Legislature(2001 - 2002)

08/15/2001 09:08 AM NGP

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
                     ALASKA STATE LEGISLATURE                                                                                 
             JOINT COMMITTEE ON NATURAL GAS PIPELINES                                                                         
                         Fairbanks, Alaska                                                                                      
                          August 15, 2001                                                                                       
                             9:08 a.m.                                                                                          
SENATE MEMBERS PRESENT                                                                                                        
Senator John Torgerson, Chair                                                                                                   
Senator Pete Kelly                                                                                                              
Senator Donny Olson, alternate                                                                                                  
SENATE MEMBERS ABSENT                                                                                                         
Senator Rick Halford                                                                                                            
Senator Johnny Ellis                                                                                                            
OTHER MEMBERS PRESENT                                                                                                         
Senator Gary Wilken                                                                                                             
HOUSE MEMBERS PRESENT                                                                                                         
Representative Joe Green, Vice Chair                                                                                            
Representative Scott Ogan                                                                                                       
Representative John Davies                                                                                                      
Representative Hugh Fate, Alternate                                                                                             
Representative Reggie Joule, Alternate                                                                                          
HOUSE MEMBERS ABSENT                                                                                                          
Representative Mike Chenault, Alternate                                                                                         
Representative Brian Porter                                                                                                     
COMMITTEE CALENDAR                                                                                                            
                NATURAL GAS PIPELINE PRESENTATIONS                                                                              
Congressional Update                                                                                                            
Regulatory Agencies' Update                                                                                                     
Alaska Highway Natural Gas Policy Council Update                                                                                
Department of Revenue - discussion of tax issues                                                                                
Overview by the Alaska Natural Gas to Liquids Company                                                                           
Alaska Gasline Port Authority Update                                                                                            
Presentations from Producer Groups                                                                                              
Foothills Pipe Lines Ltd. Update                                                                                                
Joint Natural Gas Pipelines meeting - discuss scheduling                                                                        
Additional Public Testimony by invitation of the Chair                                                                          
The Honorable Ted Stevens                                                                                                       
Public Testimony                                                                                                                
WITNESS REGISTER                                                                                                              
Mr. Mike Menge                                                                                                                  
Staff to Senator Frank Murkowski                                                                                                
United States Senate                                                                                                            
322 Hart Building                                                                                                               
Washington D.C.  20510-0202                                                                                                     
Mr. C. J. Zane                                                                                                                  
Dyer, Ellis & Joseph                                                                                                            
Washington D.C.                                                                                                                 
Mr. Duncan Smith                                                                                                                
Dyer, Ellis & Joseph                                                                                                            
Washington D.C.                                                                                                                 
Mr. John Katz, Director                                                                                                         
State and Federal Relations and                                                                                                 
  Special Counsel to the Governor                                                                                               
444 N Capitol NW, Suite 336                                                                                                     
Washington D.C. 20001-1512                                                                                                      
Mr. Bob Loeffler, Attorney                                                                                                      
Morrison and Forrester LLP                                                                                                      
2000 Pennsylvania Ave., S.W.                                                                                                    
Washington D.C.  20006-1888                                                                                                     
Ms. Nan Thompson, Chairperson                                                                                                   
Regulatory Commission of Alaska                                                                                                 
1016 W 6th Ave.                                                                                                                 
Anchorage AK  99501-1963                                                                                                        
Mr. John Katz, Director                                                                                                         
Office of Energy Projects                                                                                                       
Federal Energy Regulatory Commission                                                                                            
888 First St., N.E.                                                                                                             
Washington D.C.  20426                                                                                                          
Mr. Bill Britt, Pipeline Coordinator                                                                                            
Department of Natural Resources                                                                                                 
411 W 4th Ave.                                                                                                                  
Anchorage AK  99501-2343                                                                                                        
Mr. Mark Myers                                                                                                                  
Division of Oil and Gas                                                                                                         
Department of Natural Resources                                                                                                 
550 W 7th Ave., Ste 800                                                                                                         
Anchorage AK 99501                                                                                                              
Ms. Bonnie Robson, Petroleum Investment Manager                                                                                 
Division of Oil and Gas                                                                                                         
Department of Natural Resources                                                                                                 
550 W 7th Ave., Ste. 800                                                                                                        
Anchorage AK  99501-3560                                                                                                        
Mr. Wilson Condon, Commissioner                                                                                                 
Department of Revenue                                                                                                           
PO Box 110400                                                                                                                   
Juneau AK  99811-0400                                                                                                           
Mr. Ed Small                                                                                                                    
Cambridge Energy Research Associates, Inc. (CERA)                                                                               
Charles Square, 20 University Road                                                                                              
Cambridge MA 02138                                                                                                              
Mr. Richard Peterson, CEO                                                                                                       
Alaska Natural Gas to Liquids Co.                                                                                               
310 K Street                                                                                                                    
Anchorage AK                                                                                                                    
Mr. Dave Dengle, Executive Director                                                                                             
Alaska Gasline Port Authority                                                                                                   
406 Cushman Street                                                                                                              
Fairbanks AK 99701                                                                                                              
Mr. Rigdon Boykin                                                                                                               
Special Counsel to the Port Authority                                                                                           
O'Melveny & Myers, LLP                                                                                                          
151 East 53rd Street                                                                                                            
New York NY                                                                                                                     
Mr. Robbie Schilhab                                                                                                             
Exxon Mobil                                                                                                                     
Representing Alaska Gas Producers Pipeline Team                                                                                 
550 West 5th Avenue, Suite 500                                                                                                  
Anchorage AK  99501                                                                                                             
Mr. Joseph Marushack                                                                                                            
Alaska Gas Producers Pipeline Team                                                                                              
550 West 5th Avenue, Suite 500                                                                                                  
Anchorage AK  99501                                                                                                             
Mr. John R. Ellwood, Vice President                                                                                             
Engineering and Operations                                                                                                      
Foothills Pipe Lines Ltd.                                                                                                       
3100-707 Eighth Ave., S.W.                                                                                                      
Calgary, Alberta, Canada   T2P 3W8                                                                                              
Ms. Ronda Thompson, Special Assistant                                                                                           
International Trade Office                                                                                                      
Alaska Legislature                                                                                                              
716 W 4th Ave., Ste. 660                                                                                                        
Anchorage AK  99801                                                                                                             
Ms. Kara Moriarty, President and CEO                                                                                            
The Greater Fairbanks Chamber of Commerce                                                                                       
250 Cushman St., Suite 2-D                                                                                                      
Fairbanks AK 99701                                                                                                              
Mr. Gordie Lewis                                                                                                                
Golden Valley Electric Association                                                                                              
PO Box 71249                                                                                                                    
Fairbanks AK 99707-1249                                                                                                         
Mr. Paul Metz                                                                                                                   
3510 Rosie Creek Rd.                                                                                                            
Fairbanks AK                                                                                                                    
The Honorable Ted Stevens                                                                                                       
United States Senate                                                                                                            
522 Hart Building                                                                                                               
Washington D.C.                                                                                                                 
Ms. Deb Moore                                                                                                                   
Northern Alaska Environmental Center                                                                                            
Fairbanks AK                                                                                                                    
Mr. Ken Freeman, Member                                                                                                         
Alaska Highway Natural Gas Policy Council (AHNGPC)                                                                              
Office of the Governor                                                                                                          
550 W. 7th Ave., Suite 1700                                                                                                     
Anchorage AK  99501                                                                                                             
ACTION NARRATIVE                                                                                                              
TAPE 01-12, SIDE A                                                                                                            
9:08 a.m.                                                                                                                       
CHAIRMAN JOHN TORGERSON called the Joint Committee on Natural Gas                                                               
Pipelines meeting to order at 9:08 a.m. and announced that Mr. Mike                                                             
Menge, staff for Senator Murkowski, would comment.                                                                              
                       CONGRESSIONAL UPDATE                                                                                   
MR. MIKE MENGE,  staff to Senator  Frank Murkowski, said  he came to                                                            
Alaska  in  1979 with  the  U.S. Geological   Survey and  spent  the                                                            
ensuing  years working  on  various oil,  gas and  coal development                                                             
projects  across the  state,  including working  on  the TAPS  line.                                                            
During Governor Hickel's  latest governorship, he came to Juneau and                                                            
worked four  years as Director of  Environmental Quality  within the                                                            
Alaska  Department  of  Environmental  Conservation.  So,  he got  a                                                            
chance to  look at resource  issues from  a permitting perspective,                                                             
which controls  a lot of Alaskan projects.  Over time it  has become                                                            
the  dominant  issue.   Alaska  is  awash  in  resources,   but  not                                                            
necessarily  awash  in  good  will  or the  ability  to  permit  the                                                            
development of  these resources. When Senator Murkowski  assumed the                                                            
chairmanship  of the  Natural Resources  Committee  in D.C., he  was                                                            
invited to  serve as professional  staff  dealing with public  land,                                                            
energy issues  and Alaskan  issues. When  he was authorized  officer                                                            
for the  TransAlaska pipeline  he and Jerry  Brossia (then  with the                                                            
Alaska Department  of Natural Resources)  created the Joint  Federal                                                            
State Pipeline  Monitoring  Office, which  was created primarily  to                                                            
issue the  right-of-way permits  necessary  to proceed forward  with                                                            
the TAGS line and also  to continue monitoring the TAPS line. So, he                                                            
has followed the  gas development in Alaska from "the  lowest rung."                                                            
MR. MENGE said  he would give them  a brief update on activities  in                                                            
Washington, D.C. where  the Senate is engaged in the energy package.                                                            
When  the  Senate  finishes  its  package,  both  House  and  Senate                                                            
versions will  go to a conference committee. The committee  will get                                                            
into the meat of the energy  package starting about September 12 and                                                            
expects to have an energy  bill before the full Senate by the end of                                                            
September.  With the  transition of  power in the  Senate, it  looks                                                            
like issues  will be debated  well through  October. Other  than the                                                            
appropriations,  the energy  bill will  be the  principle issue.  He                                                            
said further:                                                                                                                   
     Senator  Murkowski has  encouraged the  advocates for  gas                                                                 
     development  in Alaska to bring forth energy legislation,                                                                  
     which  would  be considered  during  the  energy package.                                                                  
     About  two or three weeks ago  we received that submittal                                                                  
     from  the  producers   group.  We  have  also  asked   the                                                                 
     TransCanada  Foothills group  for legislation and to  this                                                                 
     point  that has not  been forthcoming.  Senator Torgerson                                                                  
     shared  with  me  proposed  legislation  I  had  not  seen                                                                 
     before.  So, now is the right  time for the consideration                                                                  
     of  that legislation.  We  have submitted  the producers'                                                                  
     legislation  to various federal agencies for their  review                                                                 
     and  comment and  have  not received  that back  yet.  The                                                                 
     Senator will  reserve his actions until after  we have had                                                                 
     a full hearing  of this information. I believe  we will be                                                                 
     scheduling  a hearing in mid-September  to take a look  at                                                                 
     this information  shortly after  we get back. The Senator                                                                  
     has made it very clear that  he prefers the Alaska line, I                                                                 
     think for all the reasons  that Senator Torgerson has been                                                                 
     working  on  and elaborating,  as  well. We  have serious                                                                  
     concerns  over the  'permittability'  of the over-the-top                                                                  
     route.  We also have concerns  with the potential impacts                                                                  
     of that  line. However, Senator  Murkowski has not closed                                                                  
     out  his options and  is prepared to  listen with an  open                                                                 
     mind to  all of the various proposals  before we draw  our                                                                 
     conclusions.  Clearly  the energy in  the committee  right                                                                 
     now is focused  primarily on ANWR opening, but  not to the                                                                 
     exclusion  of potential pipeline  legislation, as well.  I                                                                 
     think  we'll   be  doing  a  full-court  press  in   doing                                                                 
     everything we can to advance  the ANWR legislation and now                                                                 
     would  be the time when  that requires  almost all of  our                                                                 
     energy. That  is pretty much all I have to report  at this                                                                 
     point. I'd be pleased to answer any questions…"                                                                            
CHAIRMAN TORGERSON added  that he had shared Charlie Cole's proposed                                                            
legislation  with  Mr.  Menge  this morning,  not  anything  he  had                                                            
written personally.                                                                                                             
REPRESENTATIVE  OGAN asked  him to comment  on what a radio  station                                                            
was saying  about legislation  Senator Murkowski  had introduced  on                                                            
this issue. He thought there was only draft legislation.                                                                        
MR. MENGE replied:                                                                                                              
     I have  also encountered that  rumor and I can assure  you                                                                 
     that  it is  absolutely  not true.  We have  received  the                                                                 
     legislation  offered  by  the producers'  group.  We  have                                                                 
     disseminated  that to  various federal  organizations  for                                                                 
     their review and comment.  Senator Murkowski has not taken                                                                 
     a position  on that  legislation nor  has he offered  that                                                                 
     legislation   and  will  not   until  after  we  have   an                                                                 
     opportunity  to  look  at it  in  significant  detail  and                                                                 
     receive  the input from a lot  of other organizations  and                                                                 
     entities.  Thank you for the opportunity to clarify  that.                                                                 
CHAIRMAN  TORGERSON  asked  if he  was guessing  September  for  the                                                            
hearing  Senator  Murkowski  had  been  able  to  schedule  on  that                                                            
legislation with Mr. Bingaman.                                                                                                  
MR. MENGE said  he was guessing and there had only  been preliminary                                                            
discussions.  He didn't  think there  would be  any opposition  from                                                            
Senator Bingaman to have a hearing.                                                                                             
CHAIRMAN  TORGERSON  asked him  to tell  Senator  Murkowski that  he                                                            
would like  to have the  opportunity to testify  on any legislation                                                             
that may come through on this proposal.                                                                                         
MR. MENGE said he would carry that request to the Senator.                                                                      
REPRESENTATIVE  DAVIES  said that he  thought the  bill provides  an                                                            
advantage by expediting  the process for the northern route and, "We                                                            
would have serious concerns with that…"                                                                                         
MR. MENGE said he would pass on that concern.                                                                                   
CHAIRMAN TORGERSON announced  that C.J. Zane and Duncan Smith, Dyer,                                                            
Ellis and Joseph,  were under contract  through Legislative  Council                                                            
to  monitor the  progress  on  the energy  bill  in the  House,  the                                                            
Senate,  the conference committee  and the  Bush Administration.  He                                                            
said they actually signed  the contract yesterday, but they had been                                                            
on the  job for  over a month  and had  set up  some very  important                                                            
meetings between him [Chairman Torgerson] and staffers in D.C.                                                                  
MR. C.J. ZANE, Dyer, Ellis  & Joseph, said he was Chief of Staff for                                                            
Congressman  Don Young for many years  and is familiar with  Alaskan                                                            
issues. He  also lobbied for Native  corporations, Alyeska  Pipeline                                                            
and Alaskan based  interests for a number of years.   He said that a                                                            
partner  in the  law firm,  Mr. Duncan  Smith, worked  as  committee                                                            
staff for Congressman Young  at the same time. They feel they are in                                                            
a good position  to help the committee  stay on top of developments                                                             
with Congress  and the Bush Administration.  The administration  can                                                            
do a number of  energy policy things on its own that  may or may not                                                            
have an effect on the Alaska  natural gas project. There is a lot of                                                            
interest in the  energy issue.  The bill that just  passed the House                                                            
didn't seem to  have anything that was disproportionately  skewed to                                                            
adversely affect  this project. That  bears watching as this  effort                                                            
moves forward. Other than  the tax grants and incentive packages for                                                            
other types of  energy, the only thing in the House  bill of note is                                                            
the language that bars the over-the-top route.                                                                                  
     I   think   that    several   democratic   senators    who                                                                 
     traditionally  vote with the  environmental community  are                                                                 
     going to be very key in  this debate in as much as several                                                                 
     of the national environmental  groups have said they would                                                                 
     support natural  gas delivered from Alaska, but  they have                                                                 
     made it pretty  clear that does not include a  system that                                                                 
     would be in the Beaufort Sea...                                                                                            
9:27 a.m.                                                                                                                       
MR. DUNCAN SMITH,  Dyer, Ellis & Joseph, added that  four bills were                                                            
consolidated  into one.  Everyone was  putting forth  ideas and  the                                                            
bill needs to be watched through to the final package.                                                                          
REPRESENTATIVE    DAVIES   asked   if   he   concurred    with   the                                                            
characterization  of the producers'  bill that it provides  at least                                                            
equal footing, if not an advantage, to the over-the-top route.                                                                  
MR. ZANE  answered that  he read  the transcript  that Charlie  Cole                                                            
provided  yesterday  and could  understand  why  John  Katz and  Mr.                                                            
Loeffler believe  the language provides  for an over-the-top  route,                                                            
but he wasn't sure which  proposal Representative Davies was looking                                                            
at.  The  Walker  Walker  & Associates   language  [commissioned  by                                                            
Charlie Cole  and the Port Authority)  does not advantage  the over-                                                            
the-top route;  it would advantage the existing Foothills  and Yukon                                                            
Pacific line.                                                                                                                   
REPRESENTATIVE DAVIES asked  him to expand on language regarding the                                                            
over-the-top route in the House bill.                                                                                           
MR. ZANE said  he hadn't heard any  concerns with the language  from                                                            
the Canadians.  He has heard that  people were wondering  if similar                                                            
language could be added to a Senate bill.                                                                                       
MR. SMITH reiterated  that there are  a lot of moving parts  to this                                                            
bill and  this is one of  a whole range of  issues. A lot  of people                                                            
are still presenting  their ideas  and they need to be watched  as a                                                            
final  package  is  put together.   He agreed  with  Mr.  Zane  that                                                            
analyses  that had been done  to date had  been pretty careful,  but                                                            
they all conclude that you have to see what the final words say.                                                                
9:35 a.m.                                                                                                                       
CHAIRMAN TORGERSON  said he thought the criticism  Alaska is getting                                                            
from Canada is on two fronts.  One is from the Northwest Territories                                                            
on banning  the over-the-top route;  they would like to see  Prudhoe                                                            
Bay and  the Mackenzie Delta  in one line.  The other front  that is                                                            
getting more press is the  opposition to opening ANWR from our Yukon                                                            
friends and  others throughout Canada.  He thanked them for  joining                                                            
the committee.                                                                                                                  
                   Canadian Political Reactions                                                                               
CHAIRMAN TORGERSON asked  Mr. John Katz, Director, State and Federal                                                            
Relations, and  Special Counsel to the Governor in  Washington, D.C.                                                            
for an update on Canadian  political reactions to the ban imposed by                                                            
the Congress  on the over-the-top  route, Prime Minister  Chretien's                                                            
comments during  the G-8 summit when he appeared to  be favoring one                                                            
route over the other and on the producers' legislation.                                                                         
                        REGULATORY AGENCIES                                                                                   
MR. JOHN KATZ,  Director, State and  Federal Relations, and  Special                                                            
Counsel to the  Governor in Washington, D.C. said  that Bob Loeffler                                                            
was with  him and he  would testify  on other  matters later  in the                                                            
MR. KATZ said:                                                                                                                  
     My  testimony today  is the  product of  discussions  with                                                                 
     U.S. and  Canadian officials  at both the federal and,  in                                                                 
     the  case of Canada,  territorial and  provincial levels,                                                                  
     discussions  with the private sector and various  interest                                                                 
     groups.  I would like to very  briefly give my perception                                                                  
     of the current  situation with respect to four  or five of                                                                 
     the most  important entities  and interests in Canada  and                                                                 
     then  respond to  four or  five commonly  asked questions                                                                  
     about  what's going on  in Canada in  relationship to  the                                                                 
     United States.                                                                                                             
     The  first  category  would  certainly   be the  Canadian                                                                  
     federal government.  I think all of you are familiar  with                                                                 
     the so called  open mike remarks of the Prime  Minister of                                                                 
     Canada, Chretien, in which  he was heard to say at the G-8                                                                 
     summit  to President Bush, 'Well,  can't we basically  get                                                                 
     on with building the over-the-top route.'                                                                                  
     We have since followed up  on those remarks in Canada with                                                                 
     our Canadian  consultants and also through our  means. The                                                                 
     official  position   of the  Canadian   government  as  we                                                                 
     understand  it remains route and project neutrality.  They                                                                 
     would prefer in the ideal  circumstance that the producers                                                                 
     and pipeliners  come to them  with some unity on how  they                                                                 
     would  like to proceed in commercializing  natural gas  in                                                                 
     the U.S. and Canadian Arctic.                                                                                              
     There have been presentations  at the cabinet level of the                                                                 
     Canadian  government. I think  it is fair to say there  is                                                                 
      some individual ministers who would favor the over-the-                                                                   
     top  route or  who would favor  a Mackenzie  Valley  route                                                                 
     controlled  completely  by Canada.  There  are others  who                                                                 
     would favor the southern,  the Al-Can route. I think it is                                                                 
     also the case  that the Canadian cabinet has been  briefed                                                                 
     on this issue  and is aware that in the case of  the over-                                                                 
     the-top  route there  would  be a significant  permitting                                                                  
     process  that would be required  involving many different                                                                  
     regulatory processes and  permits. Whereas with respect to                                                                 
     the  southern  route,  thanks to  ANGTA  of 1976  and  the                                                                 
     ensuing  U.S. and Canada  decisions,  the decision making                                                                  
     process  would  be much  less complicated.  But  for  this                                                                 
     moment  in history,  I think  the official  position  will                                                                 
     remain neutral  while individual ministers certainly  have                                                                 
     their own personal predilections.                                                                                          
     A second major  force in the Canadian political  situation                                                                 
     is  the position of  the various provincial  premiers  and                                                                 
     territorial  premiers. As all of you know, Premier  Kakfwi                                                                 
     of the Northwest Territories  strongly favors an over-the-                                                                 
     top route  or a Mackenzie Valley  route. He is opposed  to                                                                 
     the  Al-Can  or  the  southern  route.  In  contrast,  the                                                                 
     premier of  the Yukon Territory has expressed  her support                                                                 
     for the Al-Can  route. British Columbia so far  in its new                                                                 
     administration  has  not  been  quite as  active,  but  we                                                                 
     expect that as Premier Campbell  gets more acquainted with                                                                 
     these issues, our expectation  is that he will be a strong                                                                 
     advocate for the southern route, as well.                                                                                  
     Premier  Klein of Alberta has  taken the position that  he                                                                 
     does  not  want  to  see a  so-called  'bullet  pipeline'                                                                  
     through  his  province.  That is,  he  wants to  see  some                                                                 
     additional  commercial value  from natural gas production                                                                  
     and transportation and he  has speculated about the use of                                                                 
     gas  liquids or expanding  the petrochemical  industry  in                                                                 
     The  next  group  to mention  is  the  producers  and  the                                                                 
     pipeliners  themselves. Our information is that  thus far,                                                                 
     the  North   Slope  gas  producers   and  their  Canadian                                                                  
     subsidiaries  and  affiliates have  not been  that active                                                                  
     yet, in the  Canadian decision-making process.  I think at                                                                 
     least  two entities have been  quite active. The first  is                                                                 
     Continental  Oil, which  has substantial  holdings in  the                                                                 
     Mackenzie  Valley. Some of you might have seen  the recent                                                                 
     comments of their CEO strongly  advocating the development                                                                 
     of the gas reserves in the  Mackenzie Valley and not being                                                                 
