few reasons  would                                                              
justify the  situation. One would  be failure to  attract shippers                                                              
to  commit  gas to  the  project  because the  potential  shippers                                                              
either determined  the project uneconomic for them  or decided for                                                              
other  reasons   not  to  participate.   If  the   commitment  was                                                              
uneconomic  from   a  shipper's   perspective  the   argument  for                                                              
abandonment   would  have   been  mostly   proved  and  could   be                                                              
determined within two years.                                                                                                    
                                                                                                                                
Ms. Davis  stated that if  the shippers  failed to commit  gas for                                                              
other reasons,  alternative  remedies "would  need to be  resorted                                                              
to"  whether by  the U.S.  Congress,  FERC, the  "White House"  or                                                              
another  entity that  "would have  sway over  the decision  making                                                              
process of the shippers."                                                                                                       
                                                                                                                                
9:23:57 AM                                                                                                                    
                                                                                                                                
Ms. Davis  suggested that  if the State  determined to  not engage                                                              
in  the political  aspects  of  this matter,  alternative  options                                                              
must be  considered, such  as revoking the  license if  the credit                                                              
support was  not secured within  one year  of the issuance  of the                                                              
final FERC  certificate. In  this event,  the State must  identify                                                              
other  parties  that  could  potentially  undertake  the  project,                                                              
which could be the "holders of the gas".                                                                                        
                                                                                                                                
9:24:41 AM                                                                                                                    
                                                                                                                                
Ms. Davis  cautioned of one challenge  for the party that  held an                                                              
asset  and  that was  required  to  develop  that asset  within  a                                                              
defined period of  time. Such a situation diminished  the holder's                                                              
"bargaining  position" with  entities needed  for the  development                                                              
of the  asset. A message  would be given  to the marketplace  that                                                              
the  asset holder  would be  "desperate"  at a  certain period  of                                                              
time and subsequently,  potential shippers in the  AGIA case would                                                              
be prudent to wait  until the deadline neared. The  intent of AGIA                                                              
was to  ensure that the  holder of the license  would not be  in a                                                              
position   to   be   leveraged    by   the   potential   shippers.                                                              
Establishment  of a  shorter  time period  in  which the  licensee                                                              
must  obtain credit  support  would cause  the  licensee to  "look                                                              
pretty desperate"  and cause a  potential shipper to  delay making                                                              
a  commitment  until the  deadline  was  close  and at  that  time                                                              
attempt to renegotiate terms to its advantage.                                                                                  
                                                                                                                                
9:26:03 AM                                                                                                                    
                                                                                                                                
Ms. Davis could  not guarantee that the five year  time period was                                                              
the best  option because  the matter  was not  "an exact  science"                                                              
and given the  "commercial factors at play" and  the many "parties                                                              
that could  influence that  whole process".  The process  contains                                                              
multiple uncertainties.                                                                                                         
                                                                                                                                
9:26:36 AM                                                                                                                    
                                                                                                                                
Senator Elton  argued that the State  would be best served  if the                                                              
deadline  was established  at two  years with  an option that  the                                                              
State  could  grant  an  extension  in  certain  circumstances.  A                                                              
situation  should be  avoided  that could  allow  the licensee  to                                                              
determine  that   a  prolonged  process  would  be   in  its  best                                                              
interest. A  timely process would be  in the best interest  of the                                                              
State.                                                                                                                          
                                                                                                                                
9:27:46 AM                                                                                                                    
                                                                                                                                
Ms. Davis  acknowledged the option  as possibly viable.  The issue                                                              
would  be whether  a  licensee holding  a  FERC certificate  would                                                              
experience an urgency  to secure financing if the  time period was                                                              
shorter  that was  greater than  the  urgency already  experienced                                                              
given  the  investment it  made  to  date  in achieving  the  FERC                                                              
certificate.  She  presumed  that  the  financial  "pressures"  to                                                              
secure  credit   support  would  be  "tremendous"   and  that  the                                                              
pressure of a shorter time period would "pale in comparison".                                                                   
                                                                                                                                
Ms.  Davis assented  to consideration  of a  shorter time  period,                                                              
but cautioned  that an applicant  would have to determine  that it                                                              
would  trust   the  State  to   grant  an  extension   if  certain                                                              
circumstances arose.                                                                                                            
                                                                                                                                
9:29:02 AM                                                                                                                    
                                                                                                                                
Co-Chair  Hoffman  shared  the   concerns  of  Senator  Elton  and                                                              
Senator Thomas. In  reviewing the State's "must  haves", the first                                                              
stipulation  was  completion  of  a natural  gas  pipeline  sooner                                                              
rather  than  later.  However,   this  provision  could  have  the                                                              
opposite  consequence.  It would  favor  applicants  that did  not                                                              
hold the gas resources.                                                                                                         
                                                                                                                                
Co-Chair Hoffman  asserted he would  negotiate a  similar contract                                                              
differently  and would  not provide  a five  year "carte  blanche"                                                              
"blanket  timeframe".   His  contract  would   require  assurances                                                              
during  the process  and would not  delay the  State's ability  to                                                              
seek abandonment  for five years. He would support  extensions for                                                              
the circumstances  Ms. Davis exampled. However, the  contract must                                                              
include  performance  measures   and  time  increments  for  those                                                              
measures to be achieved.                                                                                                        
                                                                                                                                
9:31:57 AM                                                                                                                    
                                                                                                                                
Senator  Huggins  requested the  witness  describe  a scenario  to                                                              
demonstrate  the  project's status  by  a certain  date.  Assuming                                                              
that an  AGIA license was issued  in 2008, he  recalled Department                                                              
testimony  predicting  that  the  licensee would  apply  for  FERC                                                              
certification five years afterwards.                                                                                            
                                                                                                                                
9:32:38 AM                                                                                                                    
                                                                                                                                
Ms. Davis qualified  that the assumption was based  on the maximum                                                              
number of years  the State would provide incentive  payments. This                                                              
five year period was not definitive.                                                                                            
                                                                                                                                
9:32:49 AM                                                                                                                    
                                                                                                                                
Senator  Huggins stated  that  if  the full  five  year period  in                                                              
which  incentive payments  were made  was utilized,  receipt of  a                                                              
FERC certificate would occur in 2013.                                                                                           
                                                                                                                                
Ms. Davis  clarified that the actual  date could be  later because                                                              
the process  to secure  a FERC  certificate could  take up  to two                                                              
years.                                                                                                                          
                                                                                                                                
9:33:12 AM                                                                                                                    
                                                                                                                                
Senator  Huggins adjusted  his  calculation of  the  date of  FERC                                                              
certification to 2015.                                                                                                          
                                                                                                                                
Senator  Huggins next  referenced  documentation  provided by  the                                                              
Department  outlining the  "tremendous decrement"  of billions  of                                                              
dollars in net present value resulting from project delays.                                                                     
                                                                                                                                
9:33:52 AM                                                                                                                    
                                                                                                                                
Ms.  Davis  informed  that  the licensee's  "drop  dead"  date  to                                                              
sanction the project would be 2020.                                                                                             
                                                                                                                                
9:34:04 AM                                                                                                                    
                                                                                                                                
Senator  Huggins then  asked  the  date of  "first  gas" when  the                                                              
pipeline would begin production.                                                                                                
                                                                                                                                
Ms. Davis  replied that  estimates predict  that the  construction                                                              
period  would  require  eight  to ten  years,  assuming  that  the                                                              
pipeline capacity would be 4.5 billion cubic feet (bcf).                                                                        
                                                                                                                                
9:34:43 AM                                                                                                                    
                                                                                                                                
Senator  Huggins   concluded  therefore  that  operation   of  the                                                              
pipeline could be as far away as 2030.                                                                                          
                                                                                                                                
Ms. Davis affirmed.                                                                                                             
                                                                                                                                
9:34:47 AM                                                                                                                    
                                                                                                                                
Senator  Huggins  commented  that  this was  a  sobering  prospect                                                              
which "scares the heck out of me."                                                                                              
                                                                                                                                
9:35:07 AM                                                                                                                    
                                                                                                                                
Ms. Davis corrected  her estimate of the pipeline  construction to                                                              
be two to three years.                                                                                                          
                                                                                                                                
9:35:24 AM                                                                                                                    
                                                                                                                                
PATRICK  GALVIN, Commissioner,  Department  of Revenue,  confirmed                                                              
that once all  permits had been secured, industry  representatives                                                              
have  stated that  the  construction phase  would  require two  to                                                              
three years.                                                                                                                    
                                                                                                                                