     particularly  supportive at all  of the southern route  or                                                                 
     the  immediate commercialization  of  North Slope natural                                                                  
     gas.  His view is  that there are  sufficient reserves  in                                                                 
     the  Mackenzie  Valley  and  he would  like  to  see  them                                                                 
     developed sooner rather than later.                                                                                        
10:41 a.m.                                                                                                                      
     All  of  you   are  familiar  with  Foothills  and   their                                                                 
     activities.  They have recently  confirmed their position                                                                  
     that  all of this  was settled between  the United States                                                                  
     and  Canada in  the late  1970's and  that  they have  the                                                                 
     exclusive franchise to develop  North Slope natural gas by                                                                 
     means of the southern route.                                                                                               
     The  next  set  of  interests,  which  I  think  are  very                                                                 
     important  in Canada  and in  the U.S.  also are Canada's                                                                  
     aboriginal people. At the  outset I should mention that as                                                                 
     most of  you know that the North  Slope Eskimos in Alaska                                                                  
     have  expressed  strong  opposition  to  the over-the-top                                                                  
     route.  In   Canada,  there  isn't  the  same  population                                                                  
     diversity along the coast.  So I'm going to focus on first                                                                 
     the  clans and tribes  of the Northwest  Territory.  We're                                                                 
     advised  that  by  and  large   the  issue  there  is  not                                                                 
     aboriginal  land claims themselves,  but rather ownership                                                                  
     and profit from the pipeline, itself.                                                                                      
     Most  of the  clans started  with the position  that  they                                                                 
     wanted  30 percent  ownership  interest in  the pipeline.                                                                  
     More  recently,   one  clan  has  advocated  100  percent                                                                  
     ownership  in  the  pipeline  and  so  that's  thrown  the                                                                 
     situation  into  some state  of  fluidity and  chaos.  The                                                                 
     ownership  interests   there  have  yet  to be  resolved.                                                                  
     There's  been some  talk about  asking  for intervention,                                                                  
     perhaps from the Canadian federal government.                                                                              
     In the  south, the  situation is a  little bit different.                                                                  
     Aboriginal  claims  have  not  been  fully  resolved,  but                                                                 
     there's only one major tribe  or clan to deal with in that                                                                 
     circumstance.  We've  been  advised  that it  is unlikely                                                                  
     there that the absence of  a full settlement at this point                                                                 
     would  be  an  obstacle  to  pipeline  construction.   The                                                                 
     feeling  is  that either  there  will be  a comprehensive                                                                  
     aboriginal  settlement  or if  not, that  probably a  deal                                                                 
     could be negotiated with respect to pipeline, itself.                                                                      
     Other  groups have weighed  in to the  fray. Canada has  a                                                                 
     very  active environmental  movement as  we do. They  have                                                                 
     expressed opposition to  the over-the-top route, but we do                                                                 
     not  detect that there  is concerted  opposition, yet,  or                                                                 
     perhaps  a conscious  joining  of Canadian  environmental                                                                  
     groups  with  Alaska  groups  and  with national  groups.                                                                  
     However,  I  think  it  is  fair  to  postulate  that  the                                                                 
     environmental  sector,  probably  in both  Canada and  the                                                                 
     United States will oppose an over-the-top route.                                                                           
     Moving  on quickly now to some  of the questions that  are                                                                 
     on people's minds about  the Canadian situation. The first                                                                 
     question  is  how did  the Tauzin  Young  amendment  [that                                                                 
     would   preclude  construction   of   over-the-top   route                                                                 
     offshore]  affect  the situation.  Certainly,  there  were                                                                 
     articles  in  Canada  of  when  this  occurred   and  some                                                                 
     editorial  comment, as well,  some to the effect that  the                                                                 
     United States  ought not to be able to dictate  what might                                                                 
     be  best  for Canada.  The  reaction  was similar  to  the                                                                 
     reaction  when our  own legislature  passed  a relatively                                                                  
     similar amendment.                                                                                                         
     The second thing I want  to comment on is the two-pipeline                                                                 
     scenario.  As  many  of  you  know,  some  of  the Alaska                                                                  
     political   leadership   has  advocated   a  two-pipeline                                                                  
     scenario believing  that the construction of the  southern                                                                 
     route  followed  by  the  Mackenzie  route  represents   a                                                                 
     reasonable  development  scenario for  both countries.  In                                                                 
     recent times  in Canada we've seen some media  comment and                                                                 
     some  of the  political leadership  saying,  'Yes, a  two-                                                                 
     pipeline  scenario is  fine, but let's  build a Mackenzie                                                                  
     Valley  pipeline first  to Alberta and  then we can  build                                                                 
     the Al-Can  Highway and commercialize  Alaska North  Slope                                                                 
     gas after  that. The feeling in that scenario  is that the                                                                 
     Mackenzie  Valley route  involves sufficient  reserves  in                                                                 
     Canada  and  the  ability  of the  Canadian  governmental                                                                  
     process  to control the permitting  and construction.  So,                                                                 
     it  would be  a reversal  of  what some  Alaska interests                                                                  
     argued earlier.                                                                                                            
     A  third issue  is the linkage  between ANWR  and the  gas                                                                 
     line.  As most of you know, the  official position of  the                                                                 
     Canadian  government is in opposition  to ANWR and Canada                                                                  
     has been active from time  to time back here in Washington                                                                 
     in expressing its opposition  to ANWR. Some interests have                                                                 
     suggested  to the Canadian political leadership  that they                                                                 
     link  the gas line and  ANWR and indicate  that they  will                                                                 
     only support  the commercialization of Alaska  North Slope                                                                 
     gas  if something  to their liking  can be  worked out  on                                                                 
     ANWR.  Fortunately, we  do not detect  that that idea  has                                                                 
     spread  its  roots.   There  has  been  a  little  bit  of                                                                 
     speculation  about  it,  but  to our  knowledge  very  few                                                                 
     people  in the political  leadership  of Canada have  been                                                                 
     willing to create that linkage.  They would much prefer to                                                                 
     evaluate each project on its own merits.                                                                                   
     Finally,  just a couple of comments  on the U.S.-Canadian                                                                  
     federal  relationship,  generally.  There  was  an energy                                                                  
     summit between President  Bush and Prime Minister Chretien                                                                 
     earlier on. They talked  about the possibility of creating                                                                 
     a North American Continental  Energy Task Force that would                                                                 
     include  the United States, Canada  and Mexico. There  has                                                                 
     not  been  significant   follow  through  there   at  high                                                                 
     political  levels. We are aware  that a bureaucratic  task                                                                 
     force   of  U.S.  agency   people  has   met  with   their                                                                 
     counterparts  in Canada, but  that process has been  going                                                                 
     on  for  years.  To  our knowledge,   there  haven't  been                                                                 
     significant  discussions  either focused  specifically  on                                                                 
     the White  House level or Prime Minister Chretien's  level                                                                 
     in  the aftermath  of the summit  they held.  So, at  this                                                                 
     point,  our understanding  is  neutrality on  the part  of                                                                 
     Canadian  federal government  and on the part of the  U.S.                                                                 
     government,  the best  indication of  where the President                                                                  
     and Vice President stand  is the very comprehensive energy                                                                 
     report  that was issued  by the Administration  some  time                                                                 
     ago where  they directed the  Secretary of Energy and  the                                                                 
     Secretary  of State to  remain very  much involved in  the                                                                 
     pipeline  issue and in the relationship  between the  U.S.                                                                 
     and  Canada. With that,  Mr. Chairman,  I think I'll  stop                                                                 
     for questions.                                                                                                             
CHAIRMAN TORGERSON  said he wrote  a letter to Mr. Katz,  which laid                                                            
out some questions,  most of which  had to do with FERC issues  that                                                            
Mr.  Loeffler  would  testify  on.  He  asked  if  the over-the-top                                                             
legislation   that  Congressman  Young   had  put  in  damaged   our                                                            
relationship with our Canadian counterparts.                                                                                    
MR. KATZ answered:                                                                                                              
     I would  have to say  from the perspective  here, there's                                                                  
     been no permanent damage.  I think the Canadian leadership                                                                 
     is  calculating  all  that  in  their  own  equation  with                                                                 
     respect to  the gas line, but we hear loud and  clear when                                                                 
     Canada  has problems with fisheries,  ANWR, etc. While  we                                                                 
     speculate  and  know that  there  is some  heartburn  with                                                                 
     that, it hasn't reached  the same crescendo at this point.                                                                 
     Recognizing  that  you will  be  leading a  delegation  to                                                                 
     Canada,  as well, I  think you will get  a sense for  that                                                                 
     also.  When the state administration  was there some  time                                                                 
     ago, the Canadian  leadership did talk about the  position                                                                 
     we have taken with respect  to over-the-top, but they were                                                                 
     willing  to move on  to discuss the pros  and cons of  the                                                                 
     various projects generally.                                                                                                
CHAIRMAN  TORGERSON  asked Mr.  Katz to  comment  on the  producers'                                                            
legislation. At a meeting  with the Governor's Conference in Juneau,                                                            
Charlie  Cole asked  him questions.    The committee  received  that                                                            
transcript  yesterday.   He  asked  Mr.  Katz  why  he  thought  the                                                            
producers'  legislation favors a particular  route over another  and                                                            
whether it  actually pulls provisions  from the 1977 ANGTA  and puts                                                            
them into the Natural Gas Act.                                                                                                  
MR. KATZ replied:                                                                                                               
     Thank you  for giving me the opportunity to comment  and I                                                                 
     very  much appreciated  the comments  that  my friend  and                                                                 
     colleague,  C.J. Zane,  said a  couple of  minutes ago.  I                                                                 
     think  we  made  three  or  four observations   about  the                                                                 
     producers'  legislation  and I'll very  briefly summarize                                                                  
     them here.  For one thing, I think the legislation  puts a                                                                 
     significant   amount   of  control   in   the  producers,                                                                  
     themselves.  The  entities that  control the  natural  gas                                                                 
     under their  amendments have tremendous authority  through                                                                 
     the  regulatory  process and  in deciding  generally  what                                                                 
     projects  to pursue. That comes  out of the definition  of                                                                 
     shipper in  there and the fact that the producers  control                                                                 
     the  gas.   Under  the  formulation   in  the  producers'                                                                  
     legislation,  the decision  by FERC is  made basically  on                                                                 
     so-called  market  placed grounds  - that  is, they  don't                                                                 
     have  the authority  under the legislation  to adjudicate                                                                  
     between   competing  applications.   They  look  at   each                                                                 
     application  in  terms of  three  criteria. The  first  is                                                                 
     rates  and charges and  the second is  control of the  gas                                                                 
     and  third is meetings,  environmental  and certain  other                                                                 
     standards.  If they make positive determinations  on those                                                                 
     grounds,   they   must  approve   the   application.   The                                                                 
     application  will  be  filed  for  the most  part  by  the                                                                 
     entities that control the gas.                                                                                             
     Then  quickly there  are three  other things  I would  say                                                                 
     about  it.  The  legislation  in  our  judgment  does  not                                                                 
     preempt  ANGTA 1976.  That remains existing  law, but  the                                                                 
     producers'  legislation   would  give  the producers   the                                                                 
     option  of proceeding  under their  expedited process  and                                                                 
     under  the  Natural  Gas  Act even  with  respect  to  the                                                                 
     southern  route. So, the question  arises, does Foothills                                                                  
     or the pipeline companies [END OF TAPE].                                                                                   
TAPE 01-12, SIDE B                                                                                                            
MR. KATZ continued:                                                                                                             
     ...With respect to the southern  route, how would ANGTA of                                                                 
     1976  relate to this  expedited process  whereby Congress                                                                  
     under  the  producers'   legislation  would  be  creating                                                                  
     another process,  which in theory could be applied  to the                                                                 
     southern route, as well.                                                                                                   
     Secondly,  the  producers'  amendments   would  allow  the                                                                 
     application   of  the  expedited  process  to  any   other                                                                 
     application  for a route and  project including the  over-                                                                 
     the-top   route.  So,  while   they're  proceeding   under                                                                 
     existing  law,  which  would  involve   a very  difficult                                                                  
     regulatory process, the  producers' amendments would allow                                                                 
     for an expedited process,  less rigorous than existing law                                                                 
     would provide to some extent  for a southern route. So, it                                                                 
     doesn't  prefer  a  southern  route,  but  it  treats  the                                                                 
     southern route  for the purpose of the expedited  process,                                                                 
     the same  as ANGTA did with respect  to the '70s southern                                                                  
     It  does,  of course,  modernize  some  of  the expedited                                                                  
     processes.   They  are  not precisely   the  same  as  the                                                                 
     processes in ANGTA. They  reflect the thinking in 2001 and                                                                 
     then finally, we observed  that there hasn't been the same                                                                 
     environmental   review,  which   preceded  the  expedited                                                                  
     process  for the southern  route. So,  you would applying                                                                  
     the expedited  process with respect to the northern  route                                                                 
     to a  data base that  has not been  as fully developed  as                                                                 
     the  one  for  ANGTA.  So,  I  think  in those  different                                                                  
     respects there are some  similarities and some differences                                                                 
     between ANGTA and the producers' proposed amendments.                                                                      
CHAIRMAN TORGERSON thanked  him and said that Mr. Menge updated them                                                            
on congressional  actions that may  happen and of a hearing  in mid-                                                            
September. He  said the committee would have its regular  meeting at                                                            
the end of September in  Kenai, but he hoped to have another meeting                                                            
in Anchorage  strictly  on  this legislation  for  that hearing.  He                                                            
asked if he or the Governor  had responded directly to the producers                                                            
about their legislation, yet.                                                                                                   
MR. KATZ responded:                                                                                                             
     No  sir. We  are still  in the  process of  analyzing  the                                                                 
     producers'  amendments  on their  own in  relationship  to                                                                 
     ANGTA  and to  the views of  the political  leadership  in                                                                 
     Alaska  and  the Natural  Gas Council.  The  Governor  has                                                                 
     actually  constituted a  smaller group  of us to complete                                                                  
     that analysis  in relatively  short order and be prepared                                                                  
     to  advise  him.  That  would  all  be  the  predicate  to                                                                 
     participate constructively  in the process that Mike Menge                                                                 
     described earlier.                                                                                                         
CHAIRMAN TORGERSON asked  if he had a timeline for responding to the                                                            
MR. KATZ replied that they  don't have a timeline yet for responding                                                            
to the producers  or to the Senate Energy Committee.  They are aware                                                            
of the  timelines of the  Committee and that  they won't be  altered                                                            
for  anyone, having  imperatives  from  Senate leadership.  "We  are                                                            
probably well  embarked on our internal  process, not finished  yet,                                                            
but  we know  the deadlines  that  are  out there  in  terms of  the                                                            
situation  back here  and we  must be in  a position  to meet  those                                                            
CHAIRMAN TORGERSON asked  if he had seen Mr. Cole's proposal [Walker                                                            
Walker & Associates].                                                                                                           
MR. KATZ said he hadn't had a chance to read it.                                                                                
CHAIRMAN  TORGERSON said he  wanted his comments  on it. He  said at                                                            
the last  meeting many  heard him criticize  the administration  for                                                            
not working very closely  with this committee. He said they had made                                                            
some "leaps  and bounds"  in trying to get  along together,  but Mr.                                                            
Katz went overboard  in Washington, D.C. "Of any issue  we should be                                                            
united  on when we  go before  the Energy Committee,  it's  probably                                                            
this proposed legislation...."                                                                                                  
MR. KATZ responded:                                                                                                             
     On  the basis  of everything  I know  I think  the policy                                                                  
     objectives  of the state administration  and the governor                                                                  
     with  respect to  these various  routes  and projects  are                                                                 
     quite  similar  and I  pledge  to you  the same  level  of                                                                 
     cooperation from here as  we ferret through this together.                                                                 
     Back in Washington, there  are very few of us and a lot of                                                                 
CHAIRMAN  TORGERSON said  he wanted  to continue  with Mr. Katz  and                                                            
that  the Federal  Energy  Regulatory  Commission had  responded  in                                                            
writing to the questions he sent them.                                                                                          
11:03 a.m.                                                                                                                      
REPRESENTATIVE DAVIES said  he was also wondering if he had seen the                                                            
Walker Walker & Associates  proposal and that he would be interested                                                            
in his comments  on those as well  as the producers' amendments.  He                                                            
said he appreciated  Mr. Katz's service to the State  of Alaska over                                                            
the years.                                                                                                                      
MR. KATZ thanked  him very much and  said he would let Mr.  Loeffler                                                            
answer that question.                                                                                                           
                       Update on FERC Issues                                                                                  
MR. BOB LOEFFLER,  Morrison & Forrester, an Atlantic  law firm, said                                                            
he has represented the  state's pipeline issues since about 1974. He                                                            
cut his teeth  on the first version  of the Alaska gas pipeline.  He                                                            
had sent  a nine-page  letter to  Senator Torgerson  addressing  the                                                            
committee's questions. He asked if that was received.                                                                           
CHAIRMAN  TORGERSON said  that they  received it and  had it  on the                                                            
back  table along  with FERC's  response  to his  questions.  FERC's                                                            
response  is 50-pages,  but 40-pages  are the  chairman's letter  of                                                            
January 18 in response to Mr. Bingaman's questions. FERC responded                                                              
with a two-page letter to Senator Torgerson's questions.                                                                        
     It basically  says that, 'A number of the questions  raise                                                                 
     important  policy matters that the Commission  should only                                                                 
     address at such time as  it is presented with applications                                                                 
     requesting   particular  approvals.   Interested  parties                                                                  
     should   also  have   the  opportunity   to  provide   the                                                                 
     Commission  with opposing points.'  They're not answering                                                                  
     any of the questions is the short story....                                                                                
MR. LOEFFLER said he would try to summarize his positions stated in                                                             
the letter:                                                                                                                     
     I'll make  one comment on FERC. The staff report  - and it                                                                 
     is  only a staff  report -  was issued in  January on  the                                                                 
     last day of  the last Democratic Chairman of the  FERC. In                                                                 
     Washington,  we're now on our  second Republican Chairman                                                                  
     of  FERC since January.  Several commissioners  have  been                                                                 
     replaced   and   we   don't   have   guidance   from   the                                                                 
     commissioners  themselves  -  staff  turns  over, general                                                                  
     counsel will turn over.  So, while the January document is                                                                 
     a very useful document in  laying out the pros and cons of                                                                 
     various  positions, it is by  no means the last word  and,                                                                 
     in  many  respects,  as  the  recent  letter  notes,  they                                                                 
     haven't  even reached  conclusions.  I hope  I'm a little                                                                  
     better, but with the caveat  that a lot will depend on the                                                                 
     exact shape of the application that comes before us.                                                                       
     My  first point,  and I think  it's good  to bear this  in                                                                 
     mind,  is that  what  FERC does  and  doesn't do  for  oil                                                                 
     pipelines  and gas pipelines are vastly different.  In oil                                                                 
     pipelines,  FERC  regulates only  their tariffs  and  FERC                                                                 
     does  not  give  oil  pipelines  permission   to  go  into                                                                 
     business  or permission  to exit.  In gas  pipelines,  the                                                                 
     Congress  gave the  FERC comprehensive  jurisdiction  over                                                                 
     interstate  gas pipelines and that means that  FERC has to                                                                 
     approve   a  new  pipeline,  the  facilities   for  a  new                                                                 
     pipeline,  the environmental  conditions that go with  it,                                                                 
     as well  as the tariffs.  Similarly,  a gas pipeline  does                                                                 
     not go out of business without  FERC permission. It's much                                                                 
     more hands-on intense regulation  than you find in the oil                                                                 
     pipeline area.                                                                                                             
     Number two, FERC has been  doing gas pipelines since 1938.                                                                 
     It   is  its   daily  business   along   with  interstate                                                                  
     electricity  issues.  They  really  have  taken  that  oil                                                                 
     pipeline  regulation reluctantly.  What that really  means                                                                 
     in  practice is  they have  developed  a lot  more law  on                                                                 
     interstate gas pipelines,  but of course, nearly all of it                                                                 
     has been developed in the Lower 48 context.                                                                                
     Number  three, there  is a special  statute that everyone                                                                  
     refers  to, the  '76  ANGTA statute,  and that  created  a                                                                 
     process  that  was  designed  to get  a  gas  pipeline  in                                                                 
     service  by 1983.  It's important  to remember  that  that                                                                 
     statute  is still  on the  books. Indeed,  although  there                                                                 
     were  recommendations  towards  the end  of the  1980s  to                                                                 
     repeal  it,  Congress  chose  to  repeal  only  two  minor                                                                 
     aspects  of it, which reinforces  the argument that  it is                                                                 
     still  extant law,  in some  respect. The  state has  some                                                                 
     special  rights under  that statute  that  it should  make                                                                 
     sure are preserved in any  new legislation and we're quite                                                                 
     attuned to that issue.                                                                                                     
     Let's talk for a minute  about the very important issue of                                                                 
     access  instate  to royalty  gas,  laterals  instate,  who                                                                 
     regulates  the main interstate gas pipeline and  who would                                                                 
     regulate laterals.  I will start with the case  before us,                                                                 
     which is the interstate  gas pipeline, not an LNG project.                                                                 
     I will talk  a little about LNG later - but an  interstate                                                                 
     gas  pipeline,  which  we  believe  should  go  along  the                                                                 
     southern route.                                                                                                            
     Number one,  the rights to charge for interstate  service,                                                                 
     I  think everyone  believes  will be  set by  the FERC.  I                                                                 
     think at that point, it's  important to note that based on                                                                 
     what   happened  in   the  1970s  and   the  division   of                                                                 
     jurisdiction   between   Canada  and   the  U.S.  federal                                                                  
     government,   there  will  be  pipeline  tariffs   set  by                                                                 
     segments.  So, that there  will be a  pipeline tariff  for                                                                 
     the Alaska segment, one  for the Canadian segments and one                                                                 
     for  Lower  48 segments.  I  know there  is  concern  that                                                                 
     instate  transportation   could  be burdened   with  costs                                                                 
     downstream out of Alaska.  Under this division of tariffs,                                                                 
     that should  not happen. Even inside Alaska, the  last go-                                                                 
     round,  we litigated for a result  that would have Alaska                                                                  
     traffic  pay only  for the  miles  and volumes  used as  a                                                                 
     fraction  of the total  miles and volumes  used in Alaska                                                                  
     and I think there's a very,  very strong case that that is                                                                 
     the  only fair result  and meets the  committee's concern                                                                  
     about   Alaska  gas  traffic   instate  carrying  only   a                                                                 
     reasonable charge for its usage of the pipeline.                                                                           
     Number  two,  the Alaska  Natural  Transportation  Act  in                                                                 
     Section 13(B) gives the  state the right to ship gas on an                                                                 
     interstate  ANGTA project and  to take the gas off within                                                                  
     Alaska, provided  the royalty contract has that  provision                                                                 
     and the  FERC is ordered to issue  all the authorizations                                                                  
     necessary to bring about  that shipment and withdrawal and                                                                 
     its jurisdiction  is limited to reviewing the  fairness of                                                                 
     the  rates  charged for  that  shipment.   Now  that is  a                                                                 
     feature  of Section 13(B),  not a feature  of the Natural                                                                  
     Gas  Act and I  think it  important for  all our concerns                                                                  
     that those rights be preserved  forever with respect to an                                                                 
     Alaska gas project.                                                                                                        
     There's a question, of course,  in how the FERC would look                                                                 
     at a lateral  serving Fairbanks  or serving other instate                                                                  
     needs.    Generally the  FERC  asked  the question,  on  a                                                                 
     lateral,  whether it  is part of the  integrated system  -                                                                 
     that owns it, [is] it regulated  by a state commission and                                                                 
     issues like that.  Certainly  if the lateral were owned by                                                                 
     a separate  company from the main pipeline, I  think there                                                                 
     would be a  very strong case that the FERC would  disclaim                                                                 
     jurisdiction and leave it  to the Regulatory Commission of                                                                 
     Alaska.   Even  if you  get to  the other  test, which  is                                                                 
     integration  with the main system, I think there's  a very                                                                 
     strong  case also that  a lateral  serving Fairbanks,  for                                                                 
     example, is  not part of the integrated interstate  system                                                                 
     but  they  do  apply factual  tests  there  and  it's  not                                                                 
     absolutely clear.                                                                                                          
     In terms of  the question of who would decide  where a tap                                                                 
     would  be  on  the interstate  system  for  a  lateral,  I                                                                 
     believe that would be the  FERC but I would point out that                                                                 
     Section 13,  to my way of thinking, would require  them to                                                                 
     establish  a lateral or the tap for a lateral  for royalty                                                                 
     gas  and I would  expect that  the FERC,  recognizing  the                                                                 
     need, would  be sensitive to creating laterals  or lateral                                                                 
     taps  inside Alaska.   There  is some very,  very old  law                                                                 
     that allows taps to be placed  on interstate gas pipelines                                                                 
     for  the benefit  of  landowners  through whose  land  the                                                                 
     pipeline passes  and the idea was farmers who  would grant                                                                 
     rights-of-way  and they could  have gas for their farming                                                                  
     operations.   I haven't seen  that law cited for about  25                                                                 
     years  but it's another basis  for recognizing the equity                                                                  
     of allowing instate use.                                                                                                   
     That  is the -  quickly - the  picture.   I know that  the                                                                 
     chair   of  the  RCA  is  going   to  testify  about   the                                                                 
     jurisdiction   of  her  agency  and  how  they  would  set                                                                 
     tariffs.   I would point  out one aspect  of pricing.   In                                                                 
     the  first go  around in the  1970s, the  U.S. government                                                                  
     regulated  the  wellhead  price  of  natural  gas.    That                                                                 
     jurisdiction  was withdrawn from the Congress.   Back then                                                                 
     a lot of people felt that  it acted to restrain Alaska and                                                                 
     others from  receiving fair value for North Slope  gas but                                                                 
     that  jurisdiction   has been  withdrawn.     The federal                                                                  
     government  does  not  regulate   the  wellhead  price  of                                                                 
     natural  gas.  On the  other hand, it's  common for  state                                                                 
     commissions, including the  RCA, to regulate the price for                                                                 
     at least distribution of  natural gas and the RCA may have                                                                 
     some  jurisdiction  over instate  prices of  natural  gas.                                                                 
     I'm sure the chair will address that.                                                                                      
     Now,  there are questions  about could  the sponsors of  a                                                                 
     project block taps for instate  use laterals and the like.                                                                 
     Well,  the short answer  is you have  to look at both  the                                                                 
     Natural  Gas Act and  ANGTA because,  as I mentioned,  the                                                                 
     state has some pretty powerful  rights under ANGTA but, in                                                                 
     any event,  the FERC, unless its jurisdiction  is modified                                                                 
     by Congress,  has the  power to require  taps for instate                                                                  
     use even if  the owners of a project would oppose  it.  Of                                                                 
     course it  would look at why they're opposing  it but they                                                                 
     would  not control the game unless  the jurisdiction  of a                                                                 
     commission is modified.                                                                                                    
     On an  LNG project, or an all-Alaska  project, we look  to                                                                 
     sort of a  different point for federal jurisdiction  and a                                                                 
     different  kind of federal jurisdiction.   I reviewed  the                                                                 
     Yukon  Pacific applications to  the federal government  in                                                                 
     the  1980s and later  for authorization  to export and  at                                                                 
     that  time the  projects  were  very clearly  premised  on                                                                 
     exports  outside the  U.S. not coming  back into the  U.S.                                                                 
     and  that   gives  the  federal   government  a  somewhat                                                                  
     different  kind of  jurisdiction  under Section  3 of  the                                                                 
     Natural  Gas Act.   And, what  that means  in practice  is                                                                 
     that  the Department  of Energy authorizes  the export  on                                                                 
     certain terms  and conditions and the FERC deals  with the                                                                 
     export facilities,  which [indisc.] the facilities  at the                                                                 
     point of export,  say Valdez, and on everything  behind it                                                                 
     all the way to the Slope  and so, in a sense, the pipeline                                                                 
     part of  the purely export LNG  facility is not regulated                                                                  
     in any comparable  sense to an over-the-land route  by the                                                                 
     federal government and any  of its agencies.  If, however,                                                                 
     the LNG comes  back into the United States, then  you have                                                                 
     the more traditional type of regulation.                                                                                   
     And  now,  a  footnote  on that  -  two  footnotes.    One                                                                 
     footnote  is Congress, in 1992,  passed a provision  which                                                                 
     no  one understands  involving  LNG  exports  and imports                                                                  
     which  limits, perhaps,  the jurisdiction  of the federal                                                                  
     government.    It tells  the federal  government  to  just                                                                 
     issue the  authorizations for import and export  projects.                                                                 
     [Indisc.]  this  month,  sponsors  of  a  project  in  the                                                                 
     southern United States filed  an application with the FERC                                                                 
     telling them why don't you  disclaim all jurisdiction over                                                                 
     facilities  at the point of import or export and  it's not                                                                 
     been  ruled  on  by  the FERC  but  they  cite  this  1992                                                                 
     statute.   Number two - footnote  number two - if the  gas                                                                 
     went out of  Alaska and came back in California,  we would                                                                 
     have a rerun of the old  El Paso LNG project and then we'd                                                                 
     be dealing  with Section  3 and Section  7 - our standard                                                                  
     FERC  jurisdiction.   If, however,  the  LNG project  went                                                                 
     from Alaska  to Mexico and then perhaps went to  different                                                                 
     ownership in Mexico and  then came into the U.S., it's not                                                                 
     clear  what  would  happen  there.    At  least  the  U.S.                                                                 
     government  would have authority under Section  3, subject                                                                 
     to  this new statute  passed in  '92, and  I can't find  a                                                                 
     precedent for that.  I'll  think more about it but I think                                                                 
     I know the  LNG cases.  I couldn't find a close  precedent                                                                 
     for that.                                                                                                                  
     Common  carrier status  - oil  pipeline TAPS  is a common                                                                  
     carrier.   Gas  pipelines are  not common  carriers.   The                                                                 
     FERC, in the  late 1980s, went to open access  principles,                                                                 
     which  are intended to  prevent the  owners of a pipeline                                                                  
     from favoring affiliated  merchant enterprises, which sell                                                                 
     gas  that will be shipped  on the line.   They don't  want                                                                 
     interstate  gas pipelines tying  up capacity to favor  the                                                                 
     other half  - their production affiliates.  There's  a lot                                                                 
     of law in  that, one spin out of this general  open access                                                                 
     concept is that the FERC  expects new gas projects to have                                                                 
     an open  season in which they  entertain applications  for                                                                 
     shippers  to sign  up for a  period of time  and they  use                                                                 
     those sign  ups to help sell the project to the  financial                                                                 
     community  and also  it shows  the need  for the project.                                                                  
     But there  is no common carrier  status of gas pipelines,                                                                  
     which  does  raise  fairly  the issue  of  owners  of  the                                                                 
     pipeline  entering into arrangements,  which could tie  up                                                                 
     access to the pipeline for a long time.                                                                                    
     Now the  open season idea, which  is more a policy than  a                                                                 
     requirement.   If you search through the requirements  for                                                                 
     new  pipelines, you  cannot find today  a requirement  for                                                                 
     open season  but the FERC has said in specific  cases that                                                                 
     they  expect  open  seasons  for  new  facilities.    But,                                                                 
     anyway, the  policy is intended to deal with issues  about                                                                 
     tying up capacity  to the detriment of future  shippers or                                                                 
     competitors.   We did a quick run last night and  we found                                                                 
     700 different rulings on  this from the FERC, so it is not                                                                 
     a simple  area.  Any  project the size  of the Alaska  gas                                                                 
     pipeline  is going to get Department  of Justice and  FERC                                                                 
     scrutiny.  Nevertheless,  I think there are valid concerns                                                                 
     about how the open season will operate.                                                                                    
     Because I'm  running fast on my time, let me take  that up                                                                 
     very quickly.  If the sponsors  of the project are not yet                                                                 
     a  natural  gas  company,  the  FERC  does  not  yet  have                                                                 
     jurisdiction  so you could conceive  of a situation  where                                                                 
     sponsors  of a project  under a new  corporate name  would                                                                 
     have an open  season and they would set the rules  as they                                                                 
     wish  and then the  capacity would  be tied  up.  If  they                                                                 
     were  already jurisdictional  by  the FERC,  people  would                                                                 
     complain  immediately  about unfair  provisions.   In  the                                                                 
     situation  where  they're not  yet jurisdictional  by  the                                                                 
     FERC,  anyone would know  that these  issues are going  to                                                                 
     come back  before the FERC at a later date and  they ought                                                                 
     to  act  to  comply  with  a fair  and  nondiscriminatory                                                                  
     provision  of FERC rulings in their open season  but there                                                                 
     might be a remedy at the  instant, as opposed to later, on                                                                 
     that.   That's an issue deserving  of close scrutiny.   On                                                                 
     the  other  hand,  if  their  future  shippers  will  want                                                                 
     capacity reserved  for them or want to make sure  the FERC                                                                 
     will  be  attuned  to them,  I  think  in  the regulatory                                                                  
     process  there's precedent at  the FERC that capacity  not                                                                 
     be  tied up  for future  shippers  and that  it be fairly                                                                  
     priced for future shippers.                                                                                                
     Let me address for a minute  the upstream access questions                                                                 
     beyond  the open season issues  and there are a couple  of                                                                 
     points worth making.  Now  when Congress, and I believe it                                                                 
     was  President  Reagan,  signed  in -  but  when Congress                                                                  
     passed  waivers of  law submitted  by the  President,  the                                                                 
     conditioning   plant  was included  within   the pipeline                                                                  
     system under  ANGTA.  A couple points there.   Number one,                                                                 
     conditioning  plants would not  normally be included.  Now                                                                 
     there's  a benefit to  their inclusion,  which is you  get                                                                 
     the  expedited permitting  and judicial  review and  there                                                                 
     was a benefit  then that doesn't exist anymore  - a second                                                                 
     benefit, which  was for pricing purposes when  the federal                                                                 
     government then priced natural  gas, you could get an add-                                                                 
     on for the conditioning  costs.  Of course, that's gone by                                                                 
     the  wayside.   It  is not  clear  what the  right result                                                                  
     should be for a new gas  pipeline.  There may be more than                                                                 
     one conditioning plant,  for example.  There may be issues                                                                 
     under  the state lease and even  an RCA jurisdiction  over                                                                 
     conditioning   plants   and,  insofar   as  I  know,   the                                                                 
     administration  does not  have a position  yet on whether                                                                  
     the  conditioning plant  should stay as  part of the  main                                                                 
     transportation  system  or should  - the  pipeline should                                                                  
     start at the exit of the conditioning plant.                                                                               
     Some  of the  issues that  are identified  in your letter                                                                  
     about  access to, for example,  the conditioning plant  by                                                                 
     new users  in the future, remind me of a number  of issues                                                                 
     that the state  and the commissioner of natural  resources                                                                 
     is,  in particular, trying  to address  in the context  of                                                                 
     the BP/ARCO  merger where there  were issues about access                                                                  
     to  field facilities  and there  were some  provisions,  I                                                                 
     recall, dealing with that.                                                                                                 
     Having raced through everything  I think I will stop for a                                                                 
     minute.  I think I'm right  on the dime, in terms of time,                                                                 
     and ask if there are any questions.                                                                                        
CHAIRMAN TORGERSON asked  Mr. Loeffler if he covered the question of                                                            
whether the NGA or ANGTA prevails.                                                                                              
MR. LOEFFLER  said he  did not, but  he covered  it a little  bit in                                                            
writing.  He stated the  answer is that no one knows.  They are both                                                            
on the  books and  the only way  that question  can be definitively                                                             
resolved  is through  legislation  or  ultimately,  a Supreme  Court                                                            
ruling.   He noted that he  commented, in  his memo, that while  the                                                            
ANGTA statute  is on the  books, at the time  it was passed,  no one                                                            
thought  it would  be  dealt with  more  than 20  years  later.   He                                                            
pointed out,  with both  the presidential  decision and the  treaty,                                                            
that the Northwest  Project was expected  to be in service  in 1983.                                                            
It is operative  because it is on the books.  He suggested  the best                                                            
one could do  to answer that question  is to look at the  January 18                                                            
FERC staff report, which weighs out the pros and cons.                                                                          
CHAIRMAN  TORGERSON   stated  that  he  believes  it  was  the  1982                                                            
amendment  that allowed the  producers to have  part ownership  in a                                                            
pipeline,  but they had to  prove that their  participation  did not                                                            
violate anti-trust laws.   He asked Mr. Loeffler to comment on that.                                                            
MR.  LOEFFLER  said  he  has  several  comments   and  provided  the                                                            
following  history.   When  the president's  decision  was in  draft                                                            
form,  the then commissioner  of  the Alaska  Department of  Revenue                                                            
objected  to the banning  of the producers  on various grounds  but,                                                            
essentially, on economic  grounds.  At that time, it was thought the                                                            
producers'  financial  support,   more  than  debt  guarantees,  was                                                            
necessary to  build the project.   Sure enough, three or  four years                                                            
later, when the financial  needs for the project were so great, they                                                            
came around to  that and the waiver of law was passed.   He recalled                                                            
the waiver  of law said the Department  of Justice had to  rule that                                                            
the  producer   participation  would   not  establish  a   condition                                                            
inconsistent with the anti-trust  laws.  That was a standard used by                                                            
the Nuclear Energy  Regulatory Commission and never  fleshed out. At                                                            
that time, they  were looking for 30 percent producer  participation                                                            
in the  equity  of the  project and  in debt  guarantees.   The  gas                                                            
pipelines  were financially  weak compared  to the  producers.   The                                                            
concern  of the producers  at the  time was that  their 30  percent,                                                            
plus cost overruns, could  become a higher percentage.  Mr. Loeffler                                                            
said  he thinks  there  are valid  concerns  about ensuring  that  a                                                            
project is built, which  will require the backing of people with the                                                            
financial  wherewithal.   Mr.  Loeffler said  he  also believes  the                                                            
state has a counter  concern that those who own the  pipeline do not                                                            
lock it up  against independent producers  and future shippers.   He                                                            
expects the  state, FERC  and Department of  Justice to take  a very                                                            
close look at the open access requirements.                                                                                     
CHAIRMAN TORGERSON asked who would make the anti-trust decision.                                                                
MR. LOEFFLER  replied it is  a double standard.   The FERC  looks at                                                            
anti-trust  issues but does not apply  the anti-trust laws  so anti-                                                            
trust  concerns  are one  of the  elements  of the  public  interest                                                            
determination  that  the  FERC  makes.    Separate  from  that,  the                                                            
Department  of Justice will  look at that  question and has  its own                                                            
ways of enforcement.                                                                                                            
CHAIRMAN  TORGERSON referred  to page  26 of the  transcript  of the                                                            
meeting  in Juneau  [August  2, Alaska  Highway Natural  Gas  Policy                                                            
Council], and  asked if the committee could get copies  of Phillips'                                                            
proposed amendments to the federal fiscal regime.                                                                               
MR.  KATZ  said  he would  prefer  that  Phillips  explain  its  own                                                            
proposal but said it is  fair to say that Phillips' current thinking                                                            
is divided  into  two parts:  one  is accelerated  depreciation  for                                                            
construction costs.   Accelerated depreciation is  an issue that has                                                            
been  framed  in  some of  the  pending  national  energy  bills  in                                                            
Washington, D.C. so he  believes that will be discussed as a generic                                                            
nationwide issue.   Second, Phillips has requested  a provision that                                                            
deals with  a floor on price  and remedies  that might apply  if the                                                            
price of natural  gas goes below a  certain level.  He pointed  out,                                                            
in the context  of the pending federal  legislation, there  had been                                                            
proposals  to deal  with  a production  tax  credit.   One  proposal                                                            
introduced by  some democratic members would tie it  specifically to                                                            
the  southern  route.   Phillips'  proposal  is route-neutral.    He                                                            
offered  to  contact   Phillips  in  Washington,  D.C.,   relay  the                                                            
Chairman's  request,  and  allow  Phillips  to  establish  a  direct                                                            
relationship with the committee.                                                                                                
CHAIRMAN TORGERSON thanked  Mr. Katz and noted a representative from                                                            
Phillips would be presenting to the committee that afternoon.                                                                   
MR.  KATZ informed  the  committee  that  the [U.S.]  Senate  Energy                                                            
Committee  has jurisdiction  over  all of  the issues  he  discussed                                                            
except the  tax regime, which  is under the  purview of the  Finance                                                            
Committee.  That  will undergo a separate process  and it is not yet                                                            
clear how that  will relate to the federal energy  legislation under                                                            
consideration by the Senate  Energy Committee.  He added that of the                                                            
many tax proposals floating  around, some do involve the development                                                            
of transportation  of natural gas so he expects those  issues to get                                                            
a fair hearing as well.                                                                                                         
CHAIRMAN TORGERSON noted  that he plans to request of the producers,                                                            
Foothills, the administration  and of the committee's legal advisors                                                            
that  each  provide  sectional  analyses  of  that  section.    That                                                            
information will  be distributed to committee members  in advance of                                                            
the next meeting so that the subject can be discussed then.                                                                     
TAPE 01-13, SIDE A                                                                                                            
REPRESENTATIVE  DAVIES stated that  at the committee's last  meeting                                                            
he was  pretty dissatisfied  with  the responses  of FERC  officials                                                            
relative to the  open season question.  It seemed  they were willing                                                            
to accept  a market-driven  imperative for  open seasons that  would                                                            
happen later  than the initial open  season.  He noted Mr.  Loeffler                                                            
indicated  that open season  decisions, with  respect to FERC,  were                                                            
set  more by  policy  than  law and  that  FERC  has made  over  700                                                            
rulings.   He asked if the  rulings were about  open seasons  at the                                                            
initiation of a pipeline  or on point for continued access.  He also                                                            
asked  whether Alaska  should consider  codifying  some of the  open                                                            
season principles in the upcoming law.                                                                                          
MR. LOEFFLER  stated that there are  rulings for new pipelines,  for                                                            
expansion  of existing  pipelines,  and  rulings  in the  life of  a                                                            
pipeline as capacity becomes  available for the first time regarding                                                            
how capacity should  be allocated between users and  new users.  So,                                                            
essentially, there are  definitely rulings that deal with "later on"                                                            
in the life of  a pipeline.  He said the question  of whether Alaska                                                            
needs a particular  expression of non-discriminatory  access or fair                                                            
access for  all shippers is an active  "hotplate" of consideration,                                                             
including the  question of whether that expression  should be placed                                                            
in legislation.                                                                                                                 
REPRESENTATIVE  DAVIES  said that  he is  interested  in being  kept                                                            
abreast of that  discussion because his impression  is that the FERC                                                            
players are not very concerned about that.                                                                                      
MR. LOEFFLER  said that as  is often the  case in Washington,  D.C.,                                                            
they  may need  a  little education  and  to  be sensitized  to  the                                                            
particular concerns on  an Alaska gas pipeline, which is part of his                                                            
CHAIRMAN  TORGERSON   commented  that  a  lot  of  the  open  season                                                            
questions came  from some of the smaller  producers that  are active                                                            
in Alaska.   He hopes they  will have an  opportunity to review  Mr.                                                            
Loeffler's   or   Mr.   Chenoweth's    legal   opinions   and   make                                                            
recommendations   for  congressional   action  prior  to   the  next                                                            
committee meeting.                                                                                                              
REPRESENTATIVE  FATE  remarked  that he  noticed the  producers,  in                                                            
their proposed  bill, say in Section  3 that they would establish  a                                                            
federal pipeline  director  position.  He asked  Mr. Loeffler  if he                                                            
sees  any  problem  with  that  relative  to  the  state  regulatory                                                            
MR. KATZ  said he does  not know  yet.  He  explained that  everyone                                                            
sees the need  to coordinate the activities  of the various  federal                                                            
agencies  and  ANGTA  of  1976  provided   for  a federal   pipeline                                                            
inspector  and a  very  large staff  that  was designed  to  provide                                                            
coordination and communication  among agencies.  That administrative                                                            
authority now  resides in the Secretary of Energy,  himself, because                                                            
the  office  of  the  pipeline  inspector  no  longer  exists.    He                                                            
indicated there  are three possible  alternatives now on  the table.                                                            
One  is to  do what  the producers  suggest,  which is  to create  a                                                            
position  in the White House  subject to  Senate confirmation.   The                                                            
second  is to revitalize  in some  form the office  of the  pipeline                                                            
inspector.    The  third would  be  an  alternative  implemented  by                                                            
administrative action.   He informed the committee that currently, a                                                            
bureaucratic task  force of federal officials meets  periodically to                                                            
discuss pipeline issues  but that task force has not moved very far.                                                            
He said he believes  that everyone who is familiar  with the federal                                                            
process  feels the  need for  coordination  in order  to  accelerate                                                            
pipeline consideration.   Exactly what form that will  take is still                                                            
REPRESENTATIVE FATE said  it sounds like this position would be more                                                            
permanent and would be applicable to other pipelines.                                                                           
MR. KATZ replied:                                                                                                               
     It  certainly  could  be.  I  think  that  the  producers                                                                  
     probably  intended  that  it  apply  specifically  to  the                                                                 
     commercialization  of  North Slope natural  gas but  there                                                                 
     are  some  general  provisions  in  some  of  the pending                                                                  
     national energy  bills that refer to a need to  coordinate                                                                 
     generically and nationwide  with respect to these kinds of                                                                 
     projects.  One bill,  for example, provides  for a formal                                                                  
     memorandum  of understanding  process so it might well  be                                                                 
     that as  the Congress looks at  this, if they decide  that                                                                 
     it's a good  idea in one circumstance, they might  seek to                                                                 
     apply it more generically.                                                                                                 
REPRESENTATIVE  OGAN noted that at the last hearing,  FERC officials                                                            
said they regulate  from the wellhead  on down if gas is  shipped to                                                            
the Lower 48.  He asked  Mr. Loeffler if a statutory scheme could be                                                            
designed  where  the  wellhead   is  moved  farther  down  the  line                                                            
statutorily, to  delineate state and FERC regulation  at that point.                                                            
MR.  LOEFFLER  explained  that  the  Natural  Gas  Act  was  adopted                                                            
following a Supreme Court  ruling that suggested that production and                                                            
gathering  were inherent  subjects  for  state regulation  and  that                                                            
interstate  commerce, in a sense,  began with the transportation  of                                                            
natural gas out-of-state.   Regarding whether FERC  jurisdiction has                                                            
been carved back  voluntarily or otherwise, to appoint  further into                                                            
the process,  the closest  analogy one  can come  to is the  Gulf of                                                            
Mexico regarding  the distinction  between production and  gathering                                                            
and transportation.   Second, Congress only has the  power to define                                                            
where federal  jurisdiction begins.  He can see some  constitutional                                                            
problems  regarding figuring  out  what is interstate  commerce  and                                                            
what  is not.   Congress  could  move the  FERC  jurisdiction  point                                                            
farther south  but he doesn't  know whether  that will solve  all of                                                            
the problems that the smaller  and independent producers see because                                                            
of the question  about access to the conditioning  plant, before the                                                            
gas  gets to  the  pipeline.   He  said  it may  not be  subject  to                                                            
regulation  by anyone  and moving  the point  of jurisdiction  south                                                            
really doesn't address  the first issue.  He noted that is one issue                                                            
in his opinion that he said he will have to think more about.                                                                   
REPRESENTATIVE  OGAN asked Mr. Loeffler for the name  of the Supreme                                                            
Court case.                                                                                                                     
MR. LOEFFLER agreed to  provide it to the committee at a later date.                                                            
There being no  more questions, CHAIRMAN TORGERSON  thanked both Mr.                                                            
Katz and Mr. Loeffler.  The committee then took a short recess.                                                                 
11:06 a.m.                                                                                                                      
                  Update from Regulatory Agencies                                                                             
CHAIRMAN TORGERSON called  the committee back to order.  He informed                                                            
participants  that he submitted  the same list  of questions  to Mr.                                                            
Loeffler,  FERC,  and others  and  copies  of their  responses  were                                                            
available at  the back of the room.   He asked Ms. Nan Thompson,  to                                                            
address the committee.                                                                                                          
MR.  NAN  THOMPSON,  Chairwoman  of  the  Regulatory  Commission  of                                                            
Alaska,  informed   committee  members  that  the   purpose  of  her                                                            
testimony is to  answer questions posed to her in  a letter from the                                                            
committee dated July 23.   She offered to later submit those answers                                                            
in writing.                                                                                                                     
MS. THOMPSON  noted  the committee's  letter  expressed frustration                                                             
about the answers it received  during the last hearing.  She pointed                                                            
out that the  committee asked great  questions, but those  questions                                                            
do not necessarily  have black and  white answers.  She stated  that                                                            
if her answer  is not solid, it is  not because she is trying  to be                                                            
ambiguous,  she is being honest.   She believes it is important  for                                                            
committee members to understand  the "lay of the land"; where things                                                            
are clear  and  unclear so  that members  can make  the best  policy                                                            
MS. THOMPSON'S testimony is as follows.                                                                                         
     The  first section  of the  letter asked  questions  about                                                                 
     jurisdiction.   It was entitled  Background and I'm  going                                                               
     to use this opportunity  to throw in a couple of prefatory                                                                 
     comments myself,  which is, the letter seemed  to - seemed                                                                 
     like at the last hearing  there was some awareness dawning                                                                 
     that  oil pipelines  are  really  regulated under  a  very                                                                 
     different  legal regime than  gas pipelines therefore  the                                                                 
     state's  experience with  TAPS, our  large interstate  oil                                                                 
     pipeline where  we concurrently regulate with  FERC, isn't                                                                 
      necessarily the way this line's going to be regulated.                                                                    
     I think it's also important  to understand that all of the                                                                 
     federal  law on gas pipelines  was developed in the  Lower                                                                 
     48 and it  was based on policies that may not  apply here.                                                                 
     This is  really the first interstate  gas pipeline that's                                                                  
     come  from  this state  and  we're different.    We're  an                                                                 
     island.   A lot of the legislation  that's been developed                                                                  
     on a federal level in the  Lower 48 is based on facts that                                                                 
     are  very  different  here.    For  example,  the current                                                                  
     regulatory  scheme that allows contract carriage,  or open                                                                 
     access  as they call  it now, is based  on an environment                                                                  
     where there should be an  option, not on one where there's                                                                 
     only  one pipeline that  leaves the state.   In the  Lower                                                                 
     48,  a producer  may have  several alternative  routes  to                                                                 
     market so  it doesn't necessarily matter that  the product                                                                 