9:35:45 AM                                                                                                                    
                                                                                                                                
Co-Chair Stedman  pointed out the necessary "lead  time" to gather                                                              
materials and equipment.                                                                                                        
                                                                                                                                
Mr.  Galvin  emphasized that  two  to  three  years would  be  the                                                              
longest  possible timeframe.  The  licensee would  be expected  to                                                              
undertake  significant   preparations  while  awaiting   the  FERC                                                              
certificate.                                                                                                                    
                                                                                                                                
9:36:12 AM                                                                                                                    
                                                                                                                                
Senator   Huggins  changed   his  calculation   to  reflect   that                                                              
production through  the pipeline would  commence in the  year 2023                                                              
at  the   latest.  He  returned   to  the  date  of   a  potential                                                              
unsuccessful open season in approximately 2011.                                                                                 
                                                                                                                                
9:36:51 AM                                                                                                                    
                                                                                                                                
Ms. Davis affirmed.                                                                                                             
                                                                                                                                
9:36:59 AM                                                                                                                    
                                                                                                                                
Senator  Huggins  continued,  noting  this would  be  a  "critical                                                              
juncture". Of the  three pipeline companies that  testified to the                                                              
committees  that  previously  heard  this bill,  two  indicated  a                                                              
lesser  concern   with  obtaining  a  FERC  certificate   than  in                                                              
committing  gas. A representative  from the  third company  stated                                                              
exactly, "I can't  answer that question." Senator  Huggins pointed                                                              
out  that  none  agreed  to  pursue   a  FERC  certificate,  which                                                              
concerned  him.  He  questioned  the State's  concept  that  would                                                              
require  the  AGIA  licensee  to  do  so  despite  the  companies'                                                              
assertions.                                                                                                                     
                                                                                                                                
9:38:16 AM                                                                                                                    
                                                                                                                                
Mr.  Galvin  asserted,  "Continuing   past  an  unsuccessful  open                                                              
season to  a FERC certificate is  something that's in  the State's                                                              
interest." He elaborated as follows.                                                                                            
                                                                                                                                
     We  want  to  ensure  that  the  project  continues  to  move                                                              
     forward.  From  the  company's   perspective,  because  these                                                              
     particular  companies   are  pipeline  companies,   they  get                                                              
     regulated set  rate of return,  they don't see the  upside of                                                              
     taking  that risk.  That's  why within  our  "must haves"  we                                                              
     have  to require  them to  move  to the  FERC certificate  in                                                              
     order to  get them to  do so. It's  not that they  would have                                                              
     the option  or that they  would be  given the choice  at that                                                              
     particular time  of whether or not  to do so, it's  that as a                                                              
     condition of accepting  the license they have to  agree to do                                                              
     so.                                                                                                                        
                                                                                                                                
9:39:04 AM                                                                                                                    
                                                                                                                                
Senator  Huggins understood.  He  stressed  that this  requirement                                                              
must be  emphasized to  the applicants.  A penalty formula,  equal                                                              
to that  which the  State would  be subject  to in  the event  the                                                              
State  violated the  exclusivity  clause, must  be  levied for  an                                                              
applicant's   failure  to  pursue   FERC  certification.   Current                                                              
language  pertaining to  the exclusivity  clause  would provide  a                                                              
damage award of three times the amount of investment.                                                                           
                                                                                                                                
9:40:12 AM                                                                                                                    
                                                                                                                                
Co-Chair  Hoffman asked  if the  construction estimate  of two  to                                                              
three  years  includes  completion  of the  pipeline  to  Chicago,                                                              
Illinois.                                                                                                                       
                                                                                                                                
9:40:32 AM                                                                                                                    
                                                                                                                                
Mr.  Galvin corrected  this estimate  would  entail completion  of                                                              
the pipeline in Alberta, Canada.                                                                                                
                                                                                                                                
9:40:39 AM                                                                                                                    
                                                                                                                                
Co-Chair  Hoffman  recalled  testimony   given  to  the  Committee                                                              
during the previous  legislative session about the  limited supply                                                              
of steel  available. Estimates predict  that the entire  amount of                                                              
steel  produced   in  one  year  worldwide  would   be  needed  to                                                              
construct  the pipeline.  However, competing  projects would  also                                                              
be  attempting to  secure  steel supplies.  He  doubted that  this                                                              
"mega" pipeline project could be completed in two years.                                                                        
                                                                                                                                
9:41:19 AM                                                                                                                    
                                                                                                                                
Co-Chair  Stedman asked  the number  of  FERC certificates  issued                                                              
for  projects  without  credit  support  and the  terms  of  those                                                              
certificates.  The presentation  on "opportunity  costs" given  to                                                              
the  Committee at  the previous  hearing only  included delays  of                                                              
one to three years. He pointed out the following.                                                                               
                                                                                                                                
     Roughly  at  seven  dollar  gas -  three  year  delay  you're                                                              
     looking at about  a $7 billion, and a five  year delay you're                                                              
     looking a  $10 billion. That's  one quarter of  the permanent                                                              
     fund.  There's a  huge opportunity  cost  that we're  talking                                                              
     about here  with this delay and  that's - we've not  only got                                                              
     the  roughly  $10  billion  in opportunity  costs  over  five                                                              
     years,  but we've  got the  issue that  this Committee  faces                                                              
     every year in  the operating budget trying to  make ends meet                                                              
     and run our  State. It is of a concern when  we get stretched                                                              
     out in  particularly if  we're looking into  the mid  - going                                                              
     from 2018 into 2025 or 2027.                                                                                               
                                                                                                                                
Co-Chair  Stedman requested  a forecast of  the opportunity  costs                                                              
incurred from this delay.                                                                                                       
                                                                                                                                
9:43:14 AM                                                                                                                    
                                                                                                                                
Mr. Galvin  advised that  opportunity costs  must have  "something                                                              
else"  to be compared  against.  The suggestion  that if the  time                                                              
limit  in which to  secure credit  support was  reduced from  five                                                              
years to  one year makes an  assumption that the project  would be                                                              
successfully advanced  in one year. However, it  did not recognize                                                              
that the purpose  of the five year  limit was to "get  them in the                                                              
door in the  first place" and  allow an entity the  possibility of                                                              
building  a   pipeline.  Potential   AGIA  applicants   would  not                                                              
participate  given  the  risk  involved   in  the  expenditure  of                                                              
significant funding  to obtain FERC certification if  time was not                                                              
permitted  for   the  licensee  to  secure  credit   support.  The                                                              
competition  necessary  to  further   the  project  would  not  be                                                              
forthcoming.                                                                                                                    
                                                                                                                                
Mr. Galvin continued as follows.                                                                                                
                                                                                                                                
     By saying  through some form of  analysis that we  can make a                                                              
     choice  between having the  pipeline come  in in  2016 versus                                                              
     having it  come in in 2020 -  I can assure you that  the 2016                                                              
     is going  to look a  heck of a lot  better. But it's  a false                                                              
     choice.  It's not as  though we're making  a decision  to say                                                              
     let's have  it come in in  2020 versus 2016; it's  a question                                                              
     of  whether we  are presenting  reasonable terms  so that  we                                                              
     can bring them in the door in the first place.                                                                             
                                                                                                                                
Mr.  Galvin  summarized  that the  Department  would  provide  the                                                              
Committee  with  the  State  revenue   forecast  and  expenditures                                                              
predicted for  the timeframe. He  impressed, "we will all  see how                                                              
far underwater we're  going to get". At that  point, timeframes in                                                              
which a gas pipeline could be possible would be reviewed.                                                                       
                                                                                                                                
9:46:57 AM                                                                                                                    
                                                                                                                                
Co-Chair  Stedman understood  the inability  to predict the  exact                                                              
date  that  the  pipeline would  begin  production.  However,  the                                                              
issue was  the State's  risk exposure  and if the  date was  to be                                                              
later than sooner,  the Committee must be made aware  of this. The                                                              
risk exposure of a scenario with no gas pipeline was known.                                                                     
                                                                                                                                
9:47:51 AM                                                                                                                    
                                                                                                                                
Mr. Galvin  stressed that  this issue  was recognized.  The intent                                                              
of AGIA was to  obtain a gas pipeline and as  quickly as possible.                                                              
The question  embedded in this  discussion was whether  a pipeline                                                              
could be completed  sooner "by simply shrinking  all the timelines                                                              
that  we   give  to  our   applicant."  The  timelines   could  be                                                              
shortened, but the  consequence would be that  potential applicant                                                              
would  decide against  accepting the  risk. The  State would  have                                                              
the ability  to "pull the plug  out" before a licensee  would have                                                              
reasonable opportunity to benefit from its investment.                                                                          
                                                                                                                                