     gets on  a specific line.  But,  nonetheless, the federal                                                                  
     regulatory  regime,  the policies  supporting, recognizes                                                                  
     the importance of preventing  pipelines from being used as                                                                 
     a tool  to discriminate against  shippers so I would  urge                                                                 
     caution  about how the  current federal  law on gas  lines                                                                 
     may or may  not be applied here and I think, what  I heard                                                                 
     briefly  when I joined  this group a  little earlier  this                                                                 
     morning,   was  discussion   about  changes   in  federal                                                                  
     legislation.   I think that,  in order to develop clarity                                                                  
     in this  situation, is the way  to go.  I wouldn't assume                                                                  
     that it  can't be changed because  in order to affect  the                                                                 
     same  policies that  the Lower  48 law does  here, it  may                                                                 
     have  to be different  up here because  of our geographic                                                                  
     location amongst other things.                                                                                             
     It's also  important to understand - and you probably  are                                                                 
     well  aware  of this  by  now  - that  which  federal  law                                                                 
     applies to  this pipeline and how it applies isn't  clear.                                                                 
     ANGTA  was passed  in the late  '70s, and  it gave from  a                                                                 
     regulatory  perspective, it gave remarkable powers  to the                                                                 
     President  to  pick the  route.   But  the  pipeline  that                                                                 
     legislation anticipated  wasn't built and the deadlines in                                                                 
     the  Act have passed  so only the courts  or the Congress                                                                  
     can sort  out what it really  means and how it applies  to                                                                 
     this particular  situation.   The significance of that  is                                                                 
     ambiguity  in law creates a potential for litigation.   It                                                                 
     creates a potential for  posturing and delay so any of the                                                                 
     parties  who have varying  interests in  one route or  the                                                                 
     other can hire a stable  of lawyers and spend years trying                                                                 
     to clarify the ambiguities,  or at least threaten to.  The                                                                 
     alternative  to that  is a route that  would work through                                                                  
     the  federal legislative  process to  clarify some of  the                                                                 
     ambiguities in the law.                                                                                                    
     The  only other  background comment  I have  is about  the                                                                 
     track  record  that  FERC  and  the RCA  have.    We  have                                                                 
     concurrently  regulated TAPS over its years and  we have a                                                                 
     track record of cooperating  to do that.  I don't have any                                                                 
     reason  to believe that  that cooperation  isn't going  to                                                                 
     still  continue.  We have a -  our relationship with  that                                                                 
     agency has changed as the  head of the agency has changed,                                                                 
     but  I'm confident  that  the group  that's  there now  is                                                                 
     going  to be  sensitive  to the  state's concerns  and  is                                                                 
     going to work  well with my regulatory agency.   It is not                                                                 
     a  turf  battle between  FERC  and  my agency.    We  have                                                                 
     different  concerns.  My agency  is worried about instate                                                                  
     access   and  instate   rates,  and   FERC  is  concerned                                                                  
     principally  with the interstate shipment and  responsible                                                                 
     for  making  sure that  nothing  we  do within  the  state                                                                 
     interferes  with interstate commerce  but I think, within                                                                  
     those  parameters,  we  can work  well  together  on  this                                                                 
     The  first question  was about  state access  for instate                                                                  
     demand  and it  was: What  would the  FERC  and the  RCA's                                                                 
     jurisdiction  be over  a pipeline along  the Alcan route?                                                                  
     The  RCA - my  agency has  jurisdiction  under the Alaska                                                                  
     Pipeline Act, a state law,  to regulate intrastate oil and                                                                 
     gas  pipelines  and  state  law also  says  that  we  have                                                                 
     jurisdiction over interstate  pipelines to the extent that                                                                 
     we're not  preempted.  On the federal side, I  know you've                                                                 
     heard from Mr. Loeffler  and others this morning about the                                                                 
     Natural   Gas  Act.    FERC  has  jurisdiction  over   all                                                                 
     interstate  pipelines and under the Commingling  Doctrine,                                                                 
     if  there's   one  molecule  of  gas  that's  transported                                                                  
     interstate  commerce it's an interstate pipeline.   So, at                                                                 
     first  blush, the Al-Can route,  carrying gas to Chicago,                                                                  
     would  be regulated  by  FERC but  there's ANGTA  and  its                                                                 
     impact,  again, is not entirely  clear.  Section 13(B)  is                                                                 
     the one provision of ANGTA  that I think is most important                                                                 
     to focus on here.  That  gives the state the right to ship                                                                 
     its  royalty gas  - to use  its royalty gas  - within  the                                                                 
     state  of Alaska. It  gives the state  the right to go  to                                                                 
     FERC  and say  we want  to take our  share and  use it  in                                                                 
     Alaska  and it  requires FERC  to accommodate  that.   The                                                                 
     language  - it's  one of  those paragraph  long sentences                                                                  
     that drive  me nuts - but I think it could be  interpreted                                                                 
     either  way.  I would  argue that it  gives the state  the                                                                 
     responsibility  for  setting  rates  for  that intrastate                                                                  
     shipment  subject to review by  FERC.  But, again, that's                                                                  
     one of the  ambiguities that would be nice to  clear up in                                                                 
     order  to avoid some type of  litigation over that issue.                                                                  
     I think  [Section] 13(B)  of ANGTA  has another important                                                                  
     provision when you're considering  instate access and that                                                                 
     authorized  that - 13(A) - I'm sorry - that prohibits  the                                                                 
     operator  of the  gas line and  if it's  also a producer,                                                                  
     from  discriminating  against  others  who  want  to  have                                                                 
     access  to the line.   So Section 13  of ANGTA, as it  now                                                                 
     exists, is  very important for delineating state's  rights                                                                 
     and protecting state's interests  in using gas instate.  I                                                                 
     urge you, if you review  any of the drafts now circulating                                                                 
     for changes to ANGTA, to  look carefully and see what they                                                                 
     say  in terms  of  provisions comparable  to  the current                                                                  
     Section 13.                                                                                                                
     The one thing  that's important to note is that  ANGTA now                                                                 
     requires  an instate delivery  point just for the state's                                                                  
     royalty  gas.    So,  if the  state  -  if  there's  other                                                                 
     producers  who want  their gas  to be used  instate,  they                                                                 
     would  have to be  protected by another  means or perhaps                                                                  
     through  this legislation.   And I imagine  what would  be                                                                 
     required   of  the  state,  in  order  to  exercise   this                                                                 
     privilege  under  ANGTA, would  be some  demonstration  of                                                                 
     ability  to use,  or plans  to use,  its gas  instate.   I                                                                 
     think   under  those  circumstances   it  would  be   very                                                                 
     difficult  for  FERC to  deny an access,  even  on a  FERC                                                                 
     regulated pipeline within the state.                                                                                       
     The  next  question was  about  generally  - a  series  of                                                                 
     questions  -  about  regulation  of  instate  tariffs  and                                                                 
     prices.   Under the Natural Gas  Act, FERC would set  rate                                                                 
     for instate  delivery points on a pipeline from  the North                                                                 
     Slope to Chicago.   Again, under ANGTA, the answer  may be                                                                 
     different.    It's  arguable  under  that  law  the  RCA's                                                                 
     responsibility   is   subject   to   FERC's   review   for                                                                 
     reasonableness,   if  the  gas  taken  at  those  instate                                                                  
     delivery points is state royalty gas.                                                                                      
     When we  set pipeline rates,  we operate under the Alaska                                                                  
     Pipeline  Act, again, and we're  required to set just  and                                                                 
     reasonable rates.  Our case  history says that means rates                                                                 
     based  on cost.  So,  there isn't  one tariff methodology                                                                  
     that we  consistently approve.   There's a number of  them                                                                 
     and  what  actually  happens  most  of  the  time  is  the                                                                 
     producers  and the  other interested  parties negotiate  a                                                                 
     settlement  and  they  come  to  us  for  review  of  that                                                                 
     settlement.   They  resolve issues  like  how quickly  the                                                                 
     pipeline  will  be depreciated;  how  DR&R funds  will  be                                                                 
     accumulated;  how the rates change according to  different                                                                 
     take-off points.  We review  those when we come in, again,                                                                 
     to  insure that  they're  just  and reasonable,  that  the                                                                 
     interests  of future  shippers,  as well  as current,  are                                                                 
     protected  and the public interests  are protected.   But,                                                                 
     we  look principally  at the cost  of delivering service,                                                                  
     Just  like  any other  utility  regulation,  they're  only                                                                 
     allowed  to charge their  customers what  it really  costs                                                                 
     them  to deliver  the service  so  I can't  tell you  that                                                                 
     there's  one pipeline  methodology  that we  use but  it's                                                                 
     generally cost-based and  the history on pipelines in this                                                                 
     state  is  a  series of  settlements  negotiated  between                                                                  
     producers  and shippers that  we've reviewed and approved                                                                  
     as appropriate.   What we do when we get them,  if we have                                                                 
     questions,  we have  a hearing,  we ask,  require further                                                                  
     filings,  sometimes  negotiate  other  modifications   but                                                                 
     generally they've all been approved that way.                                                                              
     Regulation of an all-Alaska  pipeline - there was a series                                                                 
     of questions  under this that talked about a hypothetical                                                                  
     pipeline to Valdez and shipments  to Mexico and back or to                                                                 
     California  via  Mexico.    Basically,   FERC  would  have                                                                 
     jurisdiction  over a  pipeline to Valdez  if that carried                                                                  
     export  gas.   The  federal  government  regulates export                                                                  
     pipelines.     There  are  different  agencies   that  are                                                                 
     involved.  I think Mr. Loeffler  probably hinted on that a                                                                 
     little   but  it  doesn't  matter   -  it's  the  federal                                                                  
     government, it's not us.                                                                                                   
     Our jurisdiction  is influenced  by a couple of different                                                                  
     factors.   If there's a pipeline  that begins and ends  in                                                                 
     the state,  that's an intrastate  shipment, that's within                                                                  
     our jurisdiction.   Other factors that are important  are:                                                                 
     what  gas is taken  off?  Under  ANGTA, it  matters.   Our                                                                 
     jurisdiction  is influenced  by  whether or  not it's  the                                                                 
     state's royalty gas taken  off.  I think also what type of                                                                 
     processing  or handling  is done to  the gas that changes                                                                  
     its character might influence our jurisdiction.                                                                            
     Last,  and this  is a  difficult  one to  articulate,  but                                                                 
     where the  decision is made to ship the gas out  of state.                                                                 
      I'll give you a hypothetical  to try and explain what I'm                                                                 
     thinking  of.   I've been  asked a  lot about,  well  what                                                                 
     about  if - and I think I heard  Representative Ogan  talk                                                                 
     about it, moving the wellhead  down.  The hub concept - in                                                                 
     order  for us to have  jurisdiction  over the pipeline  to                                                                 
     the  hub,  assuming  that  all  the  very,  very  complex                                                                  
     economic and  processing issues are resolved,  there isn't                                                                 
     really  any direct analogy currently.   The letter talked                                                                  
     about  the Gulf  of Mexico  case but  this  is really  the                                                                 
     reverse.   In the  Gulf of  Mexico, the  feeder lines,  or                                                                 
     gathering  lines, they go into  a central facility and  go                                                                 
     out.   In this case  it would be one  line coming out  and                                                                 
     then  splitting  out  theoretically  so,  if there  was  a                                                                 
     pipeline from the North  Slope that went to a center - and                                                                 
     I'll say Fairbanks because  that's where I'm sitting today                                                                 
     - and in Fairbanks  there was some kind of trading  center                                                                 
     and  gas went either  through  an LNG line  to Valdez  for                                                                 
     export or  was sold to a local petrochemical facility  for                                                                 
     processing   or sold  to  a  local  utility  to  generate                                                                  
     electricity or shipped on  a pipeline route through Canada                                                                 
     to  the Lower  48, then  I think  we'd be  in a situation                                                                  
     where  there would  be a better  reason to  argue that  at                                                                 
     least  that  first  segment   of the  pipeline   could  be                                                                 
     regulated  intrastate.    Again,  it depends  on  how  the                                                                 
     project is set up and designed.   That's not inconceivable                                                                 
     but there isn't, like in  response to many other questions                                                                 
     you asked, there isn't really a clear path on that.                                                                        
     The  next section talked  about regulation  over hubs.   I                                                                 
     think  I explained why  the Gulf of  Mexico example  isn't                                                                 
     really analogous  because it's an opposite.  The  question                                                                 
     also  talked about spur  lines.  It's  true that any  line                                                                 
     that went off of a main  pipeline that transported product                                                                 
     to  somewhere else  in the  state, to  a utility  or to  a                                                                 
     processing   plant  from  an  off take   point,  would  be                                                                 
     regulated  by the  RCA.   This is  another  area where  it                                                                 
     would  be helpful to have clarification  over the federal                                                                  
     law  if  that's  what the  policy  makers  decide  is  the                                                                 
     objective, to have where  our jurisdiction begins and ends                                                                 
     and  whether or not  - I'm not  sure it's  a good idea  to                                                                 
     have us regulate  the rates down from Fairbanks  but if it                                                                 
     is,  that's an area  where some clarification  of federal                                                                  
     law defining what a hub  or a training center or where the                                                                 
     jurisdiction begins and ends, would be helpful.                                                                            
     Regulation  as common carrier  - that was the next series                                                                  
     of  questions.   The letter  asked if  I knew  of any  gas                                                                 
     pipelines  that FERC now regulates as common carriers.   I                                                                 
     don't  but remember,  again,  that the Lower  48 pipeline                                                                  
     regulatory   scheme  was  based  on  a  different  market                                                                  
     structure.   You've got a network  of pipelines going  all                                                                 
     over  the place.   In a  world where shippers  have  other                                                                 
     options,   the  concept  of  common  carriers  that's   so                                                                 
     important to us, isn't as  important.  This is going to be                                                                 
     a  bottleneck  facility,  at  least  for the  foreseeable                                                                  
     future  therefore  I  think  there's  very  strong public                                                                  
     policy reasons why common  carriage, or some other scheme,                                                                 
     it doesn't  matter if you call it common carriage  or open                                                                 
     access,   some  scheme   to  ensure   that  there's   non-                                                                 
     discriminatory   access to  the  line  by  producers,  any                                                                 
     producer  that  has product  to ship  is important.    And                                                                 
     that's  something  that  could be  best  resolved through                                                                  
     federal legislation.                                                                                                       
     The  danger of  a contract  carriage pipeline  is that  it                                                                 
     would  allow the producers, or  some subgroup of them,  to                                                                 
     control  whose gas got  to market.   From my perspective,                                                                  
     that's  unacceptable for a couple  of reasons.  The  state                                                                 
     as a  royalty gas owner  is going to  want to get its  own                                                                 
     gas to market  and may be left out of that scheme.   Also,                                                                 
     as  the owner  of lands  from which  the gas  resource  is                                                                 
     developed, I'm sure we'd  want to encourage development of                                                                 
     our  gas resources.   ANGTA,  again, Section  13(A)  talks                                                                 
     about  - prohibits  discrimination against  shippers  that                                                                 
     don't  own an interest  in the pipeline  and that type  of                                                                 
     model - if there's going  to be modifications to that law,                                                                 
     bringing  that principle  forward  I think  would be  very                                                                 
     It's  also  worthy  to  note, when  we  talk  about  state                                                                 
     regulations  to influence  who gets their  product on  the                                                                 
     line,  what  some  other  states have  done.    In Texas,                                                                  
     they've used some of their  right-of-way access procedures                                                                 
     to require  pipelines to be common carriers.   I know that                                                                 
     provision is in some of  the state leases.  I have no idea                                                                 
     whether it's  in any of the leases on any of the  proposed                                                                 
     routes folks are talking  about, but that's another option                                                                 
     for the state  ensuring that all producers have  access to                                                                 
     the  line.   Another  option  to think  about is  the  one                                                                 
     similar,  perhaps, to what the  legislature crafted  a few                                                                 
     years ago  on HB 290.  I know some of you were  around for                                                                 
     that  effort.   There, it was  an export  gas pipeline  at                                                                 
     issue.  What happened in the end was a balance.                                                                            
     The   problem  was   the  pipeline   owners  needed   firm                                                                 
     commitments in order to  obtain financing for the pipeline                                                                 
     and there  were users in-state  who were not able at  that                                                                 
     point  in time  to make the  long term  commitments.   So,                                                                 
     what the legislature did  was carved out, or designated, a                                                                 
     section  of the line that would  be regulated as a common                                                                  
     carrier and gave the RCA  responsibility when the pipeline                                                                 
     project  began to come on line  for defining how big  that                                                                 
     slice  was going to  be and regulating  that one piece  of                                                                 
     the  pipeline so that  in-state users  would have access.                                                                  
     That  pipeline was never  built but  that's another -  and                                                                 
     that  concept  is  untested  but  that's another  option,                                                                  
     perhaps  worthy of consideration  if we're thinking  about                                                                 
     how the  interests of in-state  users could be protected.                                                                  
     I  don't know  of any  other precedent  for  that type  of                                                                 
     scheme on a national level.   Again, TAPS was - and how we                                                                 
     regulate  TAPS concurrently  with FERC,  was the original                                                                  
     model  for that. The thought  there was that - again,  our                                                                 
     role  on TAPS  is to  protect  the interests  of in-state                                                                  
     shippers so  they pay fair rates even though there's  much                                                                 
     more pipeline beyond where they take off.                                                                                  
     The next  series of questions  was about regulation  under                                                                 
     the  Natural Gas Act,  or ANGTA, and  it asked about  FERC                                                                 
     applications.   FERC is really  the appropriate agency  to                                                                 
     comment  on how it's going to  handle applications.   They                                                                 
     have a statutory obligation  to process applications and I                                                                 
     understand  that  their  response   today  was  until  the                                                                 
     application  was filed they're not able to say  a lot.  As                                                                 
     frustrating  as  that  may be,  that  makes sense  from  a                                                                 
     regulatory  perspective.  What  they're going to be  faced                                                                 
     with is  sorting out whatever  legal challenges are  filed                                                                 
     to  whatever  application  they  get.    The  answers  are                                                                 
     different  depending on the particular  application.   But                                                                 
     I'd suggest that if the  goal is a smooth process at FERC,                                                                 
     that the best  model is for all of the interested  parties                                                                 
     to  sort out  their differences  and go  together to  FERC                                                                 
     with an application.   That's the model we've  seen in our                                                                 
     pipeline  cases and I  know FERC does  the same thing,  or                                                                 
     experiences  the same thing.    It's when the parties  are                                                                 
     able to  negotiate, all the interested  parties, again  if                                                                 
     they're  not all  at the table  it's FERC's  role to  make                                                                 
     sure  that their  interests are  protected,  but the  best                                                                 
     model  is for folks sorting out  their differences before                                                                  
     they get there.                                                                                                            
     On upstream  access, I'm not well versed on the  first and                                                                 
     open season  process but many  of the concerns about  that                                                                 
     process expressed  in the letter are whether the  producer                                                                 
     owned  pipeline  [is]   valid.   My  agency's   goals  and                                                                 
     priorities  are in-state access  at a reasonable cost  and                                                                 
     that's based  on my knowledge and experience with  what it                                                                 
     costs to generate  power in the state and how  it might be                                                                 
     very  helpful to  have some  of this  gas to  reduce  that                                                                 
     cost.   I would caution  that the cost  of constructing  a                                                                 
     pipeline is really what's  recovered in the transportation                                                                 
     rate so  that if you're evaluating  alternative routes  or                                                                 
     alternative   options,  whatever  minimizes  construction                                                                  
     costs is really  important.  I think I saw a statement  in                                                                 
     the press  by producers to that  effect and I would  agree                                                                 
     that minimizing  costs is important,  although I may  look                                                                 
     at costs a  little differently.  The incentives  that they                                                                 
     have to keep construction  costs low are different than an                                                                 
     independent  pipeline company might have or another  owner                                                                 
     and that  issue is significant  when you're talking  about                                                                 
     keeping  tariff rates low enough  that in-state users  can                                                                 
     have reasonable access.                                                                                                    
     I think  the state, in summary,  has legitimate interests                                                                  
     in the  connection with this  pipeline that will be  heard                                                                 
     and appreciated  at FERC.  We  have interests in ensuring                                                                  
     state  access  and  use of  our  gas in-state.    We  have                                                                 
     interest in  getting our gas to market, if that's  what we                                                                 
     choose,  and a strong interest  in pipeline safety.   And,                                                                 
     any pipeline  permitting process  that doesn't take  those                                                                 
     interests  into account  is not  likely in  the end to  be                                                                 
     successful.    That's   the  end  of  my  answers  to  the                                                                 
     questions posed in the letter.   I'd be happy to entertain                                                                 
     more  questions.   I saw  some scribbling  up  there so  I                                                                 
     suspect I'm going to get ....                                                                                              
CHAIRMAN TORGERSON asked Ms. Thompson if she could suggest any                                                                  
legislation the committee might consider to make the RCA's job                                                                  
MS. THOMPSON replied not on the state level because her focus now                                                               
is to clarify the federal law, which would benefit all parties if                                                               
this project is to move forward.                                                                                                
CHAIRMAN  TORGERSON asked Ms.  Thompson if  she has had a chance  to                                                            
review the producers' draft legislation.                                                                                        
MS. THOMPSON said  she briefly looked at it but has  not analyzed or                                                            
studied  it.   She  offered  to provide  specific  comments  if  the                                                            
committee so desired.                                                                                                           
CHAIRMAN TORGERSON  indicated the  committee would be interested  in                                                            
her comments.   He informed her that the committee  plans to meet in                                                            
September for  the sole purpose of  discussing the producers'  draft                                                            
legislation.    He also said  he would provide  Ms. Thompson  with a                                                            
copy  of the  proposed  legislation  provided  to the  committee  by                                                            
Charlie  Cole.    He  commented  that  it looks  like  some  fix  is                                                            
necessary  on  the  federal  level and  that  the  committee  should                                                            
provide  suggestions   for  changes  to  the  federal  law  and  her                                                            
expertise would be welcome.                                                                                                     
REPRESENTATIVE  DAVIES asked Ms. Thompson to expand  on her comments                                                            
about the  need for clarification  of the federal  law in a  memo to                                                            
the committee.                                                                                                                  
MS. THOMPSON agreed to do so.                                                                                                   
REPRESENTATIVE DAVIES noted  that Ms. Thompson stated that an export                                                            
pipeline would  be federally regulated  but he thought Mr.  Loeffler                                                            
said that  FERC would regulate  the export  facility.  He asked  for                                                            
MS. THOMPSON  said she did not hear  Mr. Loeffler's comments  but it                                                            
is her understanding  that an export pipeline would  be regulated by                                                            
FERC or the U.S.  Department of Energy.  She repeated  that [HB] 290                                                            
pertained to a case in  which some of the gas would be used in-state                                                            
so the rates  for that portion of  the gas would be set by  RCA, but                                                            
the RCA would  have nothing to do with setting transportation  rates                                                            
for gas sent out-of-state.                                                                                                      
11:33 a.m.                                                                                                                      
CHAIRMAN TORGERSON recalled  something he read that said if the port                                                            
authority concept  went forward or if the pipeline  was state owned,                                                            
it would not  come under FERC jurisdiction.   He asked Ms.  Thompson                                                            
to comment on that.                                                                                                             
MS. THOMPSON  said  she honestly  does not understand  that  concept                                                            
well enough to comment.                                                                                                         
TAPE 01-13, SIDE B                                                                                                            
CHAIRMAN  TORGERSON noted  that he  posed a series  of questions  to                                                            
that group to answer at their presentation that afternoon.                                                                      
SENATOR KELLY stated that  at the last meeting, the committee talked                                                            
and heard about  FERC jurisdiction  if a single molecule  of gas was                                                            
exported   or  transported   to  the  Lower   48  and  it   was  his                                                            
understanding that RCA  would not be involved if that were the case.                                                            
He asked  Ms. Thompson if  her opinion differs  since she said  that                                                            
gas for use instate would  fall under the regulation of the RCA.  He                                                            
asked if she meant  from a hub transported to a community  in Alaska                                                            
or  for  royalty  gas  -  under  what  circumstances  RCA  would  be                                                            
MS. THOMPSON  said the committee walked  away with the right  answer                                                            
under the Natural Gas Act  but the question is: What does ANGTA mean                                                            
and what impact  does that piece of legislation have  on the answer?                                                            
The  one molecule  concept  falls under  the  Commingling  Doctrine,                                                            
which  falls under  the Natural  Gas Act.  That  came about  because                                                            
creative  state  regulators  and creative  pipeline  companies  were                                                            
building  pipelines to  avoid certain  state  boundaries so  federal                                                            
regulations  were imposed because  it didn't make any sense.  Alaska                                                            
has different  factual circumstances.  She believes  it is arguable,                                                            
although it is  not clear, under ANGTA, that the state  would have a                                                            
role in  setting the rates  under which its  gas is transported  in-                                                            
state.  If, under  ANGTA, Section 13, the state exercises  the right                                                            
to take  its royalty gas  in-state, then the  language of that  bill                                                            
could be construed to give  states the right to set the rate to that                                                            
off-take  point for state  gas.  She repeated  that applies  only to                                                            
royalty gas.                                                                                                                    