9:48:58 AM                                                                                                                    
                                                                                                                                
Co-Chair Stedman  spoke of amendments  considered to this  bill to                                                              
change the  time periods  of some  provisions from  90 days  to 60                                                              
days.  This discussion  involves  five years.  Time  delay was  an                                                              
issue  that would affect  cash flow.  The Committee  must  have an                                                              
understanding of the risk exposure.                                                                                             
                                                                                                                                
Co-Chair  Stedman furthered  on an  interrelated issue  pertaining                                                              
to the  gas tax  and the  possibility that  the first open  season                                                              
was  unsuccessful  and other  open  seasons  must be  offered.  He                                                              
deferred  this  topic  to  a future  discussion  relating  to  the                                                              
inducements.                                                                                                                    
                                                                                                                                
9:50:40 AM                                                                                                                    
                                                                                                                                
Senator  Elton commented  to  his skepticism  that  a natural  gas                                                              
pipeline  could be  completed  in  two to  three  years given  the                                                              
changed  regulatory  environment  from  the time  that  the  Trans                                                              
Alaska  Pipeline  System  was  constructed   30  years  prior.  He                                                              
requested an explanation of the reasoning for the projection.                                                                   
                                                                                                                                
Senator  Elton  next opined  that  the  State could  achieve  some                                                              
control  by requiring  credit  support within  two  years with  an                                                              
opportunity  for   two  one  year  extensions.  He   requested  an                                                              
analysis of this "midway approach".                                                                                             
                                                                                                                                
9:52:15 AM                                                                                                                    
                                                                                                                                
Mr.  Galvin qualified  that the  choice  was not  just whether  to                                                              
provide  for a two  or five  year time  restriction. The  proposed                                                              
five year  period was  not "magical". His  statements had  been in                                                              
response to  the premise that a  shorter deadline would  result in                                                              
a  sooner construction  date.  Instead,  such a  shorter  deadline                                                              
could result in fewer applicants under AGIA.                                                                                    
                                                                                                                                
9:53:11 AM                                                                                                                    
                                                                                                                                
Co-Chair  Hoffman concurred  with Senator  Elton's comments  based                                                              
on the  State's "must haves" of  achieving a pipeline  sooner. The                                                              
language  of this provision  must be  "tightened up"  specifically                                                              
to  allow the  State to  "take control"  during  that time  period                                                              
rather  than allowing  the  licensee to  make  the decisions.  The                                                              
licensee  must be  "pushed"; perimeters  must  be established  and                                                              
assurances   received  to   demonstrate  that   the  project   was                                                              
progressing.                                                                                                                    
                                                                                                                                
Mr.  Galvin  agreed  and  relayed  the  intent  to  guarantee  the                                                              
process  would  be "buttoned  down".  The  licensee would  not  be                                                              
allowed  to operate  without  oversight. Whether  in  the form  of                                                              
formal deadlines  or through other methods, the  licensee would be                                                              
required to demonstrate its actions in furthering the project.                                                                  
                                                                                                                                
9:55:25 AM                                                                                                                    
                                                                                                                                
Co-Chair  Hoffman   countered  that  such  a  guarantee   was  not                                                              
provided  for in  the provision  of subsection  (c). The  language                                                              
should be specific.                                                                                                             
                                                                                                                                
9:55:45 AM                                                                                                                    
                                                                                                                                
Mr. Galvin assured this issue would be addressed.                                                                               
                                                                                                                                
9:55:49 AM                                                                                                                    
                                                                                                                                
          Section 43.90.210. Amendment of or modification to the                                                                
     project plan. (page 15, line 11)                                                                                           
                                                                                                                                
Ms.  Davis resumed  her analysis  of  the bill  and informed  that                                                              
amendments  had been  made  to the  original  language to  include                                                              
three  situations in  which a project  plan could  be amended.  An                                                              
improvement  to the  net present  value  of the  project would  be                                                              
justified, as  well as a  change necessitated  by an order  of the                                                              
Alaska  Oil  and  Gas  Conservation   Commission  (AOGCC),  and  a                                                              
situation   resulting   from  unforeseen   circumstances   outside                                                              
control of the  licensee. Additionally, this  provision stipulated                                                              
that with  an exception  of a  change required  by the  AOGCC, any                                                              
amendment  to  the project  could  not  diminish the  net  present                                                              
value of the project  to the State or the project's  likelihood of                                                              
success.                                                                                                                        
                                                                                                                                
9:57:04 AM                                                                                                                    
                                                                                                                                
          Section 43.90.220. Records, reports, conditions, and                                                                  
     audit requirements. (page 15, line 22)                                                                                     
                                                                                                                                
Ms.  Davis  described  this  section as  "the  State's  rights  to                                                              
audit, inspect books,  [and] compel information to  be provided to                                                              
it  both  in  hard  copy  and  electronic  format."  She  directed                                                              
attention  to subsection  (d)  on  page 16,  lines  3 through  10,                                                              
which  would grant  the  State the  right  to  participate "as  an                                                              
observer, in a  room with the applicant's owners,  equity members,                                                              
groups, at  meetings" to  monitor progress  and ensure  compliance                                                              
with  the license  provisions  as  well  as statutes.  This  right                                                              
would terminate after commencement of commercial operations.                                                                    
                                                                                                                                
9:58:06 AM                                                                                                                    
                                                                                                                                
Co-Chair  Stedman  returned  to  AS 43.90.210  in  an  attempt  to                                                              
understand  the concept  of  "the group  that  makes the  proposal                                                              
that doesn't  have any  gas." He  stated, "We  run it through  the                                                              
net present  value model.  How we  do that,  I don't know  because                                                              
there's no gas to run through the model."                                                                                       
                                                                                                                                
Ms. Davis  interrupted to respond  that assumptions would  be made                                                              
in this situation.                                                                                                              
                                                                                                                                
9:58:37 AM                                                                                                                    
                                                                                                                                
Co-Chair Stedman continued as follows.                                                                                          
                                                                                                                                
     So  we  make  assumptions.  That  entity  that  doesn't  have                                                              
     commitments  for   gas  prevails  in  the  issuance   of  the                                                              
     license;  gets  the  license;  moves  forward.  But  economic                                                              
     reality sets  in and the gas  expectations either due  to tax                                                              
     changes  or some other  issue, the revenue  would go  down to                                                              
    the State, which would move the net present value down.                                                                     
                                                                                                                                
Co-Chair  Stedman asked  if in  this instance  the licensee  would                                                              
not be in compliance.                                                                                                           
                                                                                                                                
9:59:12 AM                                                                                                                    
                                                                                                                                
Ms. Davis explained  that the State's analysis of  the net present                                                              
value was  addressed twice  in this  legislation. The  net present                                                              
value "balanced  with" the  likelihood of  success would  be first                                                              
calculated during  the initial selection period.  Applications for                                                              
the  AGIA license  would be  ranked at  that time  and a  "winner"                                                              
would  be selected.  Once  the license  was  granted, the  project                                                              
would  progress   and  encounter   "whatever's  going   to  happen                                                              
relative  to  costs  of materials  …  what's  happening  with  gas                                                              
commodity pricing,  [and] … the  world of taxes and  royalties and                                                              
how they impact  the mentality and the desires of  its … producers                                                              
to want to ship gas on its pipeline."                                                                                           
                                                                                                                                
Ms. Davis  suggested that  during that time  period, if  the State                                                              
determined that  the project would  not be economic to  the State,                                                              
it could  potentially also be determined  to be uneconomic  to the                                                              
licensee as  well and an agreement  could be reached to  cease the                                                              
project.  However,  if  one  party   disagreed  with  ceasing  the                                                              
project   the  issue  would   be  decided   in  arbitration.   The                                                              
abandonment  clause "focuses  on" the  ability of  the shipper  to                                                              
secure  credit support  and whether  a  shipper would  "reasonably                                                              
want to ship on that pipeline."                                                                                                 
                                                                                                                                