SENATOR KELLY  asked if Ms.  Thompson was  speaking only to  setting                                                            
transportation rates to the off-take point.                                                                                     
MS. THOMPSON  said  that is  correct; she  was only  speaking  about                                                            
SENATOR KELLY  asked if "to the off-take  point" means to  the point                                                            
where the end  purchaser purchases  it or to a hub where  it is then                                                            
transported from  the big pipeline to the communities  of the state.                                                            
MS. THOMPSON replied:                                                                                                           
     To  the point where  it leaves  the pipeline  and the  end                                                                 
     user -  I guess there's a number  of different scenarios.                                                                  
     If it goes, for example,  if there's a spur line that goes                                                                 
     out  of Fairbanks down  to the Kenai  area, then we  would                                                                 
     regulate   the  spur  line  clearly   because  that's   an                                                                 
     intrastate  pipeline.  We may,  under ANGTA, regulate  the                                                                 
     rates that  folks who were the end users in Kenai  pay for                                                                 
     the portion of transportation  between the North Slope and                                                                 
     wherever  the spur line starts  off the big line.  That's                                                                  
      the ambiguity, whether or not ANGTA means that we have                                                                    
     some say in what they pay for their share of shipment on                                                                   
     the big line.                                                                                                              
CHAIRMAN  TORGERSON  asked  if  that  answer  differs  depending  on                                                            
whether the application  is filed under the Natural Gas Act or under                                                            
MS. THOMPSON  asked Chairman Torgerson  if he is speaking  about the                                                            
application  that has  already been  filed when  he referred  to the                                                            
ANGTA application.                                                                                                              
CHAIRMAN  TORGERSON  said  yes.    He noted  the  1977  law  clearly                                                            
provided for access in-state.                                                                                                   
MS. THOMPSON agreed.                                                                                                            
CHAIRMAN TORGERSON  stated, "NGA doesn't,  except for what  we heard                                                            
earlier, is for some farmers,  so we're going to make folks in Delta                                                            
happy maybe, if it crosses  their property but, you know, what about                                                            
everybody else?"                                                                                                                
MS. THOMPSON responded  that not having looked back  at the original                                                            
application,  she is uncomfortable  providing  a definitive  answer.                                                            
She said  if Chairman Torgerson  is asking  whether the RCA  has any                                                            
control over  the in-state rates under  either piece of legislation                                                             
and  whether it  makes  a difference  whether  it was  the  original                                                            
application or  another one, she guessed the answer  is probably no.                                                            
She  noted this  is an  area  that should  be clarified  if  federal                                                            
legislation  is passed - that the  state has the right to  set rates                                                            
for gas  that's taken  off and  used in  the state  and the  federal                                                            
government can do everything else.                                                                                              
CHAIRMAN   TORGERSON   asked  Ms.   Thompson   if   she  has,   "any                                                            
recommendations that would  stop us from chasing our tail and get to                                                            
some real answers?"                                                                                                             
MS. THOMPSON  said she shares the  Chair's frustration about  having                                                            
to absorb a lot  of information.  She stated in an  ideal world, she                                                            
would like  to see  a unified state  position  that the state  could                                                            
take to  the table to negotiate  with the  entities that will  build                                                            
the line.   That  would enable RCA  to better  protect the  in-state                                                            
users.  She  said she doesn't think  anyone has the answer  yet, but                                                            
anything the committee  can do to encourage a unified position would                                                            
be helpful to the RCA.                                                                                                          
CHAIRMAN TORGERSON  thanked Ms. Thompson  and asked representatives                                                             
from FERC  to testify.   He noted  that he  distributed the  40-page                                                            
letter to the  committee from Mr.  Chamblee [dated August  14, 2001]                                                            
and the  short letter  that  said FERC did  not want  to answer  any                                                            
questions until it received an application.                                                                                     
MR. JOHN  KATZ, Director  of the  Office of  Energy Projects,  FERC,                                                            
informed  the Chairman that  he noted the  concern expressed  in his                                                            
letter regarding  the responses  provided by  FERC officials  at the                                                            
last meeting -  that the responses were given in the  context of the                                                            
NGA and not to ANGTA.   He explained that FERC officials were trying                                                            
to answer the  questions as they understood them but  no one at FERC                                                            
has  an expressed  preference  or negative  sense  about whether  an                                                            
application  could or should be filed  under ANGTA versus  under the                                                            
NGA.  Those statutes coexist  and it will be up to the applicants to                                                            
decide what  they want to  file under.  The  bottom line is  nothing                                                            
that FERC officials said  was intended to cast aspersion on ANGTA or                                                            
to express  a preference.  Second,  while FERC officials  want to be                                                            
as forthcoming  and helpful  as possible, it  is hard to answer  all                                                            
questions in detail  before an application is filed  because so much                                                            
depends  on other factors.   FERC  will first need  to know  what is                                                            
being  proposed and  who is  asking  for what  authority,  etcetera.                                                            
Finally, the questions  are also difficult to answer because FERC is                                                            
an independent  regulatory agency  with five commissioners  who vote                                                            
on matters  of law and policy so staff  can provide the standing  of                                                            
the commission's  policy  and what  the commission  has done  in the                                                            
past, but  staff cannot  predict what  the commission  will do.   He                                                            
said he totally  agrees with Chair  Nan Thompson that an  Alaska gas                                                            
pipeline proposal is a  matter of first impression here and that the                                                            
ANGTA certificate, which   never became a final certificate may pose                                                            
policy and legal issues  that the FERC has not dealt with because of                                                            
the unique circumstances  in Alaska.  He said staff does not want to                                                            
mislead  anyone by  suggesting that  FERC might  reach a  particular                                                            
MR. KATZ said  that Nan Thompson's answers to the  committee tracked                                                            
the best  answers he could  give the committee.   He said he  agrees                                                            
that Section  13 of  ANGTA does  contain a  provision regarding  the                                                            
transportation  of royalty  gas and the NGA  does not address  that.                                                            
That doesn't  mean such a  thing couldn't occur  under the NGA.   In                                                            
regard to the rates that  would be charged for such a service, Chair                                                            
Thompson spoke on that  point.  He clarified that Section 13(B) says                                                            
the State of Alaska is  authorized to ship its royalty gas.  The end                                                            
of that  section says  the commission  [FERC]  shall issue  whatever                                                            
authorization  necessary, "subject to review by the  commission only                                                            
of  the justice  and  reasonableness  of the  rate charge  for  such                                                            
transportation."   He repeated that this is hypothetical  because no                                                            
gas has ever been transported  pursuant to ANGTA but a plain reading                                                            
of that section  suggests that the FERC would at least  need to look                                                            
at the  proposed rates for  Alaska royalty  gas transportation.   He                                                            
was not sure whether  those rates would initially  be set by the RCA                                                            
and then reviewed by the FERC.                                                                                                  
CHAIRMAN TORGERSON  commented that they have been  talking about the                                                            
1977 act and that, in reality,  nothing has materialized as a result                                                            
of passage of  that act.  He asked how to account  for the pre-build                                                            
in Alberta and  British Columbia in relation to that  act or whether                                                            
it shouldn't  be recognized.   He stated it  seems that portions  of                                                            
the requirements  in the  law that was passed  were accomplished  in                                                            
the pre-build.                                                                                                                  
MR. KATZ said  the Chairman is absolutely  right and that  those two                                                            
legs of  the pipeline were  indeed built under  ANGTA but no  Alaska                                                            
portion has been constructed.                                                                                                   
CHAIRMAN TORGERSON said  it is very frustrating to committee members                                                            
to realize that  one of the major stumbling blocks  it is faced with                                                            
today is whether  or not NGA or ANGTA prevails over  an application.                                                            
He said  he finds it almost  intolerable  that the committee  cannot                                                            
get a decision from anyone.  He stated that this issue smells like a                                                            
court  fight and  that  hundreds of  attorneys  on both  sides  will                                                            
represent Foothills  and producers if one side doesn't  like what is                                                            
going on.  He  said he realizes that FERC's position  is to let them                                                            
negotiate and hopefully  work it out, which he wishes they would do,                                                            
but he feels it is a matter  of law and a decision on it needs to be                                                            
before the  FERC so  that the matter  can be settled.   He asked  if                                                            
there is a way the State  of Alaska can put this question before the                                                            
FERC and get a ruling on which law prevails.                                                                                    
MR. KATZ  said, "I  can tell  you we  are right behind  in terms  of                                                            
wishing we  had answers to  all those questions."   He noted  in the                                                            
report  FERC sent  to  Congress, staff  stated  that  ANGTA did  not                                                            
preclude  consideration of  another proposal  under the NGA.   ANGTA                                                            
says  the FERC  has  to  do various  things  and  that once  it  has                                                            
completed  the process  of  a President's  decision  and  Congress's                                                            
approval of  that decision, the FERC  may reject other applications                                                             
under the NGA,  which staff has interpreted to mean  that FERC could                                                            
choose to consider  them or not consider them, depending  on whether                                                            
the application  is in the public interest.   He informed  committee                                                            
members  that in terms  of getting  an answer  from FERC, people  do                                                            
file requests  for  declaratory orders,  otherwise  the state  could                                                            
request a  general counsel's  opinion.  He  said the problem  with a                                                            
general counsel's opinion  is that he is not sure the answer will be                                                            
worth much  more than the paper it  is printed on because  any party                                                            
could litigate.   He did  not think another  party could litigate  a                                                            
declaratory order  because that would just be an opinion  that would                                                            
not affect  anyone's right  to liability until  the FERC acted  upon                                                            
it.  He maintained  that the issue will probably go  to court unless                                                            
Congress speaks on and clarifies it.                                                                                            
CHAIRMAN  TORGERSON  thanked Mr.  Katz and  Randy  Methura (ph)  for                                                            
their information.                                                                                                              
MR. KATZ said  FERC staff tries to  work with whatever agencies  and                                                            
legislatures  are involved  and  hopes to  do that  as this  project                                                            
moves down the road.                                                                                                            
REPRESENTATIVE  OGAN noted that he  believes the statement  that the                                                            
easiest way to resolve  this issue is to get Congress to speak is an                                                            
CHAIRMAN  TORGERSON  asked Mr.  Katz  to clarify  what  is going  on                                                            
within FERC regarding staff and Chair changes.                                                                                  
MR.  KATZ said  that  Chairman Hebert  has  announced  that he  will                                                            
resign as  of the end of  the month and  Kevin Madden (ph),  general                                                            
counsel, has also resigned.   The President announced yesterday that                                                            
Pat  Woods,  who  was Chairman  of  the  Texas  Commission,  and  is                                                            
currently   FERC Commissioner, will  be the new FERC chairman  as of                                                            
September  1.   The vacant  seat will  presumably be  filled with  a                                                            
CHAIRMAN TORGERSON  asked if anyone else, besides  the lead counsel,                                                            
has left the FERC.                                                                                                              
MR. KATZ  said no.  He  stated that Chairman-designate  Wood  has an                                                            
excellent background in  energy regulation and has a strong interest                                                            
in gas issues.                                                                                                                  
CHAIRMAN  TORGERSON asked Mr.  Katz if he  will be the next  general                                                            
MR. KATZ said that he can promise he will not be.                                                                               
CHAIRMAN TORGERSON asked if the Chairman makes that appointment.                                                                
MR. KATZ said it is.  He noted the Chairman has someone in mind.                                                                
CHAIRMAN  TORGERSON   asked  Mr.  Katz  if  he  has  looked  at  the                                                            
producers' legislation.                                                                                                         
MR. KATZ  said that  staff supports  anything  that clarifies  under                                                            
what authority  FERC should consider  pipeline proposals  and agrees                                                            
with the  thrust of the  parts of the legislation  that implies  the                                                            
need for coordination  of federal  efforts.  But, staff has  not yet                                                            
done a detailed review of the legislation.                                                                                      
CHAIRMAN  TORGERSON asked  for a copy  of the  staff's remarks  when                                                            
they are available.                                                                                                             
MR. KATZ agreed.                                                                                                                
CHAIRMAN  TORGERSON thanked  Mr. Katz  and announced  the  committee                                                            
would take a lunch break until 1:00 p.m.                                                                                        
TAPE 01-14, Side A                                                                                                            
                  DEPARTMENT OF NATURAL RESOURCES                                                                             
CHAIRMAN  TORGERSON called  the meeting back  to order at 1:04  p.m.                                                            
He invited  Mr. Bill  Britt to testify.   He asked  Mr. Britt  if he                                                            
believes the state can  have, in its right-of-way leases, provisions                                                            
to protect access  to communities or other projects  the state might                                                            
want to do.                                                                                                                     
MR. BILL BRITT,  Gas Pipeline Coordinator  within the Department  of                                                            
Natural  Resources  (DNR),  said he  hesitates  to  answer  specific                                                            
questions  without   consulting  with  counsel  because   there  are                                                            
limitations to  the power, but he believes the Right-of-way  Leasing                                                            
Act  is one  of the  most powerful  tools  the state  has to  affect                                                            
policy relative to the  question and it is not frequently recognized                                                            
as such.  He stated  that when the legislature chose  to preempt the                                                            
over-the-top  route, the Right-of-way  Leasing Act was the  tool the                                                            
legislature  used  to do  so.   DNR can  affect  very consequential                                                             
policy through  right-of-way leases;  that realm is contractual  law                                                            
as  opposed to  police  powers.   However,  the  state  does run  up                                                            
against  federal  preemption  issues  within  certain  areas  so  it                                                            
depends  on the  specific  question  and what  the state  wishes  to                                                            
affect.  He  said he would like to  find out how and what  the State                                                            
of Texas has done in this arena.                                                                                                
CHAIRMAN TORGERSON  said he understands  someone will be  discussing                                                            
that issue with  the Alaska Highway Natural Gas Pipeline  Council on                                                            
September  17 so they  may learn more  at that  time.  He  commented                                                            
that there  has been a lot  of talk about  the hub concept  and that                                                            
there  is a  feeling  that  hubs are  created  legislatively.    The                                                            
committee  has not been able  to find any  such animal.  It  appears                                                            
the Commonwealth  did something to create a hub and  that may be the                                                            
only example.  He asked  if perhaps access to Fairbanks could be put                                                            
in a right-of-way and effectively that may become the hub.                                                                      
MR.  BRITT said  there  are two  ways  to go.   The  statute  itself                                                            
contains  mandatory covenants  that  every right-of-way  lease  must                                                            
include.  In addition,  DNR negotiates the lease with  the owners of                                                            
the pipelines,  and that includes  stipulations and provisions  that                                                            
vary from pipeline  to pipeline.  If DNR can figure  out how to put,                                                            
in plain language,  what the state  wishes to have happen,  it would                                                            
be relatively  easy  to find out  whether that  can be accomplished                                                             
through statute,  which is  where the mandatory  covenants  live, or                                                            
through the negotiated lease.                                                                                                   
CHAIRMAN  TORGERSON asked  Mr. Britt  to comment  on the  producers'                                                            
legislation and the port authority's legislation.                                                                               
MR. BRITT  noted  that he  only saw  the port  authority's  proposed                                                            
legislation  for the first  time this afternoon  but, regarding  the                                                            
producers' legislation,  the administration is preparing comments on                                                            
that legislation.   His  comments to the  administration were  that:                                                            
the definition of Alaskan  gas was limited to North Slope gas and he                                                            
was unsure what  affect that would have on future  exploration; that                                                            
the  return  of  the  office  of  the  federal  inspector  would  be                                                            
beneficial;  and the preemption to  FERC was required to  say yes to                                                            
applications  if three tests were  met - those tests seemed  slanted                                                            
in favor of the producers.                                                                                                      
CHAIRMAN  TORGERSON  asked Mr.  Britt  if one  of the  goals of  the                                                            
federal group  of agencies that has been meeting is  the creation of                                                            
a "super-agency" to look after rights-of-way.                                                                                   
MR. BRITT said  their mission is unclear at this time.   He was told                                                            
in a briefing  that they are strictly  limited to analyzing  federal                                                            
approval  processes,  determining  where  the  bottlenecks  are  and                                                            
making  recommendations  in a  report to  be completed  in the  late                                                            
CHAIRMAN TORGERSON  commented that  forming a super organization  is                                                            
consistent  with the President's  energy policy  if the President's                                                             
goal  is  to move  mega-projects   forward.   He  thought  that  the                                                            
President  said he  would establish  such  an office  in his  policy                                                            
MR. BRITT  said he thinks  it is  a good idea  and that is what  his                                                            
office  is at the  state  level.  Agencies  operating  on their  own                                                            
frequently operate  on various schedules and at cross  purposes.  If                                                            
everyone is under one roof, the process goes more smoothly.                                                                     
REPRESENTATIVE  FATE  asked Mr.  Britt if  his office  has  received                                                            
enough  money from  the Division  of  Legislative  Budget and  Audit                                                            
(LBA) to coordinate  and implement  some of the activities  required                                                            
of his office.                                                                                                                  
MR. BRITT  replied the general  funds his  office received  from LBA                                                            
were  sufficient for  him  to sign  two reimbursement  memoranda  of                                                            
understanding  (MOUs) with Foothills  and the producers.   That seed                                                            
money is all  his office really needed  to begin going forward  at a                                                            
pace  determined   appropriate  in  conjunction  with   the  project                                                            
proponents.  He has been hiring staff.                                                                                          
REPRESENTATIVE FATE asked if the process was fairly smooth.                                                                     
MR. BRITT said  it happened very quickly.   After LBA gave  Chairman                                                            
Therriault  the power  to enter into  the agreements,  a letter  was                                                            
sent to  Commissioner Pourchot  the following  day.  That same  day,                                                            
the agreements  with  Foothills and  the producers  were signed.  He                                                            
believes working with Chairman Therriault will be very easy.                                                                    
CHAIRMAN  TORGERSON asked  Mr. Britt what  interaction he is  having                                                            
with the  Canadian regulatory  authorities.   He  asked if they  are                                                            
forming a joint office also.                                                                                                    
MR. BRITT said  his interaction with  Canadian authorities  has been                                                            
extremely  limited up until  now. He has  been concentrating  on the                                                            
federal agencies so the Canadians will be next.                                                                                 
CHAIRMAN TORGERSON asked if we should care.                                                                                     
MR.  BRITT  said he  believes  so,  simply  because  ultimately  how                                                            
quickly something  is approved and the expense associated  with that                                                            
approval  occurs on both  sides of the border.   He thinks  everyone                                                            
will be  better served  if the  authorities in  both countries  work                                                            
together.   He said he also believes  it is easier to influence  the                                                            
approvals  of  others  if  the  state   interacts  with  and  has  a                                                            
coordinated process with those agencies.                                                                                        
CHAIRMAN  TORGERSON asked  Mr. Britt  if he  anticipates a  Canadian                                                            
member on Alaska's Joint Pipeline Committee and vice versa.                                                                     
MR. BRITT said he thinks  that is entirely possible.  He expects the                                                            
state and Canada  to be wrestling with many of the  same engineering                                                            
questions and  land status and title questions so  it makes sense to                                                            
learn from each other.                                                                                                          
CHAIRMAN  TORGERSON asked  Mr. Britt  if Jack Griffin  is his  legal                                                            
MR. BRITT said he deals with the folks who work for Mr. Griffin.                                                                
CHAIRMAN  TORGERSON asked Mr.  Britt to ask  for a legal opinion  on                                                            
the right-of-way issue  and provide the committee with the response.                                                            
MR. BRITT agreed to do so.                                                                                                      
CHAIRMAN TORGERSON  thanked Mr. Britt and asked Representative  Ogan                                                            
to proceed with his questions of Mr. Myers.                                                                                     
REPRESENTATIVE OGAN asked Mr. Myers:                                                                                            
     Mr.  Myers -  I want  to have  a little  discussion  about                                                                 
     possible interaction  between the producers on  what could                                                                 
     possibly  be deal killers, or  at least slow down the  gas                                                                 
     going  to market and  maybe have an  effect on the routes                                                                  
     selected.   Kevin Meyer has been  on record in the past  -                                                                 
     and  I'm going  to kind of  paraphrase  it, but basically                                                                  
     saying that  this alignment agreement removes  some of the                                                                 
     impediments to a major gas  sale but - maybe we could talk                                                                 
     a  little bit  about some  of the  past things  that  have                                                                 
     caused problems, like the  MI and NGL dispute.  You've got                                                                 
     the gas cap owners and BP  at odds over that and could you                                                                 
     kind of tell us your knowledge  of what happened with that                                                                 
MR. MARK  MYERS,  Director of  the Division  of Oil  and Gas in  the                                                            
Department   of  Natural   Resources,  introduced   Bonnie   Robson,                                                            
petroleum  investment manager  and informed  the committee  that Ms.                                                            
Robson represented  the state  as an assistant  attorney general  on                                                            
some of the legal issues  so he would defer to her on the fine legal                                                            
MR.  MYERS  stated  the  North  Slope  oil field  is  a  very  rough                                                            
playground.   The commercial  issues involve  large dollars  and the                                                            
companies are  very much competitors  in many ways even though  they                                                            
have  a unified  interest so  that competition  is  manifested  in a                                                            
large number of  areas.  There are cases, not uncommonly,  where the                                                            
commercial  interests of  one company  are advantaged  over  another                                                            
company  and  those commercial  interests  are  different  than  the                                                            
state's.   There  are  cases  when those  commercial  interests  are                                                            
aligned.  Those  alignments are usually  gotten to through  a series                                                            
of very tough  negotiations.  Some  of the issues are so  large that                                                            
the negotiations  are often protracted and have a  very strong legal                                                            
and commercial aspect to them.                                                                                                  
Regarding  the MI-NGL  "wars,"  MR.  MYERS said  that  prior to  the                                                            
alignment  agreement, BP  had a majority  interest  in the oil  rim,                                                            
whereas ARCO  and Exxon had  a larger position  in the gas cap.   In                                                            
the case  where natural  gas liquids were  being produced,  stripped                                                            
out of  the gas,  there were  two major  uses for  them: one was  to                                                            
create  miscible  injectant  (MI) to  reinject  into the  fields  to                                                            
enhance oil recovery; the  second was to create a natural gas liquid                                                            
and ship it down  the pipeline with the oil.  Once  the oil line had                                                            
sufficient  capacity  in  it, there  were  some  engineering  safety                                                            
concerns that were answered:  yes it's appropriate to ship a certain                                                            
amount of natural  gas liquids down  the pipeline.  The bottom  line                                                            
was that the natural gas  liquids were dominantly out of the gas rim                                                            
acreage that had majority  ownership by Exxon and ARCO and therefore                                                            
they were  at a commercial  advantage to see  those liquids  go down                                                            
the pipeline.  The state  was in a similar position with its royalty                                                            
interest.  BP felt it was  more advantageous to have the MI used for                                                            
reinjection  to recover more of its  oil rim oil.  So, essentially,                                                             
there was a commercial  dispute in terms of value.   That commercial                                                            
dispute led  to BP building  separate facilities,  which were  never                                                            
used.   That dispute  moved  into the  public sector,  with  several                                                            
agencies  on several  fronts,  including the  [Alaska  Oil and  Gas]                                                            
Conservation Commission  and the Division of Oil and  Gas.  Hearings                                                            
were  held  and  ultimately   a  settlement  was  reached   and  the                                                            
facilities  were  not used.    It was  an  example of  a  commercial                                                            
dispute  getting  in  the  way  of  the  highest  and  best  use  of                                                            
facilities on the North Slope.                                                                                                  
MR. MYERS said, regarding  the Gas Balancing Act, the division would                                                            
expect the  Gas Balancing  Act would be needed  if a large  gas sale                                                            
were to  occur.  It would  take 100 percent  ownership agreement  in                                                            
the field for  that Gas Balancing Act, which means  a minority owner                                                            
could block  it.  Therefore,  even though  there is alignment  among                                                            
majority  owners, major negotiations  would  need to occur  with the                                                            
minority  interests   regarding  the  Gas  Balancing   Act  and  the                                                            
methodology developed and  used by the producers.  Mr. Myers said to                                                            
single that case out as  unique is not really accurate, he can think                                                            
of a half  dozen other mechanisms  that could  be used if one  owner                                                            
wanted to block development.                                                                                                    
MR. MYERS continued:                                                                                                            
     We heard earlier  testimony by the AOGCC on the  issues of                                                                 
     oil production  in terms of lost oil production  with gas.                                                                 
     Obviously,  to  mitigate  that  you're going  to  want  to                                                                 
     modify  the reinjection  profiles  of the  field - either                                                                  
     change the  gas compositional mix to vary the  composition                                                                 
     as you  lower pressure for additional  recovery, increase                                                                  
     water   flood  or  a   combination  of   that  and   other                                                                 
     mechanisms.  So,  that  involves  significant  investment                                                                  
     capital.  So, you  would need  all parties  agreement.  In                                                                 
     addition,  the AOGCC, through  their Title 31, would  have                                                                 
     to  approve  it  and  look  at  the conservation   of  the                                                                 
     resource   and   physical   waste.   DNR   through   their                                                                 
     unitization   would  have  to  approve  that  there's   no                                                                 
     economic waste  and do the balancing between lost  gas and                                                                 
     But in that process, if  you have a major owner there that                                                                 
     doesn't  want  to  pay  their share,  they  can  kill  the                                                                 
     project. Or if you had a  major producer that did not want                                                                 
     to  sell  their   gas,  they  could  argue  successfully,                                                                  
     potentially,  that they  need to be  compensated for  that                                                                 
     lost oil.  Therefore, we need to extract this  extra value                                                                 
     out  of this negotiation.  So, there  would be protracted                                                                  
     legal negotiations there.                                                                                                  
     Another  issue is the gas in  probably a 4 BCF case  isn't                                                                 
     Prudhoe  Bay alone. It  has to be Point  Thompson gas.  So                                                                 
     now, you've  got another separate unit, which  will have a                                                                 
     separate  unit operating  agreement where  that balancing                                                                  
     has  to occur. In  addition, you have  other parties  like                                                                 
     Chevron and while they have  a small percentage in Prudhoe                                                                 
     Bay, certainly  less than 2 percent, they have  about a 25                                                                 
     percent or so interest in  Point Thompson. So, again there                                                                 
     are parties not even involved  in this current realignment                                                                 
     that  while their  position is  small in  Prudhoe is  very                                                                 
     large  elsewhere  in  gas  sales.  So,  anywhere  without                                                                  