10:00:57 AM                                                                                                                   
                                                                                                                                
Ms. Davis  posed an  assumption that  this process was  undertaken                                                              
and  neither   party  prevailed   in  the   arbitration   or  that                                                              
abandonment  was not considered,  "the economy  and the  economics                                                              
of the project are  what they are" and no opportunity  would exist                                                              
to review the economics  before the next phase of  the process. In                                                              
the  event a  licensee was  unable  to secure  credit support  and                                                              
proceeded  to  obtain  a  FERC certificate,  the  issue  would  be                                                              
whether  the  license  could  sanction   the  project  within  the                                                              
allowed timeframe.                                                                                                              
                                                                                                                                
10:01:49 AM                                                                                                                   
                                                                                                                                
Ms. Davis stressed  that the provision of AS  43.90.210 would only                                                              
be activated  in the  event a  party sought  to amend the  project                                                              
plan. She  gave an  unsuccessful open  season as  an example  of a                                                              
reason  a  party   could  attempt  to  amend  the   project  plan.                                                              
Amendments  to  the  project  could   include  construction  of  a                                                              
pipeline utilizing  a smaller pipe size. The  project could remain                                                              
economic, although  with a lower  net present value to  the State.                                                              
If a  determination was made  that the  change was necessary  as a                                                              
result  of changed  circumstances  beyond  the licensee's  control                                                              
and  not reasonably  foreseeable, the  AOGCC could  agree to  that                                                              
change.                                                                                                                         
                                                                                                                                
10:02:50 AM                                                                                                                   
                                                                                                                                
Co-Chair Stedman  asked if this  would provide an  opportunity for                                                              
the licensee  that had  no gas commitments  to negotiate  with the                                                              
producers then leverage the State.                                                                                              
                                                                                                                                
10:03:04 AM                                                                                                                   
                                                                                                                                
Ms. Davis  answered "no",  that this  provision would  require the                                                              
State to  "consent" to whether  it should proceed.  This provision                                                              
also  stipulated that  a  change  to the  project  plan could  not                                                              
diminish the net present value to the State.                                                                                    
                                                                                                                                
10:04:01 AM                                                                                                                   
                                                                                                                                
Ms. Davis repeated  that Section 43.90.220 relates  to the State's                                                              
right  to  monitor  the  licensee's  activities  in  pursuing  the                                                              
project.                                                                                                                        
                                                                                                                                
10:04:14 AM                                                                                                                   
                                                                                                                                
          Section 43.90.230. License violations; damages. (page                                                                 
     16, line 14)                                                                                                               
                                                                                                                                
Ms.  Davis  stated  that  this  provision  listed  violations  and                                                              
damage  allowances  and  outlined the  resolution  process.  These                                                              
include  conditions  imposed in  many  other contracts  for  State                                                              
projects,  such   as  prohibitions  against  violation   of  State                                                              
statues or  misuse of funds. If  a dispute to correct  a violation                                                              
was  not resolved  in  90 days,  the  AOGCC could  invoke  certain                                                              
remedies,  including suspension  of  disbursement or  recuperation                                                              
of  State funds  contributed  to the  project,  revocation of  the                                                              
license with  assignment of  all project  data surrendered  or any                                                              
other remedies  provided for  by law.  The provision was  expanded                                                              
to  include "in  equity" as  a potential  remedy in  the event  "a                                                              
particular situation called for a specific performance."                                                                        
                                                                                                                                
10:05:28 AM                                                                                                                   
                                                                                                                                
          Section 43.90.240. Abandonment of project. (page 17,                                                                  
     line 17)                                                                                                                   
                                                                                                                                
Ms.  Davis reminded  that  this provision  had  been mentioned  in                                                              
previous discussions.  Abandonment of  the project would  occur at                                                              
the  point the  project  was found  to  be uneconomic,  either  by                                                              
agreement of  the State  and the licensee  or by arbitration.  The                                                              
rules provided  for by  the American  Arbitration Association  had                                                              
been  invoked  for  this  section.   This  issue  had  been  given                                                              
significant  attention  by  the  Senate  Judiciary  Committee  and                                                              
improvements  were  made  to  the   original  language  to  ensure                                                              
"Alaska's  state  substance and  procedural  laws".  Additionally,                                                              
this  section  would provide  that  each  party would  select  one                                                              
arbitrator  who   in  turn  would   select  a  third   arbitrator.                                                              
Arbitration would  be conducted by  a panel of three  members. All                                                              
arbitrators  would  be  selected  from  the  American  Arbitration                                                              
Association roster.                                                                                                             
                                                                                                                                
10:06:30 AM                                                                                                                   
                                                                                                                                
Ms. Davis  pointed  out that the  language adopted  by the  Senate                                                              
Judiciary  Committee was  also  utilized in  an  amendment to  the                                                              
House  of Representatives  companion  legislation.  However,  upon                                                              
later review conflict  was identified in the provision  of Section                                                              
43.90.240(d) on page  18, line 17 and 18, which  would require the                                                              
party filing  an appeal  of a final  arbitration determination  to                                                              
provide  the burden  of proof.  Alaska's  Uniform Arbitration  Act                                                              
established  the   procedures  pertaining   to  which   party  was                                                              
obligated  with the  burden  of proof.  Although  the language  of                                                              
this  bill was  similar, concerns  were expressed  that it  should                                                              
not be  included in the  AGIA bill. As  a result, this  subsection                                                              
was deleted  from the House  bill and should  be removed  from the                                                              
Senate version as well.                                                                                                         
                                                                                                                                
10:07:37 AM                                                                                                                   
                                                                                                                                
Co-Chair Stedman took note of the matter.                                                                                       
                                                                                                                                
10:07:45 AM                                                                                                                   
                                                                                                                                
Ms. Davis stated  that the language of AS 43.90.240(c)  on page 18                                                              
lines 5 through  16 contained the standards the  arbitrators would                                                              
apply to determine  whether a project was uneconomic.  To make the                                                              
determination the  arbitrators would be required to  find that the                                                              
licensee   did  not   have   credit  support.   Additionally,   an                                                              
"objective standard",  utilizing the assumption that  the pipeline                                                              
would have  "100 percent  load factor  using reasonable  predicted                                                              
prices  for the  future  applied  to that  gas  volume", would  be                                                              
applied to  determine whether  a "reasonable  producer would  ship                                                              
on  that  pipeline."  These  objectives  would  be  considered  to                                                              
determine if the project had a likelihood of success.                                                                           
                                                                                                                                
10:08:38 AM                                                                                                                   
                                                                                                                                
Senator Elton  questioned  the definition  of "uneconomic"  in the                                                              
context  of   this  legislation.   Subsection  (c)(1)   stipulated                                                              
uneconomic  as,   "the  project  does  not  have   credit  support                                                              
sufficient to finance  construction of the project…"  He asked why                                                              
language  similar  to "can  not  get"  was not  instead  utilized.                                                              
Because  the licensee  did not  have  the credit  support did  not                                                              
conclude that it could not obtain that support.                                                                                 
                                                                                                                                
10:09:13 AM                                                                                                                   
                                                                                                                                
Ms.  Davis  agreed  that  the  language  of  (c)(1)  was  "clearly                                                              
pointing  to the  here  and now."  This  provision considered  the                                                              
status of  credit support at  the point in  time of a  request for                                                              
abandonment.   The  provision   of   subsection  (c)(2)   however,                                                              
addressed  the issue  in the event  that a  determination  found a                                                              
reasonable  likelihood  that  producers  would ship  gas  on  that                                                              
pipeline.  This  would  provide  proof  that  credit  support  was                                                              
obtainable.                                                                                                                     
                                                                                                                                
Ms.  Davis   explained  the  intent   to  provide   criteria  that                                                              
reflected the  subjective status  of the licensee  at the  time of                                                              
arbitration  as well as  an objective  standard to predict  future                                                              
credit support.                                                                                                                 
                                                                                                                                
Ms.  Davis acknowledged  that the  point raised  by Senator  Elton                                                              
had been considered with the following conclusion reached.                                                                      
                                                                                                                                
     Each  time we  looked at  it we  kept peeling  the onion  and                                                              
     wanting  to  get  to  the   core  of  what  makes  a  project                                                              
     objectively  uneconomic.  We  eventually  ended up  with  the                                                              
     bottom  line [of]  whether there  would be  shippers to  ship                                                              
     gas because  that ultimately influences whether  financer are                                                              
     going to step up and offer financing for the project.                                                                      
                                                                                                                                
Ms.  Davis  confirmed the  need  for  an objective  standard,  but                                                              
stated  that  this would  be  achieved  through the  provision  of                                                              
Section 43.90.240(c)(2).                                                                                                        
                                                                                                                                
10:10:46 AM                                                                                                                   
                                                                                                                                
          Section 43.90.250. Alaska Gasline Inducement Act                                                                      
     coordinator. (page 19, line 2)                                                                                             
                                                                                                                                
Ms. Davis  informed that the  original language of  this provision                                                              
would  have  required  legislative   confirmation  of  the  person                                                              
appointed  to this  position by  the  governor. Legislative  legal                                                              
counsel advised  that legislative  confirmation would  violate the                                                              
Alaska  Constitution article  pertaining to  separation of  powers                                                              
of the  three branches of  State government. The  Senate Judiciary                                                              
Committee chose  to delete the legislative  confirmation provision                                                              
from this section.                                                                                                              
                                                                                                                                
Ms.  Davis stated  that  with  the aforementioned  exception,  the                                                              
provision relating  to the coordinator position was  modeled after                                                              
the  federal   pipeline  coordinator   position.  Ms.   Davis  had                                                              
provided Co-Chair  Stedman a  copy of  the provisions  relating to                                                              
the federal position.                                                                                                           
                                                                                                                                
10:11:42 AM                                                                                                                   
                                                                                                                                
Co-Chair Stedman  indicated he had  received this  information and                                                              
would distribute it to the Committee [copy on file].                                                                            
                                                                                                                                
10:11:48 AM                                                                                                                   
                                                                                                                                
Senator  Dyson  understood  from   industry  representatives  that                                                              
possibly more than  one pipeline project could  be undertaken; one                                                              
utilizing  the   AGIA  license  and  another  as   an  independent                                                              
project.  In such  an  instance, concern  was  expressed that  the                                                              
AGIA-licensed  project would  have  the advantage  over the  other                                                              
project through  the assistance of a designated  representative in                                                              
the Office of the  Governor. The other project would  not have the                                                              
benefit of  "inside support." He  asked if the Administration  had                                                              
considered this possibility.                                                                                                    
                                                                                                                                
10:12:44 AM                                                                                                                   
                                                                                                                                
Ms. Davis responded  that this issue had been  considered and that                                                              
the  Administration intended  to "incentivise"  the AGIA  process.                                                              
The coordinator  and the  assistance provided  from that  position                                                              
would  be   "as  attractive   as  possible".  The   Administration                                                              
preferred to not  have multiple projects. Rather  the best project                                                              
should be undertaken,  with that project operating  under the AGIA                                                              
process.  Therefore the maximum  incentives  would be provided  to                                                              
encourage potential parties to participate in AGIA.                                                                             
                                                                                                                                
Ms. Davis  qualified that  the State, as  a sovereign  entity, had                                                              
an  obligation,   under  federal  law,  to  support   and  provide                                                              
guidance  on matters  including right-of-ways  and permitting  for                                                              
any project  involving an interstate  pipeline through  its lands.                                                              
A  State statute  governing the  Department  of Natural  Resources                                                              
was currently  utilized for  the Pebble  Creek Mine operation  and                                                              
other projects that  allowed the Department to  establish a "large                                                              
project coordination  team" to  facilitate the permitting  process                                                              
for all  State agencies.  Although this  effort was not  conducted                                                              
by the  Office of the  Governor and did  not provide  "as explicit                                                              
directions  to State agencies"  as the  proposed AGIA  coordinator                                                              
position   would,   the   process  existed   to   accommodate   an                                                              
alternative pipeline project.                                                                                                   
                                                                                                                                
10:14:53 AM                                                                                                                   
                                                                                                                                
Senator  Dyson  commented  that  in the  following  two  to  three                                                              
years,   the  national   energy  supply   and  national   security                                                              
situations  could change  significantly  at which  time an  entity                                                              
that  had  decided  to  not  apply  for  the  AGIA  license  could                                                              
determine that a  pipeline project had "huge  economic potential".                                                              
Efforts   by  this   entity  should   not  be   hindered  by   the                                                              
predisposition  of  the  State  in  supporting  the  AGIA-licensed                                                              
party. He was unsure how to resolve this issue.                                                                                 
                                                                                                                                
10:15:53 AM                                                                                                                   
                                                                                                                                
Senator Huggins  agreed with Senator  Dyson and suggested  that if                                                              
the  coordination process  administered within  the Department  of                                                              
Natural  Resources would  be sufficient  for  a non-AGIA  licensed                                                              
project  it should  be acceptable  for the AGIA  project as  well.                                                              
Otherwise,  a  second  pipeline  coordinator  position  should  be                                                              
created  within  the Office  of  the  Governor  to assist  with  a                                                              
competing   project.  This   competing  project   could  also   be                                                              
beneficial  to  the  State  and  therefore  assistance  should  be                                                              
provided for  its benefit as well  as the assistance  provided for                                                              
the AGIA project.                                                                                                               
                                                                                                                                
10:16:54 AM                                                                                                                   
                                                                                                                                
Ms.  Davis  shared  that  the original  language  of  the  license                                                              
assurance  section would  have only  prohibited preferential  tax,                                                              
royalty  and monetary  treatment  for the  AGIA licensed  project.                                                              
The  section   deliberately  did  not  provide   for  preferential                                                              
pipeline   coordination  or   agency   facilitation  "that   would                                                              
activate  the  damages  clause"   because  the  State's  sovereign                                                              
duties  to  manage  permits  could   not  be  conditioned  on  the                                                              
securitization of  the AGIA license. However, facilitation  of the                                                              
AGIA project  in the  form of the  AGIA coordinator  would benefit                                                              
the project.  If another  project were  undertaken, an  additional                                                              
pipeline  coordination position  could be  created, provided  that                                                              
the provisions of the assurance clause were complied with.                                                                      
                                                                                                                                
10:18:26 AM                                                                                                                   
                                                                                                                                
Senator   Huggins  clarified   the   intent   that  the   pipeline                                                              
coordinator position  established under  Sec. 43.90.250  would not                                                              
be "shared" with a competing non-AGIA project.                                                                                  
                                                                                                                                
10:18:38 AM                                                                                                                   
                                                                                                                                
Ms.  Davis  answered  that  the  language  of  the  section  would                                                              
provide that  the coordinator  position would  be applied  to only                                                              
the AGIA-licensed project.                                                                                                      
                                                                                                                                
Senator  Huggins  asked  if  the provisions  of  this  bill  would                                                              
preclude future sharing of the coordinator.                                                                                     
                                                                                                                                
Ms.  Davis  responded  that  the  original  version  of  the  bill                                                              
contained no  such preclusion. Language  had been inserted  in the                                                              
committee hearing  process that  "might arguably create  a problem                                                              
that we  can look  at that is  not fundamental  to that  section …                                                              
that might  cause a  little bit  of a hiccup"  and which  could be                                                              
reviewed.                                                                                                                       
                                                                                                                                
10:19:12 AM                                                                                                                   
                                                                                                                                
Senator  Huggins asked  if under  existing  statute an  additional                                                              
pipeline coordinator position could be created.                                                                                 
                                                                                                                                
Ms. Davis  stated that  no provision in  AGIA would  prevent this.                                                              
Existing  statute governing  the Department  of Natural  Resources                                                              
established the  Department's role and obligation  to provide lead                                                              
support and the  structure to support a large  project. Therefore,                                                              
a new statute  could be adopted  or the existing statute  could be                                                              
amended  to  provide  for  the   additional  pipeline  coordinator                                                              
position.                                                                                                                       
                                                                                                                                
10:20:03 AM                                                                                                                   
                                                                                                                                
Senator Huggins identified the existing statue under Title 38.                                                                  
                                                                                                                                
Ms. Davis affirmed.                                                                                                             
                                                                                                                                
10:20:10 AM                                                                                                                   
                                                                                                                                
          Sec. 43.90.260. Expedited review and action by state                                                                  
     agencies. (page 19, line 10)                                                                                               
                                                                                                                                
Ms.  Davis  explained  this section  would  provide  direction  to                                                              
State  agencies as  administered  by the  pipeline coordinator  to                                                              
ensure  that  agency  permitting  processes would  not  delay  the                                                              
project  unnecessarily. This  language was  modeled after  federal                                                              
legislation.                                                                                                                    
                                                                                                                                
10:20:40 AM                                                                                                                   
                                                                                                                                
               Article 3. Resource Inducement.                                                                                  
          Section    43.90.300.    Qualification   for    resource                                                              
     inducement. (page 19, line 26)                                                                                             
                                                                                                                                
Ms.  Davis   characterized  this   section  as  the   "overarching                                                              
umbrella that  introduces the  resource inducements"  contained in                                                              
Article 3.  She listed the  other two sections comprising  Article                                                              
3 as providing for royalty inducement and inducement vouchers.                                                                  
                                                                                                                                