     agreement  from  these parties,  there are  numerous  ways                                                                 
     this project can be blocked.                                                                                               
     Another issue would be the  conditioning plant. If it is a                                                                 
     unit   facility   within   Prudhoe,   it   has  different                                                                  
     implications   than  if  it  was  part  of  the  pipeline                                                                  
     structure in terms of ownership,  regulation and potential                                                                 
     rates  of return for it. So,  there's another issue  where                                                                 
     if someone  doesn't want to put  the hundreds of millions                                                                  
     of  dollars they  would  have to  into that  facility,  it                                                                 
     would be very difficult to build.                                                                                          
REPRESENTATIVE  OGAN  asked  about a  scenario  in which  Exxon  has                                                            
significant  holdings  in the  Mackenzie Delta  area  and the  board                                                            
decides not to  play unless the route goes over the  top, whether it                                                            
could kill the whole deal.                                                                                                      
MR.  MYERS  answered  that  wouldn't  be  an unrealistic   scenario,                                                            
although  the state  has  some right  to  have expectations  of  the                                                            
implied covenant  to market.  If there's  a reasonable mechanism  to                                                            
get that gas,  we could force the  issue through that, but  it would                                                            
be a difficult fight. Another  issue is that these are not primarily                                                            
gas  fields; they  are  primarily liquids  fields  with significant                                                             
amounts of  gas. So, you  have to look at  producing the liquids  as                                                            
well  as producing  the gas  and there  are multiple  ways of  doing                                                            
that. Some of  them involve much more capital investment.  At 35 TCF                                                            
on  the Slope,  Exxon  is  the owner  of  the  majority of  the  gas                                                            
MR. MYERS continued:                                                                                                            
     It would  be very difficult  to see  the volumes that  you                                                                 
     would need  in this type of process independent  of them -                                                                 
     if you need a 20 or 30-year  supply of gas, to justify the                                                                 
     financing. And even if you  could solve all the commercial                                                                 
     issues  and they don't want to  sell, that's over a  third                                                                 
     of that gas. That's a significant  amount and would have a                                                                 
     major  impact on the  project…. Basically,  I believe  the                                                                 
     producers  will  try  to  reach  an  alignment   of  their                                                                 
     positions  and that's one of  the issues of why we're  not                                                                 
     hearing  a  whole  lot.  They  will  have  to  reach  that                                                                 
     internal alignment.                                                                                                        
     Another  issue along  the line is how  much capacity  does                                                                 
     each company  get. I'm sure that's  a very hot subject  of                                                                 
     negotiation.  It's probably ongoing.  Does a company  that                                                                 
     has more proven  reserves bill a higher percentage  of the                                                                 
     project  or do  they in  a practical  sense  get a higher                                                                  
     nomination versus someone  that's willing to take the risk                                                                 
     that  they're   going  to  discover  more.  Someone   like                                                                 
     Phillips  that  has  a smaller  percentage,  a  5 percent                                                                  
     interest in Point Thompson,  has a very different economic                                                                 
     scenario than  does a company like Exxon that  has over 30                                                                 
     percent.  There are  a lot  of internal  negotiations  and                                                                 
     alignments  that  have to  be reached  before  they  reach                                                                 
     consensus  on  the size  of  the project  and  what  their                                                                 
     preferred route is.                                                                                                        
REPRESENTATIVE OGAN asked if the lack of alignment on Exxon's part                                                              
slowing any development.                                                                                                        
MR. MYERS answered:                                                                                                             
     I think we  can look at the oil examples of the  alignment                                                                 
     even in Prudhoe,  but lack of alignment - and  this is not                                                                 
     pointed   particularly  at  Exxon,  but  at  the  aligned                                                                  
     parties,   versus  Chevron's  interest  in  some   of  the                                                                 
     satellite  oil development - it has been an impediment  in                                                                 
     the past to rapid development  of these satellites. That's                                                                 
     again  why Chevron's  commercial interest  in Prudhoe  Bay                                                                 
     was only less than 2 percent.  Their ownership in specific                                                                 
     smaller  satellites  might be  much higher  than that.  It                                                                 
     might  be  25, 30  or  50 percent.  So,  the impact  on  a                                                                 
     particular  project   is much  larger   in their  overall                                                                  
     interest.  The same thing could  occur in situations  with                                                                 
     gas. That  lack of alignment created a problem  and we had                                                                 
     to hold  a hearing on the application  to produce. We  had                                                                 
     to make a  decision on what was appropriate participating                                                                  
     area. We did not have consensus  among the parties. So, we                                                                 
     had to  act to basically broker  the dispute. I think  the                                                                 
     good  news is that  we reached a reasonable  decision,  at                                                                 
     least  reasonable  by  our standards  and  development  is                                                                 
     going  forward. But not without  real fits and starts  and                                                                 
     issues  involving  how  much production  is  the minority                                                                  
     owner allocated  and how much do they pay to use  existing                                                                 
     facilities.  Some of  those decisions,  even though  we've                                                                 
     reached a resolution, aren't  fully decided, yet. We often                                                                 
     postpone.  We say, 'We'll  do a temporary  mechanism.  You                                                                 
     guys internally  fix it, come back to us in two  years. In                                                                 
     the meantime, we'll use this mechanism.'                                                                                   
     That  is a very  common way.  In the oil  field often  the                                                                 
     disputes   are   based   on   commercial   uncertainties,                                                                  
     uncertainties  about  how  much  oil or  gas  underlays  a                                                                 
     particular  lease, its commercialities, price,  etc. Those                                                                 
     are often  solved by a temporary mechanism that  has to be                                                                 
     fixed  later. So, you  agree to the  methodology, but  you                                                                 
     don't necessarily agree  to the actual number. That number                                                                 
     is  back calculated.  There  are  numerous ways  to  solve                                                                 
     these  disputes at  least to  the point where  you can  go                                                                 
     forward with development without fully solving them.                                                                       
     I think  the alignment  is an example  of one of those  in                                                                 
     some  aspects  because  it  fixed  the  problem  with  the                                                                 
     majority  owners, but it really  hasn't fixed it with  the                                                                 
     minority. I hope that answers your question.                                                                               
REPRESENTATIVE  OGAN  indicated  that  it  did and  asked  what  his                                                            
experience  has been  with gag orders.  He had  the impression  they                                                            
were not  releasing anything  on the gas  pipeline unless all  three                                                            
MR. MYERS answered that he wanted to refer some of the legal                                                                    
aspects of it to Ms. Robson. He said:                                                                                           
     There  is an  agreement involving  the allocation  of  the                                                                 
     leases  that  is not  yet part  of the  unit  or the  unit                                                                 
     operating  agreement. Because  of that, it's confidential                                                                  
     and we  can't talk about it.  We're hoping to get clarity                                                                  
     on  that.  If  it  becomes  part  of  the unit  operating                                                                  
     agreement, we would be able to talk about it.                                                                              
MS. BONNIE ROBSON, Petroleum Investment Manager, DNR, responded:                                                                
     Basically,   the  Prudhoe  Bay  Alignment  Agreement   was                                                                 
     executed in  the wake of the BP/ARCO/Phillips  acquisition                                                                 
     merger  and  transaction.  It was  received by  the  state                                                                 
     Attorney  General's  Office  as  a confidential  document                                                                  
     protected through the FTC  proceedings. We believe it does                                                                 
     address  a number  of  issues typically  found  in a  unit                                                                 
     operating  agreement  and that  it doesn't  in fact  amend                                                                 
     some of the terms of the  Prudhoe Bay Operating Agreement.                                                                 
     So, we  have prepared a draft  letter and forwarded  it to                                                                 
     the Attorney General's Office  for review in which we will                                                                 
     ask the  producers and specifically  the Prudhoe Bay  unit                                                                 
     operator, BP, to file that  as an amendment to the Prudhoe                                                                 
     Bay Unit  Operating Agreement  and then provide copies  to                                                                 
     the public.  Again, it's not certain that we will  be able                                                                 
     to do  that. Our request has  to receive legal review  and                                                                 
     it may be contested by the producers.                                                                                      
MR. MYERS added:                                                                                                                
     I think  I'd address it a little  more philosophically  in                                                                 
     terms of I think: a) The  companies are reluctant often to                                                                 
     share their commercial disputes  or their dirty laundry in                                                                 
     a  public forum  and you can't  fault them  for that.  So,                                                                 
     that's  part of  it. Another  part of  it is,  I think,  a                                                                 
     unified  front  to  agencies  like  ours that  negotiates                                                                  
     royalty or deals with tax  structure has value to them. It                                                                 
     has strength and value in  terms of the risk of divide and                                                                 
     conquer  and other scenarios.  I think  those issues  have                                                                 
     lead  to an approach  we've seen recently  from the  AOGCC                                                                 
     and from us  that it has often been very difficult  to get                                                                 
     information  that in past years  has been relatively  free                                                                 
     flowing   to  agencies   that  are  able   to  deal   with                                                                 
     confidential data.                                                                                                         
     So,  we've seen  an  overall effect  of  less information                                                                  
     flowing  directly to the state.  I will say in past  years                                                                 
     the lack  of alignment and the  commercial disputes  which                                                                 
     we  have had  to  resolve, and  often  we have  a royalty                                                                  
     interest if we have varying  royalty rates, for example on                                                                 
     a lease.  The different  technical  interpretation by  the                                                                 
     different  companies  helps  us review  our  own internal                                                                  
     interpretation     and    look    at    other    optional                                                                  
     interpretations.   So,  it's  been  a  value.  A  unified                                                                  
     interpretation  that's  a  compromise  that fits  all  the                                                                 
     commercial needs often isn't  the approach we would really                                                                 
     like  to  see.   We'd  like  to  see  the  best  unbiased                                                                  
     interpretation  of  the data.  Again,  that's  one of  the                                                                 
     reasons  we have  technical folks  that  do forensic  type                                                                 
     geosciences  engineering and  geophysics - is to actually                                                                  
     determine  where our  commercial interests  are harmed  or                                                                 
     where we believe  the interpretation has more  uncertainty                                                                 
     or  less uncertainty  and that  affects  the bottom  line.                                                                 
     That  is one of  the aspects  of when you  see a combined                                                                  
     approach  and interpretation.  We've lost  the benefit  of                                                                 
     that which,  again, I would argue is another argument  for                                                                 
     the state  to strengthen their  ability to do those  types                                                                 
     of  technical interpretation.  It's also  a function of  a                                                                 
     unified front in that we  can expect in these cases to get                                                                 
     a variation  of interpretation. I do want to stress  these                                                                 
     are   variations   in   interpretation    of   data   with                                                                 
     uncertainty.  It's not mischaracterizations  of the  data.                                                                 
     It's taking a more liberal  or less liberal interpretation                                                                 
     of that data.                                                                                                              
                       DEPARTMENT OF REVENUE                                                                                  
CHAIRMAN TORGERSON thanked him for answering their questions and                                                                
announced that Commissioner Wilson Condon, Department of Revenue,                                                               
would comment next.                                                                                                             
COMMISSIONER CONDON introduced Mr. Ed Small, Cambridge Energy                                                                   
Research Consultants (CERA), to give them a market update.                                                                      
MR. ED SMALL, CERA, updated the committee:                                                                                      
     There  has  been some  significant  changes  in  the  past                                                                 
     month.  The combination of continued  demand softness  and                                                                 
     the  supply growth  that  we're seeing  has  caused us  to                                                                 
     revise  our pricing outlook downward  and downward fairly                                                                  
     substantially.  We believe,  though, that  this more of  a                                                                 
     short term situation than  an enduring phenomenon and as I                                                                 
     go  through  the  why,  hopefully   that'll  give  you  an                                                                 
     indication of where we think  we're going in the long term                                                                 
     as well.                                                                                                                   
     The current situation is  one where the Lower 48 supply is                                                                 
     up. It was  up about 500 MCF/D last year. We're  expecting                                                                 
     it to  be up about 800 MCF/D  this year. Depending on  how                                                                 
     low  prices go, to  be up between  600 -  800 MCF/D  again                                                                 
     next  year. Canadian supply  is going  to be up about  850                                                                 
     MCF/D  this year. So,  in total we're  in that 1.75  BCF/D                                                                 
     increase for 2001.                                                                                                         
     What that  is causing is out of the 2.5 BCF/D  of residual                                                                 
     fuel oil that had come on  and switched off gas during the                                                                 
     winter, there's currently  only about .5 - 1 BCF/D that is                                                                 
     still on residual  fuel oil. We expect that to  be gone by                                                                 
     the  end of the year.  In other words  all of that demand                                                                  
     that  had switched  to residual  fuel oil  will likely  be                                                                 
     gone and be back on gas by the end of this year.                                                                           
     What that  does is it eliminates  the price floor that  we                                                                 
     have seen  over the past four  to six months. When prices                                                                  
     came down to a point where  residual fuel oil was cheaper,                                                                 
     that  caused the gas  to basically stay  at that level  or                                                                 
     people  would switch  back to  fuel oil. So,  we see  that                                                                 
     floor  being gone probably in  the fourth quarter of  this                                                                 
     year.  At the same time that  we're seeing some growth  in                                                                 
     supply,  we are seeing  continued demand  softness.  Power                                                                 
     demand  in the West has been  off 10 percent this summer.                                                                  
     It has  been up to  flat nationwide in  the Lower 48  with                                                                 
     the  recent heat  wave, but prior  to the  last few  weeks                                                                 
     nationwide power demand  had been off. The demand softness                                                                 
     is  primarily  in the  industrial  sector,  though,  power                                                                 
     being one  of the things I just mentioned, but  industrial                                                                 
     demand is the biggest factor.  How much of that is economy                                                                 
     driven  is still hard  to tell. I think  I mentioned  that                                                                 
     last time  I chatted, but we have revised our  GDP outlook                                                                 
     lower for  the balance of this year and in 2002  we expect                                                                 
     to  see some recovery  the second  half of  2002. At  this                                                                 
     point  in time, we  are looking  for a GDP  growth of  1.1                                                                 
     percent in 2001 and 1.4  percent in 2002 with the majority                                                                 
     of that being in the second half.                                                                                          
     What that does say is we  do expect to see that industrial                                                                 
     demand  come back  next  year. In  2002 we  expect to  see                                                                 
     industrial  demand increase  by 1 to  1.2 BCF/D over  2001                                                                 
     levels,  but again most of that  will occur in the second                                                                  
     half of  the year. Currently,  ammonia is still down,  the                                                                 
     manufacturing  sectors are still hard hit, steel  is still                                                                 
     off, etc. In 2002 we also  expect to see roughly 300 BCF/D                                                                 
     of power growth. So the  combination of the industrial and                                                                 
     power should give a demand  growth of about 1.5 BCF/D next                                                                 
     year.  That suggests that by  the end of next year,  we'll                                                                 
     begin  to  see the  kind  of  supply/demand  tightness  we                                                                 
     experienced in the second quarter of this year.                                                                            
     What's  happening  now also  is  impacted by  storage.  In                                                                 
     spite  of last week where storage  was basically flat,  we                                                                 
     still expect  storage to reach anywhere from 3  to 3.2 TCF                                                                 
     by November 1 of this year.  Keep in mind that full is 3.3                                                                 
     TCF.  So storage  is going to  be in very  good condition                                                                  
     going  into the  upcoming winter.  In 2002  absent a  cold                                                                 
     winter,  we expect the  supply situation  to be such  that                                                                 
     storage  will be closer to that  3.3 level going into  the                                                                 
     winter of  '02 and '03. So, those are some of  the factors                                                                 
     we  expect to  cause the  price softness.  To  give you  a                                                                 
     sense of what  price softness we're talking about,  when I                                                                 
     chatted with  you last we had indicated a Henry  Hub price                                                                 
     of $4.41  for 2001.  We've now lowered  that to $4.24.  We                                                                 
     had  an outlook  for 2002  of $3.53  on average.  We  have                                                                 
     lowered that to $2.80 Henry Hub.                                                                                           
     But as I had indicated,  there is going to be an impact of                                                                 
     this lower  price. That impact is going to be  both on the                                                                 
     supply  side  and  on  the  demand  side.  We're  already                                                                  
     starting to  see indications on the supply side  via lower                                                                 
     rig  counts. They  are starting  to show  some softening.                                                                  
     We're  starting  to  see  indications  that  rigs  may  be                                                                 
     leaving  the Gulf of  Mexico. So, if  we see the price  we                                                                 
     are calling  for the balance of this year, it  will likely                                                                 
     have an  impact on drilling.  That with about a six  month                                                                 
     to one  year lag means  a lowering of  the supply growth,                                                                  
     not necessarily going away,  but not as strong as it would                                                                 
     have been had we seen the  kind of drilling levels we have                                                                 
     seen for the first half  of this year. So the lower prices                                                                 
     will have  an impact by lowering  the supply response.  It                                                                 
     also  will have  an impact  in  addition to  the economic                                                                  
     growth  we expect  next  year.  Lower prices  should  help                                                                 
     bring some  of that demand back - ammonia, steel  and some                                                                 
     Where  this leads  is  to the  likelihood of  2003 prices                                                                  
     going back into that low  $3 level, probably between $3.10                                                                 
     and  $3.25. So, the  outlook that I  have suggested  going                                                                 
     out through  '05 we still believe  is the path we will  be                                                                 
     on from  '03 through '05 of prices  in the low $3, around                                                                  
     $3.25 range. As an indication  of that, that's kind of the                                                                 
     level  that we expect  to see  prices by  the end of  next                                                                 
     year even though the annual  average will be below $3. So,                                                                 
     that is the update since we last spoke.                                                                                    
CHAIRMAN TORGERSON asked if he had any information on the                                                                       
proposed receiving plants around the U.S. for LNG.                                                                              
MR. SMALL replied:                                                                                                              
     The only  change I think is that  there probably has  been                                                                 
     one addition  to the ones I had indicated before.  I think                                                                 
     the answer  there is the proponents of those projects  are                                                                 
     going to be  wrestling with the dilemma of the  short term                                                                 
     price  softness. I think  unless they  have a belief  that                                                                 
     prices  are going to  be stronger in  the longer term,  it                                                                 
     would be difficult  to proceed in the short term.  But the                                                                 
     prices  have not been soft enough  long enough for any  of                                                                 
     the  proponents to say  'No, we're not  going ahead.'  So,                                                                 
     basically, there's no change on that front.                                                                                
CHAIRMAN TORGERSON asked who will get scared off first on the lower                                                             
prices, LNG or pipeline?                                                                                                        
MR. SMALL replied:                                                                                                              
     That  is  a  very  good  question.  It  is  one  of  those                                                                 
     situations  of  who blinks  first. Part  of  the answer  I                                                                 
     think is going to be in  which companies have the stronger                                                                 
     price  forecast going  forward. If they  believe as we  do                                                                 
     that  in '03 you'll  see some strengthening  again,  those                                                                 
     people  would  likely go  ahead.  If people  believe  that                                                                 
     we're going to see softness  continuing, those will be the                                                                 
     people that  blink and back off. Who goes first  is really                                                                 
     hard to tell.                                                                                                              
     The other  factor is obviously the magnitude of  the costs                                                                 
     involved.  The higher  the risk,  the higher  the cost.  I                                                                 
      think those people may have a tendency to blink first.                                                                    
CHAIRMAN TORGERSON thanked him for joining them and directed the                                                                
discussion to Commissioner Condon.                                                                                              
                       DEPARTMENT OF REVENUE                                                                                  
COMMISSIONER WILSON CONDON said:                                                                                                
     Since  we  started  at the  end  with item  5  and CERA's                                                                  
     update, maybe  we can just go backwards and touch  on item                                                                 
     4 next and then conclude with item 3.                                                                                      
     In item  4 you ask for a discussion,  some analysis,  some                                                                 
     conjecture  about  netback values  and how  the notion  of                                                                 
     netback is used to determine  values for severance tax and                                                                 
     royalty purposes. I'll talk  some about the use of netback                                                                 
     valuation  for the severance  tax and  Bonnie Robson  will                                                                 
     address the same set of considerations for royalty.                                                                        
     The  first  thing  that  you  asked   was  how  crude  oil                                                                 
     severance  tax values are currently established.  And that                                                                 
     really  involves basically a  two-step process. The  first                                                                 
     step is  valuing the oil in the  destination market  where                                                                 
     it's disposed  of. When we talk  about destination market                                                                  
     or  crude oil  that's  sold by  the  producer to  a  third                                                                 
     party,  we're  talking about  the  place where  that  sale                                                                 
     takes place. If the crude  oil is not sold as crude oil by                                                                 
     the  producer,   but  instead   is  transported  to   that                                                                 
     producer's  refinery and refined, we're talking  about the                                                                 
     location  of the producer's refinery.  Today for purposes                                                                  
     of  taxation   there  are  three   important  destination                                                                  
     markets.  One of those is the  West Coast in the Lower  48                                                                 
     and that  really is the refining  area in the Puget  Sound                                                                 
     and  in the  Bay area  in Southern  California.  As  well,                                                                 
     Alaska North  Slope crude is disposed of at tide  water in                                                                 
     Alaska  and  that's  treated  as  a separate  destination                                                                  
     market for  valuation purposes and finally, there  is some                                                                 
     production sold at Pump Station 1 on the North Slope.                                                                      
     In   earlier  times,   when  the  production   level   was                                                                 
     considerably   higher  than  it  was  today,  there   were                                                                 
     dispositions  on the  U.S. Gulf  Coast, on  the U.S.  East                                                                 
     Coast, in the Caribbean  area, in the U.S. Virgin Islands,                                                                 
     and in the  mid-continent in the refineries that  exist in                                                                 
     the  Northern  Midwest. Each  of those  was  treated as  a                                                                 
     separate   destination   market  when   Alaskan  oil   was                                                                 
     transported  there and either sold there or refined  there                                                                 
     by a producer.  Then in the '90s for a substantial  period                                                                 
     of time Alaskan  North Slope crude was transported  to the                                                                 
     Far  East and  sold there  to refiners  in Japan, Taiwan,                                                                  
     South  Korea, and the Peoples  Republic of China. The  Far                                                                 
     East was  also treated as a separate  destination market,                                                                  
     in  terms  of  how oil  is  valued  in those  destination                                                                  
     markets for that is sold to third parties.                                                                                 
     The  valuation measure  that has been  implemented in  our                                                                 
     production  tax is to  use the higher  of two measures  of                                                                 
     value  and  those  two  measures  are  what  the producer                                                                  
     actually  sells  the  oil for  a measure  of  the current                                                                  
     market  value in that market,  a term that goes under  the                                                                 
     label in the tax business  here, of prevailing value. With                                                                 
     respect to crude oil a producer  takes to its own refiner,                                                                 
     the value  measure there is what I call prevailing  value,                                                                 
     which is what we hope is  an objective measure of value in                                                                 
     that market.                                                                                                               
     Having  determined  destination  values,  we jump  to  the                                                                 
     second step in the process,  which is to subtract from the                                                                 
     applicable  destination  value in the  disposition market                                                                  
     each  taxpayer's actual  transportation  charges from  the                                                                 
     point  of  incidence  on the  North  Slope where  the  tax                                                                 
     applies   to  the   destination  market   where  we   have                                                                 
     calculated  this value. Thence  for the netback, you  take                                                                 
     the  destination  value and  subtract  the transportation                                                                  
     charge  to arrive at  a netback value.  That's how values                                                                  
     are determined for severance tax calculations.                                                                             
     Over the years we've had  to face a number of issues. Some                                                                 
     of those  issues will  be resurrected  when we talk  about                                                                 
     gas taxation.  So, I ought to  run through those briefly.                                                                  
     First major issue that we've  wrestled with for the better                                                                 
     part  of 25 years is  how to determine  this thing called                                                                  
     prevailing value. When we're  telling tax payers they have                                                                 
     to pay taxes on the basis  of this value, we have picked a                                                                 
     measure  that they can know and  appreciate when it  comes                                                                 
     time  to pay their taxes.  Today we believe  we do have  a                                                                 
     system  where a  taxpayer can  and should  know what  they                                                                 
     should  be paying their taxes  on. The measure we use  for                                                                 
     determining  this  thing called  prevailing  value is  the                                                                 
     spot price  that's published by the third party  reporting                                                                 
     services.  That  is the  measure  we use  for determining                                                                  
     prevailing  value both at the  West Coast, which is  where                                                                 
     that  price  applies,   and  we  use  it  to calculate   a                                                                 
     prevailing  value at South Alaska  and at Pump Station  1.                                                                 
     Spot  prices  for  Alaskan North  Slope  crude  have  been                                                                 
     published  by  third  party  reporters  since  the 1983-4                                                                  
     timeframe.  They actually weren't recognized specifically                                                                  
     in the regulations  that apply to the severance  tax until                                                                 
     1994.  Before 1994,  this measure,  prevailing value,  was                                                                 
     based on the price that  would be derived from three sales                                                                 
     contracts  selected  by  the  department  in each  of  the                                                                 
     destination  markets. That determination  was made by  the                                                                 
     department at the time it  conducted its audits and had an                                                                 
     opportunity  to collect some or all of the contracts  from                                                                 
     all  of the producers.  What  this meant,  of course,  was                                                                 
     that producers did not know  which contracts were going to                                                                 
     be used.  They probably for the  most part [END OF TAPE].                                                                  
TAPE 01-14, SIDE B                                                                                                            
COMMISSIONER CONDON continued:                                                                                                  
     …what  other producers' contracts  looked like precisely.                                                                  
     So,  we did have a  situation where  sometimes many,  many                                                                 
     years went by before we  told the producers precisely what                                                                 
     the  prevailing value  we expected  them to  pay taxes  on                                                                 
     would  be. Presumably  they did  know what  they actually                                                                  
     sold their production for.  So, today we believe we have a                                                                 
     transparent   knowable   valuation   procedure   so   that                                                                 
     taxpayers  can know what their tax obligation  is. We have                                                                 
     to be concerned,  not that this hearing is focused  on oil                                                                 
     issues,  but the spot  price that we  believe is reliable                                                                  
     today,  given  the declining  production  rates. Changing                                                                  
     marketing  patterns  may  not  be reliable  indefinitely.                                                                  
     That's  something we  have to be concerned  about as  time                                                                 
     marches on.                                                                                                                
     The  second issue we've  had to face  is which deliveries                                                                  
     match  which  production months.  If  you stop  and  think                                                                 
     about  that for a minute, you  realize that oil comes  out                                                                 
     of  the ground  on  the North  Slope;  it moves  down  the                                                                 
     TransAlaska  Pipeline; it  may sit in  the terminal for  a                                                                 
     while  in Valdez; it's loaded  on to tankers. Today  those                                                                 
     tankers   take  it  to  West  Coast  refining  locations,                                                                  
     sometimes  including the Cook Inlet, have gone  to the Far                                                                 
     East and  for a long period of  time went to locations  on                                                                 
     the East Coast  of the United States and it took  in those                                                                 
     instances  six weeks or  longer for oil  to get to market                                                                  
     after it was produced on  the North Slope. If you're going                                                                 
     to be  matching values  and determining  a higher of  some                                                                 
     objective   measure  of  market  value  and  proceeds   at                                                                 
     destination  and then matching  that back to a production                                                                  
     month  on the North  Slope, you obviously  have to figure                                                                  
     out  which deliveries  go with which  production month  to                                                                 
     implement  the  tax  value.  That's  been  a  complicated                                                                  
     problem that we've wrestled  with over the years. We think                                                                 
     we  have a  good solution  now for  oil and  no doubt  the                                                                 
     problem that  we'll have to wrestle with on the  gas front                                                                 
     will be different  than what we've had to wrestle  with on                                                                 
     the oil front.                                                                                                             
     Similarly,  where you're using  different value measures,                                                                  
     you also have  to make sure that you've matched  the right                                                                 
     measures  in destination  market  and this  gets a little                                                                  
     more  complicated than  I want to get  into today, but  in                                                                 
     the  oil  business, when  you  hear  a spot  price quoted                                                                  
     today, that  spot price is for deliveries that  will occur                                                                 
     next month. Where you have  prices quoted in the press, we                                                                 
     talk  about the  August spot  price, but  the August  spot                                                                 
     price really applies to  September deliveries. Again, that                                                                 
     requires  that if  you're going  to have  a measure  where                                                                 
     you're  looking at  some objective  measure  of value  and                                                                 
     comparing  it  to  actual  proceeds,   and you're  making                                                                  
     reference to spot prices  and you have volatile prices, as                                                                 
     we  do,  to  get a  fair  match  requires  some  care  and                                                                 
     ingenuity.  Again,  it's a problem  which  we think  we've                                                                 
     solved  correctly,  but  it  is not  a  problem  which  we                                                                 
     arrived at a solution for easily.                                                                                          
     The  next problem  is determining  transportation charges                                                                  
     and  for  that   in  the  oil  area,  it's  really   meant                                                                 
     determining  what a fair return on the capital  investment                                                                 
     made  in the tanker  fleet ought  to be  and then coupled                                                                  
     with  that is the  question of  how you take  a bundle  of                                                                 
     charges that  just occur over time and allocate  them on a                                                                 
     month  by month basis so that  you have a definite figure                                                                  
     that you  can subtract for value  every month. You've  got                                                                 
     to adopt  a set of  conventions that  are knowable by  the                                                                 
     taxpayer  so they can  take their  transportation charges                                                                  
     and  allocate them  the way  you expect  them to allocate                                                                  
     them  to  determine   a  value.  That  has  been  another                                                                  
     administrative   problem  that we've  had  to  solve  with                                                                 
     respect  to the netback valuation  of Alaskan North  Slope                                                                 
     crude oil production.                                                                                                      
     Going forward,  how do we see the value determination  for                                                                 
     North  Slope gas production including  the various liquid                                                                  
     components  in the  gas. As we  sit here  today and  think                                                                 
     ahead  to what ought to happen,  we have identified  three                                                                 
     principals that we stick  to today. One of them is that we                                                                 
     believe  we ought to  continue with  the notion of higher                                                                  
     of. We get  at least market value and if somebody  makes a                                                                 
     particularly  good deal, we get the benefit of  that deal.                                                                 
     We want  to make sure that however  we value gas, that  we                                                                 
     capture  the economic value of  the NGL components and  we                                                                 
     want to come  up with a procedure where it's possible  for                                                                 
     the  taxpayers to know  the right value  on which they're                                                                  
     supposed  to be  computing their  taxes at  the time  they                                                                 
     file their  returns or shortly  thereafter. If they  can't                                                                 
     know  it in the  month immediately  following production,                                                                  
     which is when  their taxes are due, that they  are able to                                                                 
     get  the  information  in some  manner  so that  they  can                                                                 
     figure  out what  it is that  they were  supposed to  have                                                                 
     With  respect to the  problem areas  that we're obviously                                                                  
     going  to have to  address in pursuing  those principles,                                                                  
     we're going to have to determine  a good objective measure                                                                 
     of market value to determine  prevailing value. As we look                                                                 
     at  the  world today  there  are  some possibilities   out                                                                 
     there,  but  as I'll  discuss  at the  end, I  think  it's                                                                 
     premature   to  do  anything  other  than  examine   those                                                                 
     possibilities. The province  of Alberta has come up with a                                                                 
     very ingenious  way of deriving what they call  an Alberta                                                                 
     reference  price.  That's  certainly  a  candidate  for  a                                                                 
     measure  of prevailing value,  but it's entirely possible                                                                  
     that transportation  system that  carries North Slope  gas                                                                 
     to market  would in  effect bypass Alberta  and carry  gas                                                                 
     directly to  the mid northern United States in  which case                                                                 
     the  market  peculiarities   that  are  faced  by Alberta                                                                  
     production  might be bypassed by Alaska gas. So,  we don't                                                                 
     know  whether  that  would  really   be  a good  measure.                                                                  
     Obviously,  in the gas  business we need  to make sure  we                                                                 
     correctly identify what  we contend the actual proceeds of                                                                 
     transactions  are, if there are  incidental charges  where                                                                 
     consideration   changes   hands  in  terms   of  the   gas                                                                 
     transacting.  Should  some  of those  be included  in  the                                                                 
     value is something we'll  have to work through when we see                                                                 
     what  the business  looks like.  We're still  going to  be                                                                 
     faced  with the same issues,  although the solutions  will                                                                 
     probably   be  different  for  matching  dispositions   to                                                                 
     production  months. There may  as well be issues relating                                                                  
     to allocating costs of particular production months.                                                                       
     Can we solve  these problems today in terms of  adopting a                                                                 
     set  of  regulations  and  putting  it to  bed?  Our  past                                                                 
     experience  certainly  would  suggest  no.  We're talking                                                                  
     about  deliveries  that are  going  to commence  if  we're                                                                 
     fortunate 8-10 years from  now. We're hoping for something                                                                 
     But,  if you  think about  the oil business,  North  Slope                                                                 
     production  started in  1977 and back  up to 1967 and  say                                                                 
     what  changed in the  world from '67  to '77. In '67  U.S.                                                                 
     crude oil  values were the province of the Texas  Railroad                                                                 
     Commission;  OPEC existed, but hadn't flexed its  muscles;                                                                 
     the notion of spot prices  simply didn't exist; that's not                                                                 
     how oil was  priced. If you look at what the world  looked                                                                 
     like  when TAPS commenced,  you had  OPEC in the driver's                                                                  
     seat  trying to  establish an  official  price which  they                                                                 
     hoped to defend;  we were marketing oil on the  Gulf Coast                                                                 
     and in  the Caribbean and on  the East Coast. We wouldn't                                                                  
     have  guessed that would  happen as  we looked ahead  from                                                                 
     1967 to 1977. There were  some spot transactions that were                                                                 
     occurring  in  1977, but  there  was no  transparent  spot                                                                 
     market. Then,  if you fast forward ahead another  10 years                                                                 
     to  1987, OPEC  has given up  this notion  of an official                                                                  
     price   and  is  simply  trying   to  control  prices   by                                                                 
     controlling  the volume they  produced. The NYMEX futures                                                                  
     market had come into existence  and there was a reasonably                                                                 
     transparent  spot market and certainly spot services  were                                                                 
     publishing prices.                                                                                                         
     In 1987,  there was not an agreement  or a consensus  that                                                                 
     spot prices  were the best and  fairest measure of value.                                                                  
     That was the  state's position, but the producers  in 1987                                                                 
     argued  strenuously against that  position. But, you  move                                                                 
     ahead  10  years to  1997,  we're shipping  ANS  to  Asia;                                                                 
     there's a general agreement  that reported spot prices are                                                                 
     an  accurate  measure  of market  value.  That  notion  is                                                                 
     recognized  in our regulations.  And  not to belabor  this                                                                 
     point too  much, but if you go back 10 years ago  and look                                                                 
     at the  gas business, again the  changes over the last  10                                                                 
     years have  been dramatic. That was just the beginning  of                                                                 
     a transparent  spot  price regimen  nationwide. The  NYMEX                                                                 
     futures  prices had  just been established;  the regional                                                                  
     trading  hubs that  exist throughout  the continent  today                                                                 
     were in their infancy in  terms of the kind of transacting                                                                 
     we see  there today;  and who those  majors were at  those                                                                 
     trading hubs  were a completely different kind  of company                                                                 
     than is  active at those spots  today. The point I really                                                                  
     want  to make here is  that to be able  to put together  a                                                                 
     workable  netback pricing scheme,  we're going to have  to                                                                 
     see how the realities of  the marketplace evolve before we                                                                 
     nail  down  exactly  how  we're going  to  do  what  we're                                                                 
     supposed to do.                                                                                                            
CHAIRMAN TORGERSON asked if that is a chicken-egg deal. "Wouldn't                                                               
you assume the producers would like to have taxing stability before                                                             
investment  versus what  you're  saying -  Let's wait  and see  what                                                            
happens and then set a taxing structure in place?"                                                                              
COMMISSIONER CONDON answered:                                                                                                   
     Ideally,  they  would want  us  to be  able to  tell  them                                                                 
     exactly what  to do 10 years in advance. I'm offering  the                                                                 
     proposition  that that's just something that's  impossible                                                                 
     to achieve.  We're certainly  happy to work with them.  We                                                                 
     have been  talking to them about  how we go about solving                                                                  
     this  problem.  It's  my  sense  that  they  really  don't                                                                 
     understand  the nuances of what  we need to do any better                                                                  
     than we do.  They understand that these are problems  that                                                                 
     need  to be solved,  but they're not  sure what their  own                                                                 
     business is going to look  like - whether they're going to                                                                 
     enter the Alberta market  or not, whether they're going to                                                                 
     have a bullet pipeline - I could go on and on.                                                                             
CHAIRMANT TORGERSON  said: "We may  have to work on guidelines  that                                                            
are flexible to some degree."                                                                                                   
COMMISSIONER CONDON  agreed and added: "We have a  set of principles                                                            
that I have  said we wanted to pursue  and that is to have  a way so                                                            
that the producers  can know what  the tax right value is  when they                                                            
file their returns.                                                                                                             
REPRESENTATIVE  DAVIES said that Commissioner  Condon had  indicated                                                            
that there were also prices  at tidewater and at Pump 1 and asked if                                                            
they were  the netback  of the  transportation costs  from the  spot                                                            
market price.                                                                                                                   
COMMISSIONER CONDON indicated that was right.                                                                                   
REPRESENTATIVE DAVIES asked  if there was anything the state learned                                                            
from that in terms of pricing gas at Fairbanks.                                                                                 
COMMISSIONER  CONDON  replied no  and  that it  is likely  to be  an                                                            
algebraic equation and:                                                                                                         
     It would  be my guess  that it could  be much easier  than                                                                 
     what we  have on the oil front,  because it very well  may                                                                 
     be that  the transportation system  for gas is completely                                                                  
     covered by regulated tariffs  that have been approved by a                                                                 
     regulatory  commission and business is built around  those                                                                 
     tariffs. That's not the  situation we have with respect to                                                                 
     the tinkering part of ANS oil moving to market.                                                                            
REPRESENTATIVE DAVIES responded:                                                                                                
     But we still have, even  if you know the tariff perfectly,                                                                 
     you  still have  the price  determination  and where  that                                                                 
     point applies  and what distance you would apply  from the                                                                 
     market  back to the sale at point,  let's say, Fairbanks.                                                                  
COMMISSIONER CONDON replied:                                                                                                    
     We  don't know  today what  kind of tariff  arrangement  -                                                                 
     whether  it will simply be a  MCF per mile tariff or  some                                                                 
     other  arrangement.  We  don't  know  whether  the market                                                                  
     values  we'll be selling  gas into will  be markets  where                                                                 
     everyone  pretty much agrees  on what the values in  those                                                                 
     markets are.  It would be my guess that that would  be the                                                                 
     case,  because  as time  has  unfolded  over the  last  40                                                                 
     years,  pricing has become for  both oil and gas more  and                                                                 
     more  transparent. So,  I don't believe  over the next  10                                                                 
     years pricing will become  less transparent, but obviously                                                                 
     anything is possible.                                                                                                      
He said he would let Ms. Bonnie Robson discuss the royalty issues.                                                              
MS. BONNIE ROBSON said she would briefly discuss royalty issues and                                                             
address some differences between royalty and tax and build on some                                                              
points made by Commissioner Condon:                                                                                             
     I believe  the first  question you asked  is how does  the                                                                 
     netback   methodology  work  for  both  royalty   and  tax                                                                 
     purposes.  It works for royalty  purposes much as it  does                                                                 
     for tax purposes. There  are several exceptions. The first                                                                 
     is  that when  it comes to  destination  value, I believe                                                                  
     Commissioner Condon described  two measures of destination                                                                 
     value - one  being actual proceeds and the second  being a                                                                 
     proxy  for market value that  is called prevailing price.                                                                  
     For  tax purposes  the  higher of  those two  measures  is                                                                 
     used.  For royalty purposes it  depends on the individual                                                                  
     lease  form at  play. All of  the lease  forms provide  at                                                                 
     least three  operative measures of destination  value. The                                                                 
     first  is a producer's  actual  proceeds for  the sale  of                                                                 
     gas. The second is the average  of other producers' in the                                                                 
     field proceeds  for gas and the third is market  value for                                                                 
     gas. Again, the state is  entitled to the highest of those                                                                 
     measures  of  value. There  are  other measures  that  are                                                                 
     either  not operative such as  posted prices in the  field                                                                 
     or measures  that apply in certain newer lease  forms such                                                                 
     as minimum value.                                                                                                          
     The  second   way  in  which   royalty  and  tax  netback                                                                  
     methodology  is  different  is that  taxes  are typically                                                                  
     implemented  through statutes  and regulations and may  be                                                                 
     changed   by  the  state  changing   their  statutes   and                                                                 
     regulations  with  public  comment,  but  not necessarily                                                                  
     public  agreement.  Royalties  on  the other  hand  are  a                                                                 
     function of contractual  arrangements with the lessees and                                                                 
     so we do not  necessarily have the opportunity  to correct                                                                 
     any  errors or  problems made  at a prior  point in  time.                                                                 
     That  is  we  must  live  with  the  lease  forms  now  in                                                                 
     existence  and if we  were to enter  into agreements  with                                                                 
     the producers now on valuation  methodology, we would have                                                                 
     to live with those throughout time.                                                                                        
     I  believe  another  question  that you  raised  was  what                                                                 
     specific   problems  do  you   see  with  regard  to   the                                                                 
     implementation  of  a  royalty  valuation  methodology.  I                                                                 
     think  the primary  problem  is  that the  producers  have                                                                 
     approached the administration  and asked the Department of                                                                 
     Natural Resources  to enter into negotiations  and in fact                                                                 
     complete  those  negotiations  this  calendar  year  on  a                                                                 
     royalty  valuation methodology  and on  whether the  state                                                                 
     will  take its royalty  share in kind  or in value.  Quite                                                                 
     frankly,  we have  advised the  producers that  we do  not                                                                 
     believe  we have sufficient information  at this point  in                                                                 
     time  to even commence  those negotiations.  We feel  that                                                                 
     the  situation   is  somewhat   different  from  the   oil                                                                 
     situation  in that yes, we do have royalty oil  settlement                                                                 
     agreements,   but  those  were   reached  in  1991   after                                                                 
     approximately  14 years of litigation  and an opportunity                                                                  
     to review  a decade's worth of  contracts for the sale  of                                                                 
     the state's royalty oil.                                                                                                   
     We are now  being asked to enter essentially a  settlement                                                                 
     agreement on the valuation  of gas without having seen any                                                                 
     gas sales and certainly  no gas sales contracts. So, there                                                                 
     are   basically  four   areas  where   we  are  short   of                                                                 
        · One is we do not know what the actual destination                                                                     
          for this gas will be.                                                                                                 
        · Two, we do not know how this gas will be marketed.                                                                    
        · Three, we do not know what the actual                                                                                 
          transportation costs will be.                                                                                         
        · Four, we do not know how the world will change between                                                                
          now and the actual time of gas sales.                                                                                 
     I'll just  comment briefly on  each of those four points.                                                                  
     In terms  of us not  knowing what  the actual destination                                                                  
     will   be;  of  course,   one  element   of  the  netback                                                                  
     methodology  is  destination  value. It's  quite possible                                                                  
     that this  gas will go to multiple locations in  the Lower                                                                 
     48 via Canada  and specifically Alberta. There  is in fact                                                                 
     a trading  hub in Alberta. North  Slope gas may be traded                                                                  
     in  Alberta,  but  certainly  that  is  not  its ultimate                                                                  
     destination, at least to  the dry gas. Maybe it will be as                                                                 
     to the liquids.                                                                                                            
     We  do have  a  concern  that our  gas  not be  valued  in                                                                 
     Alberta,  because  that is  a market  in which  supply  we                                                                 
     think will always exceed  demand and that is a formula for                                                                 
     a low  price. We think it should  instead be valued,  even                                                                 
     if first traded  or sold in Alberta, in its actual  market                                                                 
     or destination,  which we expect to be the Lower  48 where                                                                 
     demand  will equal and  possibly exceed  supply, which  is                                                                 
     the formula for either a fair or high price.                                                                               
     We do not know how the gas  will, in fact, be marketed. As                                                                 
     I mentioned, we have not  seen gas marketing contracts for                                                                 
     the  Lower  48  states.  We  have  in  fact  advised   the                                                                 
     producers  that as a starting  point we would like to  see                                                                 
     some of their actual gas  sales contracts for the Lower 48                                                                 
     states. We  would like to see, for example, as  a starting                                                                 
     point,  their  10  largest  gas  sales   contracts  for  a                                                                 
     representative  month;  their  10 smallest  contracts;  10                                                                 
     contracts  that  they believe  are representative  of  the                                                                 
     spectrum  of their  actual transactions;  10 contracts  if                                                                 
     not  included in the  above for field  sales; also if  not                                                                 
     included  in the above,  10 contracts  for sales at  hubs.                                                                 
     We'd like  to see 10 processing  contracts; and we'd  like                                                                 
     to see  10 straddle  plant contracts.  We would also  like                                                                 
     additional  information on how they market gas.  Again, we                                                                 
     think this information is  a starting point on some of the                                                                 
     information  we believe necessary  to intelligently  enter                                                                 
     an agreement on valuation.                                                                                                 
     I  mentioned third,  I think,  that  we do  not know  what                                                                 
     actual transportation costs  will be and one area in which                                                                 
     we are particularly deficit  is that we expect by the time                                                                 
     natural gas flows to market  the estimation of recoverable                                                                 
     resources will increase  above its 35 TCF and this matters                                                                 
     for  a determination  of the useful  life of the pipeline                                                                  
     and  the conditioning  plant. Right  now, if  we have a  4                                                                 
     BCF/D  pipeline, we would expect  that the known reserves                                                                  
     of  35 TCF  would  move  to market  in  23 years  and  the                                                                 
     producers may in fact argue  for a useful life of 23 years                                                                 
     or less. In fact, we would  expect that the facilities and                                                                 
     pipeline would  have a longer physical life than  that and                                                                 
     we would expect with additional  activity in the Foothills                                                                 
     area,  in NPRA, possibly with  gas hydrates and elsewhere                                                                  
     on  the  North  Slope,  that  number  would  increase  and                                                                 
     increase  substantially,  therefore, supporting  a longer                                                                  
     useful life.                                                                                                               
     The fourth point is that  the world will change in ways we                                                                 
     cannot  predict. It  makes us  extremely  hesitant to  now                                                                 
     enter  an  agreement,  particularly  if  there's  not  any                                                                 
     ability to revise the terms  of that agreement. We have in                                                                 
     the oil settlement agreements,  and I think we should have                                                                 
     in any  gas valuation agreement,  a provision that allows                                                                  
     the reopening  of those agreements to account  for changes                                                                 
     in market conditions in the future.                                                                                        
     With that,  I know time is tight  and I would be happy  to                                                                 
     answer questions you have  now or at a later point in time                                                                 
     on any royalty issues.                                                                                                     
CHAIRMAN  TORGERSON asked  how the  producers had  responded to  her                                                            
request for agreements.                                                                                                         
MS.  ROBSON replied  that  she had  just provided  the  list to  the                                                            
producers  one week  ago today. The  department  had not received  a                                                            
formal response  from the producers.  "They have asked for  the list                                                            
in email form so they could distribute it more extensively."                                                                    
CHAIRMAN TORGERSON  said the producers  had asked them to  assist in                                                            
tax  stability  type  questions   and  to  work  with  her  and  the                                                            
administration  to expedite  some of this.  He said the legislature                                                             
would  need a lot  of the  same information  if they  were going  to                                                            
help.  "For  those that  are  listening,  they  best share  data  to                                                            
REPRESENTATIVE DAVIES said:                                                                                                     
     On  the reopeners,  you  had  indicated  that one  of  the                                                                 
     substantial  differences between  tax and royalty was  the                                                                 
     contractual   nature   of  a  royalty.   When  you   first                                                                 
     characterized  that,  it was  pretty fixed.  But then  you                                                                 
     indicated  at the end  that we do have  some reopeners  in                                                                 
     the  oil  situation.  Is  that something  we  need  to  be                                                                 
     looking  at in terms  of providing  better flexibility  to                                                                 
     meet  uncertain  future conditions  than  we have  in  the                                                                 
MS. ROBSON replied:                                                                                                             
     I think it's very much in  the state's interest to provide                                                                 
     for  a  reopener.  The lease  forms,  themselves,  do  not                                                                 
     specifically  address  a reopener. However,  they do  call                                                                 
     for  at a minimum payment  on the basis  of market value.                                                                  
     So,  as market conditions  change,  accommodations can  be                                                                 
     made.  The problem becomes as  we enter an agreement  that                                                                 
     market  value will be  measured by for  instance the  spot                                                                 
     price  at  a particular  hub,  that  may  not in  fact  be                                                                 
     indicative of market value  in the future. And so, we need                                                                 
     a mechanism  to get back to market  value if we enter  any                                                                 
     new agreement now.                                                                                                         
REPRESENTATIVE DAVIES asked if that was in terms of any royalty                                                                 
arrangements, something we have to watch pretty carefully?                                                                      