10:21:07 AM                                                                                                                   
                                                                                                                                
Co-Chair  Stedman directed  the witness to  address the  provision                                                              
of Section 43.90.300(a)  pertaining to the "reoccurring  theme" of                                                              
"committed to  acquire firm transportation  capacity in  the first                                                              
binding open season…"                                                                                                           
                                                                                                                                
10:21:46 AM                                                                                                                   
                                                                                                                                
Ms. Davis  remarked that  "conceptually" the resource  inducements                                                              
had  been structured  to  "drive  shippers  to the  first  initial                                                              
binding open season".  To receive a benefit provided  for in AGIA,                                                              
potential  shippers  must participate  in  the first  open  season                                                              
rather than  a later  open season,  and "just sort  of sit  on the                                                              
sidelines and  see how it goes and  decide to come in  later if it                                                              
looks  good." These  producers "need  to be part  of the  solution                                                              
and not part of the problem."                                                                                                   
                                                                                                                                
Ms. Davis  explained the process  in which  a "gas owner"  or "gas                                                              
controller"  would receive  notice that a  pipeline company  would                                                              
propose  to construct  a pipeline  and that it  would solicit  the                                                              
gas controller's  interest in shipping  gas on that  pipeline. The                                                              
pipeline   company  would   provide   information  regarding   the                                                              
pipeline  such as  its design,  proposed  design, proposed  route,                                                              
anticipated  tariff, likely  cost  and plan  to  address any  cost                                                              
overruns.  The pipeline company  would invite  the gas  controller                                                              
to  enter  into  a  commercial   negotiation  to  ship  gas.  That                                                              
process,  under  FERC  regulations  specifically  directed  to  an                                                              
Alaska natural gas pipeline, would last a minimum of six months.                                                                
                                                                                                                                
10:23:28 AM                                                                                                                   
                                                                                                                                
          Section 43.90.310. Royalty inducement. (page 20, line                                                                 
     6)                                                                                                                         
                                                                                                                                
Ms. Davis  outlined this section,  which would provide that  a gas                                                              
controller or  party that would  purchase gas subject  to royalty,                                                              
would  have a  right  to receive  "certain  changes  in the  terms                                                              
under  which  [royalty  was] currently  governed."  Those  changes                                                              
related  to the valuation  of the  gas for  royalty purposes,  the                                                              
manner in which "gas was taken by the State, known as take-in-                                                                  
kind  versus take-in-value"  and  the State's  ability to  "switch                                                              
between those two options under its lease contract."                                                                            
                                                                                                                                
Ms. Davis  informed that the  structure of subparagraph  (2)(1) on                                                              
lines  14  and  15  provided  that  the  State  would  direct  the                                                              
commissioner  of the Department  of Natural  Resources to  develop                                                              
regulations  that would  provide  the following  benefits only  to                                                              
those parties that commit to ship gas at the first open season.                                                                 
                                                                                                                                
Ms.  Davis stated  that  under  this subsection,  the  Legislature                                                              
would   direct   the   commissioner   to   "minimize   retroactive                                                              
adjustments  to the value  of the  State's gas". Such  retroactive                                                              
adjustments  occurred   previously  in  instances   in  which  the                                                              
producer  sold gas  at a  certain price  and after  an audit,  the                                                              
State under  its contractual agreement,  increased the  royalty to                                                              
reflect a higher price received by a competitor.                                                                                
                                                                                                                                
10:25:18 AM                                                                                                                   
                                                                                                                                
Ms.  Davis continued  that  Section  43.90.310(a)(2),  on line  16                                                              
through 30,  related to  the pricing  for the  royalty gas.  Up to                                                              
the  present  time,  a  "wide  range   of  different  prices"  had                                                              
existed. This provision  would stipulate through  various criteria                                                              
that the  pricing would  be "fine tuned"  and "made  more certain;                                                              
more definite" for the royalty payer.                                                                                           
                                                                                                                                
Ms. Davis  furthered that  subsection (a)(3),  on page 20,  line 3                                                              
through page 21,  line 3, would direct the commissioner  to modify                                                              
the  manner it  which the  State  "switched back  and forth"  from                                                              
taking  gas royalties-in-value  and royalties-in-kind.  Currently,                                                              
the  State generally  had  the right  to  switch  between the  two                                                              
royalties  by  providing   a  90-day  notice.  This   presented  a                                                              
challenge  to resource owners  because, upon  announcement  by the                                                              
State that  it would  collect the  royalty-in-value, the  producer                                                              
would sell  gas at  a certain price  and commit  to ship  that gas                                                              
through a  pipeline. A change in  the State's decision  to instead                                                              
collect the royalty-in-kind  would require the producer  to divert                                                              
the gas that  had been committed.  The shipper had "paid  for that                                                              
space" in the  pipeline to the original destination  and would not                                                              
have  sufficient  time, given  the  90  day notice  provision,  to                                                              
"pass  that  space  off"  to  a  different  shipper  or  otherwise                                                              
mitigate the loss.                                                                                                              
                                                                                                                                
Ms.  Davis stated  that  the provision  of  this subsection  would                                                              
limit the State's  ability to change the royalty  and would ensure                                                              
that the State would "make whole" the impacts to the shipper.                                                                   
                                                                                                                                
10:28:09 AM                                                                                                                   
                                                                                                                                
Senator Huggins  asked how  realistic was  the State's  likelihood                                                              
to collect the gas royalty-in-kind.                                                                                             
                                                                                                                                
10:28:33 AM                                                                                                                   
                                                                                                                                
Ms. Davis  replied that the  State historically had  not collected                                                              
gas  royalties-in-kind  because  gas  had  not  been  produced  in                                                              
Alaska. The State  had collected oil royalties-in-kind  in limited                                                              
amounts.                                                                                                                        
                                                                                                                                
10:28:59 AM                                                                                                                   
                                                                                                                                
Mr.  Galvin clarified  that  the State  does  receive oil  royalty                                                              
payments in-kind  for in-state use.  Currently, oil was  taken in-                                                              
kind and  sold to  the Flint Hills  refinery as  well as  taken in                                                              
Fairbanks and  sold to Tesoro for  its refinery. This form  of oil                                                              
royalty  is generally  taken to  meet the in-state  needs  not met                                                              
through the royalty-in-value commercial sales.                                                                                  
                                                                                                                                
10:29:30 AM                                                                                                                   
                                                                                                                                
Senator Huggins understood  that changing the form  of the royalty                                                              
was more  cumbersome for gas than  oil. He asked the  "window that                                                              
would merge out  of this that you could switch from  to in-kind or                                                              
value."                                                                                                                         
                                                                                                                                
10:29:54 AM                                                                                                                   
                                                                                                                                
Mr. Galvin gave the following response.                                                                                         
                                                                                                                                
     The concern  about the  switch isn't so  much on  the State's                                                              
     part. There would  be a question of - it's an  option that we                                                              
     have  under our  leases.  So from  our  perspective it  would                                                              
     likely  only come up  on instances  where there was  in-state                                                              
     needs that  weren't being  met and that  we would  be looking                                                              
     to take  it in-kind in order  to be able to deliver  to those                                                              
     in-state needs.                                                                                                            
     Looking  at  the  oil  scenario,  we  haven't  encountered  a                                                              
     situation where  there's some opportunity in  the market that                                                              
     we decided  only the State can  take advantage of  so that we                                                              
     switch  to in-kind and  make that  sale on  our own.  So it's                                                              
     probably  similarly  unlikely  that  we're going  to  find  a                                                              
     scenario  in the  open market  that the  State wants  to take                                                              
     advantage of.                                                                                                              
     So it  is relatively low likelihood  that we would  be making                                                              
     the  switch ourselves  except for those  in-state needs  that                                                              
     we  may  need  to  meet at  some  point.  However,  from  the                                                              
     lessee's perspective,  the fact  that the State  could switch                                                              
     causes them concern  because, as unlikely as we  see it, they                                                              
     may see  it as  something that the  State may take  advantage                                                              
     of and  suddenly switch  out on them.  Then they're  left not                                                              
     having as much  gas to sell, ship, as they  expected and took                                                              
     their  positions   on  capacity   or  in  the   market  sales                                                              
     contracts that they no longer have the gas to fill.                                                                        
                                                                                                                                
10:31:34 AM                                                                                                                   
                                                                                                                                
Ms.  Davis  reminded  that  Anthony Scott  of  the  Department  of                                                              
Natural Resources  had testified  previously that the  time period                                                              
could be  two years. The  exact time period  was not  specified in                                                              
this  bill  to  allow  for input  from  the  industry  during  the                                                              
regulatory process  to learn its  opinion of "the  more reasonable                                                              
timeframe for  switching". To some  extent, the time  period would                                                              
be dependant  upon the lease holder  because it would  reflect its                                                              
commercial arrangements.                                                                                                        
                                                                                                                                
10:32:23 AM                                                                                                                   
                                                                                                                                
Senator  Huggins  asked  if  the   time  period  would  likely  be                                                              
measured in months or years.                                                                                                    
                                                                                                                                
10:32:28 AM                                                                                                                   
                                                                                                                                
Mr. Galvin  answered, "If  we were  to make  it something  that we                                                              
think is going to be attractive it's going to be years."                                                                        
                                                                                                                                
10:32:41 AM                                                                                                                   
                                                                                                                                
Senator  Huggins  asked the  expected  date that  the  regulations                                                              
governing  the   calculation  of   royalties  would   be  enacted.                                                              
Although some  had projected this  would be completed in  a matter                                                              
of months,  regulations pertaining  to the  Petroleum Profits  Tax                                                              
(PPT)   were   not   yet   complete   although   the   legislation                                                              
establishing  that   that  system  was  passed  by   the  previous                                                              
legislature.                                                                                                                    
                                                                                                                                
10:33:14 AM                                                                                                                   
                                                                                                                                
Ms.   Davis   responded   that  "to   be   valuable"   regulations                                                              
establishing  a  method to  determine  the  monthly value  of  the                                                              
State's  royalty share  must be  completed before  an open  season                                                              
could be  held. The AGIA  license should  be issued by  April 2008                                                              
and she predicted  that these regulations would  be established by                                                              
that time.                                                                                                                      
                                                                                                                                
10:33:36 AM                                                                                                                   
                                                                                                                                
Mr.  Galvin furthered  that the  Department  of Natural  Resources                                                              
would  begin the  efforts  upon  passage of  AGIA  to ensure  that                                                              
regulations  were   in  effect  by   April  of  2008   or  shortly                                                              
thereafter.                                                                                                                     
                                                                                                                                
10:33:53 AM                                                                                                                   
                                                                                                                                
Senator  Huggins  asked  if  a  requirement  that  regulations  be                                                              
enacted by the date of the license issuance would be "unfair".                                                                  
                                                                                                                                
10:34:09 AM                                                                                                                   
                                                                                                                                
Mr. Galvin responded  that in October 2007, once  the applications                                                              
had been received,  an estimation could be made for  the time that                                                              
the  open  season   would  likely  occur.  Upon   receipt  of  the                                                              
applications,  efforts  would  commence  to  draft  and  implement                                                              
regulations.   The   parties   which  the   State   intended   for                                                              
participation   could   require   additional   time   to   provide                                                              
"feedback"  on  the  proposed  projects.   Therefore,  a  specific                                                              
deadline could be detrimental.                                                                                                  
                                                                                                                                
10:35:00 AM                                                                                                                   
                                                                                                                                
Ms.  Davis  pointed  out  Section  43.90.310(b)(1)  contained  the                                                              
condition  that  to  receive the  royalty  inducement,  the  lease                                                              
holder must  commit "to ship to  acquire capacity" at  the initial                                                              
binding open season.                                                                                                            
                                                                                                                                
Ms.  Davis  listed  the condition  of  subsection  (b)(2)  as  the                                                              
commitment  of the  lease holder  to  not protest  the "rolled  in                                                              
expansion" costs  of the mainline  pipeline "up to the  level that                                                              
the pipeline company was required to accept rolled in rates."                                                                   
                                                                                                                                
10:35:37 AM                                                                                                                   
                                                                                                                                
Co-Chair Stedman understood the rate to be 15 percent.                                                                          
                                                                                                                                
10:35:41 AM                                                                                                                   
                                                                                                                                
Ms. Davis  clarified the  rate would be  15 percent  "above either                                                              
the rack  rate, the initial maximum  recourse rate, or  15 percent                                                              
above their negotiated rate."                                                                                                   
                                                                                                                                
10:36:04 AM                                                                                                                   
                                                                                                                                
Ms. Davis  specified that  the commissioner  of the Department  of                                                              
Natural   Resources  would   also  be  required   to  review   the                                                              
regulations it enacted  ever two years. The shippers  would not be                                                              
required  to rely  solely on  regulations.  A producer-shipper  of                                                              
gas  could  elect  "to have  the  regulations  incorporated  as  a                                                              
contractual term in  their lease so that when that  is embodied in                                                              
their  lease it's  theirs,  they  own it,  they  hold  it for  the                                                              
duration of  that entire lease."  If the commissioner  revised the                                                              
regulations subsequently  because "they got  out of step  with the                                                              
requirements of AGIA,"  the shipper could elect to  "opt into" the                                                              
revised  regulations  or  remain  under the  commitment  of  their                                                              
lease agreement.                                                                                                                
                                                                                                                                
10:37:14 AM                                                                                                                   
                                                                                                                                
Senator Huggins  posed a scenario  of the ten year  gas production                                                              
tax exemption  for those parties  that committed during  the first                                                              
binding open  season and  asked if the  parties would  limit their                                                              
commitments to ten years rather than for 15 or 20 years or more.                                                                
                                                                                                                                
10:37:40 AM                                                                                                                   
                                                                                                                                
Ms.  Davis admitted  difficulty in  providing a  response to  this                                                              
due  to  changes  to  the tax  exemption  adopted  by  the  Senate                                                              
Resource  Committee.   If  it  was   assumed  that   the  ten-year                                                              
exemption was  "durable and  it would last",  she did  not predict                                                              
that  a  producer  would  restrict its  shipments  to  ten  years.                                                              
Instead, a  producer would consider  the "larger  financial issue"                                                              
of its  "business interest relative  to acquiring capacity  in the                                                              
pipeline given the  volume of gas I need to move  from the [North]                                                              
Slope  and the  contracts."  She  elaborated that  the  producer's                                                              
"driving  commitment" for  the pipeline would  determine  that the                                                              
amount  of capacity  it would  acquire  and the  duration of  that                                                              
capacity   would  be  "driven"   by  its   commercial  model   for                                                              
monetizing the  gas. This economic  analysis would consider  a tax                                                              
exemption,   the  royalty   provisions  as   established  in   the                                                              
regulations,  and primarily  by  "the economics".  Any changes  to                                                              
the tax  that occurred after the  ten year exemption  period would                                                              
be less important  to the producer's net present  value, but would                                                              
remain important from "a cash flow standpoint."                                                                                 
                                                                                                                                
10:39:50 AM                                                                                                                   
                                                                                                                                
          Section 43.90.320. Gas Production tax exemption. (page                                                                
     22, line 12)                                                                                                               
                                                                                                                                
Ms. Davis reported  that this provision was amended  by the Senate                                                              
Judiciary  Committee  as a  result  of  a  "legal view"  that  the                                                              
Alaska   Constitution,   which  provides   for   the  manner   the                                                              
Legislature   could   handle   taxation,   stipulated   that   the                                                              
Legislature  could   never  surrender   its  power  to   tax.  The                                                              
Legislature  could however  suspend or "contract  away" the  power                                                              
to tax and could  grant exemptions "by general  law". The "general                                                              
law" language  was the basis  of the legal  debate with  regard to                                                              
the tax  exemption proposed in this  bill. One position  held that                                                              
an exemption could  have no "contractual connection"  and although                                                              
laws  passed  by  a  legislature  could be  changed  by  a  future                                                              
legislature  and  therefore  be,  "a constitutional  grant  of  an                                                              
exemption  by  general  law"  the  exemption  could  not  be  made                                                              
durable.                                                                                                                        
                                                                                                                                
Ms.  Davis  contrasted  this  argument  with  another  legal  view                                                              
supported by  the Administration and  producers "by virtue  of the                                                              
fact  that this  was the  prior fiscal  contract structure."  This                                                              
view held  that general  law, such  as AGIA,  could authorize  the                                                              
execution  of a  contractual  exemption. This  "extra  contractual                                                              
underpinning"  authorized  in the  constitutional  provision  that                                                              
allowed taxation  to be  "contracted away",  would invoke  another                                                              
constitutional  provision known as  the "impairments  of contracts                                                              
clause". That clause  "essentially disables" a  future legislature                                                              
from impairing  the contract of  an earlier legislature.  For that                                                              
clause  to apply,  a  "very express  statement  of  intent by  the                                                              
earlier  legislature  that  it  intended  to create  a  right  via                                                              
contract" must exist.                                                                                                           
                                                                                                                                
10:43:30 AM                                                                                                                   
                                                                                                                                
Ms.  Davis relayed  that because  the  Senate Judiciary  Committee                                                              
concurred  with   the  former  legal  argument,   it  deleted  the                                                              
contractual tax  exemption language  from this bill.  The language                                                              
no longer provided  for a "certificate signed by  both parties" or                                                              
a reference to a "very clear contractual right".                                                                                
                                                                                                                                
Ms. Davis  pointed out that the  amendment language did  include a                                                              
"grant of ten years"  of protection to a shipper  that stated that                                                              
"on  the date  that they  commit their  gas at  open season,  that                                                              
whatever tax  rate is in place on  that date for production  tax -                                                              
this whole provision  only relates to production taxes  … they can                                                              
count on the  fact that the tax  will never be higher  than that."                                                              
The tax rate  could be lower  if a future legislature  changed the                                                              
tax to a lower rate.                                                                                                            
                                                                                                                                
10:45:00 AM                                                                                                                   
                                                                                                                                
Co-Chair Stedman  asked the possibility  of multiple  binding open                                                              
seasons to  achieve the capacity needed  to warrant a "four  and a                                                              
half bcf line" or other configuration.                                                                                          
                                                                                                                                
10:45:17 AM                                                                                                                   
                                                                                                                                
Ms. Davis  affirmed the  possibility that  the first binding  open                                                              
season  would not  secure the  necessary commitments  to fill  the                                                              
pipeline  to its  capacity.  In this  instance,  a second  binding                                                              
open season could be held to "top off" the capacity commitment.                                                                 
                                                                                                                                
10:45:47 AM                                                                                                                   
                                                                                                                                
Co-Chair Stedman  surmised that  if a  smaller company  was unable                                                              
to commit gas at  the first open season because  of its production                                                              
volume, the  company could have  a second opportunity to  ship gas                                                              
through the pipeline.                                                                                                           
                                                                                                                                
10:46:06 AM                                                                                                                   
                                                                                                                                
Ms. Davis  stressed that any  company that participated  after the                                                              
first binding  open season  would not be  eligible to  receive the                                                              
AGIA incentives.                                                                                                                
                                                                                                                                
10:46:29 AM                                                                                                                   
                                                                                                                                
Co-Chair  Stedman asked  if one  company committed  gas in  both a                                                              
first and  second open  season whether only  the gas  committed at                                                              
the first open season would qualify for the incentives.                                                                         
                                                                                                                                
10:46:47 AM                                                                                                                   
                                                                                                                                
Ms. Davis  again affirmed  that only the  volume of  gas committed                                                              
at the first open  season would be eligible because  the intent of                                                              
the AGIA incentives  was to encourage and accelerate  the progress                                                              
of the project.                                                                                                                 
                                                                                                                                
10:47:06 AM                                                                                                                   
                                                                                                                                
Senator  Elton  opined  on the  unlikelihood  that  a  legislature                                                              
would increase  the gas  production tax at  a time "somebody"  was                                                              
"struggling  with the  economics  of trying  to  make the  project                                                              
work." Therefore,  the tax  rate would be  "locked in"  before the                                                              
first open  season. Given  the timeline  discussed earlier  in the                                                              
hearing,  the pipeline  might  not be  completed  before the  year                                                              
2023 and  it would  be unlikely  that a  future legislature  would                                                              
"kind of  break faith  with this general  law". He concluded  that                                                              
the State could  be essentially committed to a  gas production tax                                                              
until  possibly 2033.  This  was a  long period  of  time and  the                                                              
"lock down" was "more of a political imperative."                                                                               
                                                                                                                                
10:49:06 AM                                                                                                                   
                                                                                                                                
Senator  Huggins reminded  that the  Committee had  agreed that  a                                                              
"window" would  be established to  provide the timing of  when the                                                              
taxes would be in effect.                                                                                                       
                                                                                                                                
10:49:37 AM                                                                                                                   
                                                                                                                                
Co-Chair Stedman posed the following.                                                                                           
                                                                                                                                
     The  issue,  I  guess  the  question  is,  the  way  this  is                                                              
     written, there's  the opportunity  at the first  binding open                                                              
     season to lock  in whatever tax rate it is,  currently its 22                                                              
     and  a half.  Is the  Administration looking  at some  window                                                              
     where  that's going  to  be reviewed  or  is the  operational                                                              
     plan  to  leave  it at  that  or  what's  the desire  of  the                                                              
     Administration?                                                                                                            
                                                                                                                                
10:50:03 AM                                                                                                                   
                                                                                                                                
Mr. Galvin responded as follows.                                                                                                
                                                                                                                                
     With  regard to  the current  PPT, we're  looking closely  at                                                              
     both  the  tax  rate  for  both oil  and  for  gas.  We  have                                                              
     discussed in  the context of the revenue projections  and the                                                              
     fact  that we're experiencing  lower  PPT receipts then  what                                                              
     we had  anticipated that the PPT  itself is going  to have to                                                              
     be  evaluated  in  terms  of whether  it  is  performing  and                                                              
     resulting  in what  you expected  when it  was passed  by the                                                              
     Legislature last year.                                                                                                     
                                                                                                                                
Co-Chair Stedman directed Mr. Galvin to limit his response to                                                                   
taxation on gas because "oil's a whole other problem".                                                                          
                                                                                                                                
Mr. Galvin continued.                                                                                                           
                                                                                                                                
     In  the context  of  PPT in  general,  we're  looking at  the                                                              
     nature of  the tax itself. That  also leads us to  a question                                                              
     of the  gas tax rate. At  this particular point and  time, we                                                              
     don't have enough  information to be able to  take a position                                                              
     on whether or  not the 22.5 percent is an  appropriate rate -                                                              
     is too  high or  too low. But  we do  anticipate both  in the                                                              
     near term  and mid term,  receiving more information  so that                                                              
     we  can have  a  better handle  on where  we  feel that  rate                                                              
     should  be  and information  that  we  can provide  to  [the]                                                              
     legislature  to make a  determination on  how you  feel where                                                              
     that rate should be.                                                                                                       
     What we  all are committed  to is  making a decision  as soon                                                              
     as  we  can with  the  information  that's available  to  us.                                                              
     Clearly  we need to  come to an  understanding before  we get                                                              
     to that  open season so  that the  rate that's locked  in for                                                              
     the  timeframe that  we all  recognize could  be much  longer                                                              
     than ten years,  that it's a rate that we're  all comfortable                                                              
     with. So  we all are  going to need  to assess that.  I don't                                                              
     think it's something  that we want to say at  this point that                                                              
     22.5 percent is  the rate that's going to be  in place at the                                                              
     time  of the  open season.  I think  we're going  to need  to                                                              
     look at that.                                                                                                              
                                                                                                                                
10:52:13 AM                                                                                                                   
                                                                                                                                
Senator Huggins agreed that the Administration was reviewing the                                                                
"elements". The issue was that the date of the "window" would be                                                                
agreed upon rather than the actual rate.                                                                                        
                                                                                                                                
10:52:56 AM                                                                                                                   
                                                                                                                                
Co-Chair  Stedman  commented  that  if the  rate  were  increased,                                                              
calculations  must  be made  to  ensure  that  the State  was  not                                                              
disadvantaged  during the  first open season.  Conversely,  if the                                                              
rate  were  too high,  the  tax  could "block"  participants  from                                                              
committing at open season due to the economic impact.                                                                           
                                                                                                                                
10:53:15 AM                                                                                                                   
                                                                                                                                
Mr. Galvin agreed  to the duty to establish a time  frame in which                                                              
the  tax  rate  would be  discussed.  The  Department  of  Revenue                                                              
anticipated  information  would   be  available  in  the  upcoming                                                              
summer  evaluating the  current tax  rate in  comparison to  rates                                                              
imposed   elsewhere.  Upon   receipt  of   that  information   and                                                              
discussions with  the Legislature, an appropriate  timeframe could                                                              
be determined.                                                                                                                  
                                                                                                                                
The bill was HELD in Committee.                                                                                                 
                                                                                                                                
ADJOURNMENT                                                                                                                 
                                                                                                                                
Co-Chair Bert Stedman adjourned the meeting at 10:55:13 AM                                                                    

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