MS. ROBSON answered: "Absolutely!"                                                                                              
COMMISSIONER CONDON said:                                                                                                       
     On item 3 you asked us some  questions about modifications                                                                 
     to the taxes portion of  the fiscal system and your letter                                                                 
     states  that you assume  we have looked  at property  tax,                                                                 
     accelerated  depreciation versus  regressive systems.  Let                                                                 
     me briefly  review what we have done. With respect  to the                                                                 
     state fiscal system and  how it would impact the economics                                                                 
     of a gas  commercialization project,  we certainly looked                                                                  
     in detail  during the 1995 -  1998 period with respect  to                                                                 
     an LNG  project as a part of  that being HB 393 enactment                                                                  
     and  our employment of  Dr. Van Meurs'  report he did  and                                                                 
     the  recommendations he  made. At the  conclusion to  that                                                                 
     process we ended up with  an analytical model developed by                                                                 
     our staff working with him  that was appropriate to an LNG                                                                 
     project.   It  was   a  model   that  we   reviewed   with                                                                 
     representatives   of  the  producers  both  prior  to  and                                                                 
     subsequent  to  some of  their  participation  in the  LNG                                                                 
     sponsor group.                                                                                                             
     We also  reviewed the  model with staff  folks from  Yukon                                                                 
     Pacific. Following  the LNG project activity,  there was a                                                                 
     brief  period of time  when GTLs were  pressing to be  the                                                                 
     lead candidate  for North Slope commercialization  project                                                                 
     and  we actually  spent  a fair amount  of  time with  the                                                                 
     folks. First, we modified  the model to make it useful for                                                                 
     a GLT  project. Then, the staff  analysts from Exxon  were                                                                 
     generous  enough to spend  a fair amount  of time with  us                                                                 
     critiquing  our model  and we ended up  with a model  that                                                                 
     it's my  sense, although I never  spoke to them directly,                                                                  
     thought  fairly represented what  we needed to be looking                                                                  
     at   if  that   was   the  direction   North   Slope   gas                                                                 
     commercialization was headed.                                                                                              
     Now, of course,  we have the proposal for a pipeline  from                                                                 
     the  North Slope  to mid North  America. We  have not  yet                                                                 
     calibrated   that  model  and  you've  certainly   had  an                                                                 
     opportunity to play with  it and see what it does. We need                                                                 
     to sit  down with the  producers and  their study team  to                                                                 
     make sure  that the way we've  calibrated the model  makes                                                                 
     sense.  We have not  been able  to do that  yet. We  have,                                                                 
     however,  looked at some elements  that you posit we  must                                                                 
     have looked  at. In terms of  using the model and others,                                                                  
     we have  not. We have looked  at what would happen if  you                                                                 
     did  not  impose  the  20-mill  property  tax  during  the                                                                 
     construction  period  and  over a  wide range  of project                                                                  
     costs  that   makes  about  a  two-tenths  of  a  percent                                                                  
     difference  in the rate of return of a project.  What that                                                                 
     really  is going to mean in terms  of whether it matters,                                                                  
     we need to have much more  definite information about what                                                                 
     project costs are likely  to be and where the projects are                                                                 
     going  to go. What we  have done is  really a rough  look-                                                                 
     see.  I  don't  think  getting   a rough   look-see  is  a                                                                 
     particularly  valuable  result. Obviously,  such a change                                                                  
     would  leave local governments  without a revenue source,                                                                  
     which they're  not going to feel particularly  keen about,                                                                 
     because  the time when  such a project  is likely to  most                                                                 
     affect  the provision  of public services  is going to  be                                                                 
     while  the project  is being  constructed.  Similarly,  it                                                                 
     would  deny some revenue to the  state government. Such  a                                                                 
     change  in the state's  fiscal system  would have minimal                                                                  
     effect on the federal government  and it would improve the                                                                 
     rate of return for the project.                                                                                            
     With  respect   to  accelerated  depreciation,   that's  a                                                                 
     possibility.  Exactly what  affect it's  going to have  on                                                                 
     the  project  and  whether it  really  helps  the project                                                                  
     depends on  who owns the project. If the project  were all                                                                 
     owned by third  party providers and not by producers,  the                                                                 
     accelerated  depreciation  probably wouldn't  affect  them                                                                 
     very much,  if they could pass their costs on  directly to                                                                 
     the producers.  It might, however,  increase the value  of                                                                 
     the gas at the wellhead by reducing the tariff.                                                                            
     With  respect  to  the  question  of  progressive  versus                                                                  
     regressive  systems, that's an  issue, which we've talked                                                                  
     about in generalities  and have no specific analyses  that                                                                 
     we  have done.  We  have talked  to  Dr. Van  Meurs  about                                                                 
     helping  us. He's not  going to be  available until  we've                                                                 
     reached the winter months  and in terms of having the kind                                                                 
     of information  we need to have  to even begin to do  this                                                                 
     analysis,  I'd  be surprised  if we  have it  much before                                                                  
     then.  So, we're not ready to  recommend changes that  you                                                                 
     should  consider  adopting.  We need  information  and  at                                                                 
     least  this   point  in  time  it  would  be  our  strong                                                                  
     recommendation that we continue  to rely on the consultant                                                                 
     who helped  us as we looked at the LNG project  and who is                                                                 
     already  familiar  with the  ins and  outs of  our fiscal                                                                  
     system. That's the end of my presentation, Mr. Chair.                                                                      
CHAIRMAN  TORGERSON  asked  about Mr.  Katz'  testimony  on page  26                                                            
saying, "It's not secret  that one of the three producers, Phillips,                                                            
has proposed amendments  to the federal fiscal regime,  i.e. the tax                                                            
regime. Exxon and BP are not implicated in that proposal."                                                                      
He  asked if  Commissioner  Condon  if  he was  familiar  with  that                                                            
COMMISSIONER CONDON  said he was familiar with it  and has talked to                                                            
Phillips  about it.  They  wanted to  have the  honor  of making  it                                                            
available  to the committee.  He didn't have  any comments on  it at                                                            
this time.                                                                                                                      
CHIARMAN  TORGESON  said it  was his  understanding  that they  were                                                            
trying to  get downside protection  if the  price was to bottom  out                                                            
and asked if a regressive  tax system that reflected the price, like                                                            
Dr. Van  Meurs told us we  ought to do ever  since he came  on board                                                            
years ago, wouldn't  that also offer them some downside  protection?                                                            
COMMISSIONER CONDON  replied that it would offer them  some downside                                                            
protection, but it would  be quite small compared to what they would                                                            
like to achieve in their proposed legislation.                                                                                  
CHAIRMAN  TORGERSON asked if  he thought they  would be amenable  to                                                            
looking at a progressive tax system.                                                                                            
COMMISSIONER CONDON replied that he didn't know.                                                                                
CHAIRMAN  TORGERSON  thanked the  Commissioner  and  Ms. Robson  for                                                            
their  presentations and  announced  that next they  would have  Mr.                                                            
Richard Peterson give his presentation.                                                                                         
               ALASKA NATURAL GAS TO LIQUIDS COMPANY                                                                          
MR. RICHARD  PETERSON, CEO,  Natural Gas  to Liquids Co.,  addressed                                                            
their gas  to liquids  proposal, how  GTLs can  help a gas  pipeline                                                            
project  and a little  about misconceptions  of  GTLs and  Petroleum                                                            
Alternative Liquid (PAL).                                                                                                       
     Our proposal  initially was to  build a 50,000 barrel  per                                                                 
     day  (BP/D)   world  scale  GTL   plant  that  would   use                                                                 
     approximately   .5 BCF  of  natural  gas  and  batch  that                                                                 
     product down the oil pipeline.  We were going to work with                                                                 
     the state and third parties,  primarily not the majors, to                                                                 
     obtain  the gas for this particular  project. We are  also                                                                 
     going  to  work  with  Moss  Gas and  Alaskan  companies,                                                                  
     primarily  for their expertise  in the GTL field. We  want                                                                 
     to use  existing proven technology  so we could get  lower                                                                 
     costs on financing and we  want to batch the syncrude down                                                                 
     the  oil pipeline.  We  want  to be  able to  market  this                                                                 
     product  on the  West Coast where  it would  get the  most                                                                 
     exposure   for  environmental  concerns  and  market   the                                                                 
     naptha, which would be about  20 percent of the product in                                                                 
     the  mid East. That  is basically our  proposal. We  still                                                                 
     believe today that it's  an alternative to other projects.                                                                 
     It's also  something that could work very well  with a gas                                                                 
     I would  like to say for the  record that I'm not here  to                                                                 
     oppose  the   pipeline;  I'm  not  here  to  support   the                                                                 
     pipeline.  The  pipeline  will  have  to  make  itself  on                                                                 
     whatever  the market is going  to determine the value  for                                                                 
     the natural gas.                                                                                                           
     What  I  wanted to  talk  about,  then,  is what  are  the                                                                 
     benefits  we  see of  a  GTL plant.  We  see quite  a  few                                                                 
     benefits GTLs  can have for a gas pipeline, but  I want to                                                                 
     focus  on  one  thing  only.   If  you  look  at  the  CO2                                                                 
     extraction  plant that  you're planning  to build and  the                                                                 
     NGL plant,  if you combine them  into one facility on  the                                                                 
     North   Slope  and  you're  able   to  use  the  batching                                                                  
     facilities  for GTLs,  you can  batch those  NGLs down  to                                                                 
     Valdez.  So,  you  can  locate  the  entire  structure  in                                                                 
     Alaska. We  think it would be a much more economic  way to                                                                 
     do it.                                                                                                                     
     The other  thing we see is with the batching you  can take                                                                 
     any NGL  and run it down to Valdez  where you can process                                                                  
     it and market  it for other materials. The other  thing we                                                                 
     looked  at is if you operate  a dense phase gas pipeline,                                                                  
     every single  take off point that you're talking  about in                                                                 
     Alaska,  you're going  to have  to put  treating there  to                                                                 
     remove  those  liquids.  If you  operate  a  single  phase                                                                 
     pipeline,  you're going to have  more capacity and you're                                                                  
     going to have  less cost and more ability to take  gas off                                                                 
     at the  various locations  down the  system. I think  it's                                                                 
     fair  to  say  that a  single  phase  pipeline  will  have                                                                 
     greater capacity  using the same diameter for  natural gas                                                                 
     than  if you  ran it  on dense  phase. Probably  the  last                                                                 
     thing  that we  say is  if you  put this  facility on  the                                                                 
     North  Slope, a  hundred percent  of the cost  of the  NGL                                                                 
     processing facility, which  I've heard is $2 - $3 billion,                                                                 
     is in Alaska.  All the processing jobs are in  Alaska. So,                                                                 
     it's a major benefit for Alaska and Alaskans.                                                                              
     I want  to briefly talk about  what I call misconceptions                                                                  
     on the  GTL side. Is  the process proven?  Is natural  gas                                                                 
     the  only fuel?  Do we  need some  sort of  super federal                                                                  
     support to make it work? Are GTLs economic?                                                                                
     The first  thing I want to say is that if you  look at GTL                                                                 
     plants  world wide,  which  have been  announced, roughly                                                                  
     Shell  has announced  seven plants  world wide, [indisc.]                                                                  
     has  two more.  There's over  600 BP/D of  new GTL plants                                                                  
     being announced in addition  to the 300,000 barrels of GTL                                                                 
     plants  already  on  line.  GTLs  are  not  some  sort  of                                                                 
     technology  that has  yet to  prove itself.  It is a  well                                                                 
     proven  technology. It's a matter  of how you market  [END                                                                 
     OF TAPE]…                                                                                                                  
TAPE 01-15, SIDE A                                                                                                            
MR. PETERSON continued:                                                                                                         
     …in Cook Inlet  or not. If we're running out of  gas, coal                                                                 
     gasification  makes  sense.  Especially  with  a combined                                                                  
     cycle  of  electric  generation  facility.  If  we're  not                                                                 
     running out of gas, GTLs will work there.                                                                                  
     The  other  point  I  want  to  address  was  the federal                                                                  
     financial  support. Many people  have said that a program                                                                  
     as  we proposed is  uneconomic and  needs massive federal                                                                  
     support.  What we've said  is if you're  going to build  a                                                                 
     50,000  BP/D GTL plant, you need  roughly about 1 MB/D  of                                                                 
     batching   capacity  to  eliminate   any  sort  of   cross                                                                 
     contamination  problems you have.  That will support  800,                                                                 
     900,  or 1,000 1 MB/D  GTL plants. The  first 50,000  BP/D                                                                 
     plant cannot  afford to pay for that. It would  be akin to                                                                 
     saying you  build a gas pipeline to the Lower  48 and only                                                                 
     put  a .5 BCF of gas  in it. So, what  we proposed to  the                                                                 
     federal government was to  come up with a different way to                                                                 
     pay  for that infrastructure  to allow  batching to  occur                                                                 
     and they recover their money  at a later date. We actually                                                                 
     looked at  three different proposals with them  and one is                                                                 
     the  federal  motor  fuels  tax  credit,  which  we  don't                                                                 
     particularly  want to use, but it's one way to  get it. If                                                                 
     you  take the  example  of gasohol,  the ethanol  gets  54                                                                 
     cents a gallon. It's been  going on for 21 years and could                                                                 
     possibly go on for another nine.                                                                                           
     The  other way  was to look  at an  environmental credit,                                                                  
     which  seems  to  be  the  way  a  lot  of  senators   and                                                                 
     congressmen  that  we've talked  to on the  federal  level                                                                 
     like to go.  The third way that Senator Stevens  suggested                                                                 
     in  one  of   our  meetings  was  the  possibility   of  a                                                                 
     government   pilot  program   where  they   pay  for   the                                                                 
     infrastructure and they  recover it as more GTL plants are                                                                 
     The  next issue I  want to  talk about briefly  was -  and                                                                 
     here's  where I think the problem  with GTLs arises.  When                                                                 
     you  talk about GTLs,  we talk about  FT, or Fisher/Trop,                                                                  
     synthetic diesel and California  has raised this point for                                                                 
     the last  couple of years with  us. Nobody focuses on  the                                                                 
     Fisher/Trop   synthetic  part;  they  focus  on  the  word                                                                 
     diesel.  As a result, when they  look at that, they  think                                                                 
     diesel  - petroleum  products  - and  their  mind is  then                                                                 
     fixed  in this kind  of a format. We  found even with  the                                                                 
     majors, it's very difficult  for them to think of anything                                                                 
     else  other  than petroleum  based  product when  you  say                                                                 
     diesel.  So, we  like to  say, 'Is  it diesel  or is it  a                                                                 
     petroleum alternative liquid (PAL)?'                                                                                       
     The reason  we do that is because we like to say,  'My PAL                                                                 
     is clean and odorless. It  is biodegradable and non-toxic.                                                                 
     It  has no sulfur,  no aromatics.  These are  some of  the                                                                 
     environmental  qualities  synthetic fuel  has. If you  can                                                                 
     get  your  mind  off  diesel,   you  can  think  about  it                                                                 
     different  ways.  Probably the  biggest  consideration  is                                                                 
     that this FT fluid is a natural gas based product.                                                                         
     In our country we have two  basic ways to tax motor fuels.                                                                 
     One is a petroleum-based  product and one is a natural gas                                                                 
     based  product. CNG, LNG is taxed  at a natural gas  base.                                                                 
     Diesel  gasoline is taxed  as a petroleum  base. Where  we                                                                 
     say  this is  important,  if you go  back into  the  motor                                                                 
     fuels  tax on diesel,  the federal tax  is 24.3 cents  per                                                                 
     gallon  and  in  California  it's  18 cents  a  gallon  on                                                                 
     diesel.  If you look at the motor  fuels tax on CNG,  LNG,                                                                 
     etc.,  the federal  tax  is 4.3 cents  per  gallon and  in                                                                 
     California  the tax is  roughly 7 cents  per gallon.  It's                                                                 
     actually  a range that goes up  and down. So, if you  look                                                                 
     at  those numbers,  you say  that if you  think synthetic                                                                  
     diesel from a GTL process  is a natural gas based product,                                                                 
     the  current federal  tax  is $13  per barrel  less.  This                                                                 
     means $13  per barrel higher netback to the gas  supplier.                                                                 
     There's  a lot of other types  of programs out there  that                                                                 
     if  you get  away  from petroleum  products  and starting                                                                  
     thinking about this as a  natural gas product, it improves                                                                 
     the economics  of GTLs tremendously.  You also have  tests                                                                 
     running in  California right now for NOX reduction,  which                                                                 
     ranges  between  12 -  15 cents  a  gallon. You  have  the                                                                 
     ability  to put  in CNG  avoidance premium.  CNG requires                                                                  
     massive  capital upfront investment.  To do it where  it's                                                                 
     PAL synthetic  diesel does not  require that. So, you  use                                                                 
     the same  existing infrastructure.  So, we like to say  if                                                                 
     you consider  GTLs as a natural gas based product,  you're                                                                 
     going  to have a situation  with far  more value than  you                                                                 
     have given it in the past. It needs consideration.                                                                         
     But,  the primary  purpose for  me being here  is to  talk                                                                 
     about  GTLs  from Alaska.  It's  a pristine  fuel  from  a                                                                 
     pristine  environment,  but  GTLs  can  help  improve  the                                                                 
     economics  of a  gas pipeline.  We believe  that by  going                                                                 
     ahead  with the GTL  option on a small  scale, putting  in                                                                 
     the batching  facilities, you  can put the NGL processing                                                                  
     facility  with the CO2  extraction facility  on the  North                                                                 
     Slope  and keep  all  of that  work here…keep  the value;                                                                  
     batch  that down  to Valdez  and maybe  do something  else                                                                 
     with it at that location.                                                                                                  
CHAIRMAN  TORGERSON  said  he  read  something  saying  the  federal                                                            
government  recognizes  GTL  as  an alternative   fuel and  the  tax                                                            
proposals  that are pending  in congress have  a 25 cent tax  credit                                                            
for GTLs or alternative fuels.                                                                                                  
MR. PETERSON responded:                                                                                                         
     No,  I  wouldn't  say  that.  The  alternative  fuels  tax                                                                 
     definition  that was  put in  at the help  of Congressman                                                                  
     Young and Senator Stevens  places GTLs into that status of                                                                 
     alternative  fuel. By being an alternative fuel,  you make                                                                 
     yourself available  for clean cities programs  and it just                                                                 
     so happens  that every single  other alternative fuel  has                                                                 
     some sort of a tax subsidy  etc. What we're saying is that                                                                 
     GTLs are  gas based. If you tax  them based on a gas  base                                                                 
     only in the motor fuels  market, in some states you have a                                                                 
     31-cent  advantage for a higher  netback (higher or  lower                                                                 
     in some states).                                                                                                           
MR. PETERSON  commented  if the  boat that  sank  in Prince  William                                                            
Sound had been  using PAL, this would  have not been an issue.  "PAL                                                            
has been  approved by the  EPA as non-toxic,  biodegradable,  can be                                                            
dumped into the ocean and  you don't have to worry about cleaning it                                                            
                   ALASKA GASLINE PORT AUTHORITY                                                                              
CHAIRMAN TORGERSON  announced a three-minute  break before  going to                                                            
the Port  Authority for  the rest of their  presentation  [CONTINUED                                                            
FROM THE  LAST MEETING].  He said  that Fairbanks  is a part  of the                                                            
Port Authority concept,  having placed that issue before the voters.                                                            
The North Slope Borough and Valdez are also active members.                                                                     
MR. DAVE DENGLE,  Interim Executive  Director, Port Authority,  said                                                            
Mr. Rigdon Boykin, Special  Counsel for the Port Authority, Mr. Burt                                                            
Kodel,  a board  member,  and Mr.  Dave  Cobb, Secretary  were  also                                                            
present.  He said that  Charlie Cole  was called  away on a  special                                                            
assignment by the Governor  and he would take up where Mr. Cole left                                                            
off discussing some of  the benefits of the Port Authority financing                                                            
and tax exemption  status and answering  the committee's  questions.                                                            
MR. RIGDON BOYKIN, Special Counsel to the Port Authority, said:                                                                 
     The  first slide goes  into the base  case assumptions  we                                                                 
     used  in our  financial  model. This  is a  model a  great                                                                 
     amount  of detail  of which  we gave  to you  at the  last                                                                 
     hearing  in Anchorage. I have  selected a few slides  from                                                                 
     that  to  illustrate  the  base case  used  and  what  the                                                                 
     results from that base case were.                                                                                          
     You may recall  that the Port Authority model  is based on                                                                 
     a combination  project of both  the Foothills project  and                                                                 
     basically  the YPC project,  because  we get a tremendous                                                                  
     amount  of economies of scale  by combining both projects                                                                  
     into one project  along the common 550-mile corridor  down                                                                 
     to Delta Junction.  Consequently, we're ending  up putting                                                                 
     6 BCF into the pipeline.  In order to do that, you need to                                                                 
     process  8.7 BCF on the North  Slope. We have assumed  for                                                                 
     the purpose  of this model that  the Port Authority  would                                                                 
     own  and construct that  conditioning  plant on the  North                                                                 
     Slope.  That may be  quite a difference  from some of  the                                                                 
     other models or theories that you've seen.                                                                                 
     From that 8.7 BCF, we will  extract 2 BCF of CO2 and other                                                                 
     elements.  That will be returned to the producers  for use                                                                 
     as   miscible    injectant.   We   will   actually    buy,                                                                 
     consequently,  a little  over 6.7 BCF  of gas and we  will                                                                 
     pay for that gas a split  payment, 30 cents base price and                                                                 
     45  cents,  which  will  be  an  additional  subordinated                                                                  
     payment  for the feed  gas for a total  price of 75  cents                                                                 
     per million BTUs.                                                                                                          
     We  will  produce  15  million  tons  of  LNG.  That  will                                                                 
     basically  be  three trains  of  five million  tons  each.                                                                 
     Those trains  will come on line at six-month intervals.  I                                                                 
     think the initial train  will come on line 49 months after                                                                 
     the start of construction.                                                                                                 
     We have  assumed a price for  the LNG of $2.5 per million                                                                  
     BTUs  at Valdez.  If that were  shipped to  Japan and  the                                                                 
     shipping  were 60 cents, which  we believe it would  be at                                                                 
     or less, that  would equate to a delivered price  in Japan                                                                 
     of $3.10.  We have assumed  a $3 per  million BTU Chicago                                                                  
     price.  Based in the assumption  is $1.20 per million  BTU                                                                 
     assumed  tariff  for  the  Alaska  border  to  Alberta  to                                                                 
     Chicago section of the line.                                                                                               
     As I mentioned  earlier about  6 BCF will enter the  line;                                                                 
     approximately  2.7  BCF  will go  into  the LNG  plant  in                                                                 
     Valdez;  and a little over 3  BCF will go down to Canada.                                                                  
     This  will be  a  dense phase,  high-pressure  line.  That                                                                 
     means we'll  be carrying propane and butane down  the line                                                                 
     in  a gaseous  form.  I cannot  overstate the  benefit  of                                                                 
     these liquids  and the value of those liquids  to the line                                                                 
     in  terms   of  amortizing  the  cost  of  all  of   these                                                                 
     Eighty-one  thousand barrels of NGLs will be extracted  on                                                                 
     the  North   Slope;  119,000  barrels  of  LPGs   will  be                                                                 
     extracted  in  Valdez; 141,000  barrels  of LPGs  will  be                                                                 
     extracted  from the gas that's going down to Canada.  That                                                                 
     will be  extracted either in  Calgary, our assumption  is,                                                                 
     or in Chicago  if it ends up going down the Alliance  Line                                                                 
     to Chicago.  We have  assumed an LPG  price of $12.50  per                                                                 
     barrel  and an  NGL price  of $16.50.  We believe  all  of                                                                 
     these numbers are relatively conservative.                                                                                 
     The  benefits to the  producers: basically  they get  $811                                                                 
     million  from  the gas  sale  at the  base payment  of  30                                                                 
     cents.   They   get  another   $1.2   billion   from   the                                                                 
     subordinated gas payment  of 45 cents per million BTUs for                                                                 
     a total amount of just over $2 billion per year.                                                                           
     The benefits  to the state and  municipalities of Alaska:                                                                  
     $371 million  per year in royalty  and severance tax;  $81                                                                 
     million  per year  in  royalty and  severance  tax on  the                                                                 
     NGLs;  $148 million per year  if they're paying corporate                                                                  
     income tax. (I don't know  whether they're taxpayer or not                                                                 
     due  to consolidation,  etc.).  One hundred  and fourteen                                                                  
     million  will  be the  payment  in lieu  of taxes  to  the                                                                 
     municipalities   along   the   route;  that   equates   to                                                                 
     approximately  a 10 mill tax as opposed to the  current 20                                                                 
     mill regime for the oil line.                                                                                              
     The  project was designed  to throw  off $370 million  per                                                                 
     year,  which would go $220 million  to the state and  $148                                                                 
     million to the municipalities;  $111 million of that would                                                                 
     be  in the  form of  direct money  based on  a per capita                                                                  
     allocation.  The other $37 million would be used  to lower                                                                 
     energy  costs  for  communities  that  could  not readily                                                                  
     access gas along the corridor.                                                                                             
     Because  we're only paying 75  cents for the gas from  the                                                                 
     producers  in  this example  and because  we  need a  very                                                                 
     healthy debt service coverage  ratio, in this case it ends                                                                 
     up being  over two times  debt service,  we have a lot  of                                                                 
     excess cash  that's generated by this project.  Basically,                                                                 
     it  generates  $1,750,000  of excess  cash; of  that  $1.2                                                                 
     billion  goes  to  the  producers  (that's  the  45  cents                                                                 
     subordinated  payment);  that leaves  $532 million,  which                                                                 
     can  be used  to increase  the  netback for  reserves,  to                                                                 
     accelerate debt payment,  a whole host of different things                                                                 
     including  potentially building in incentives  for whoever                                                                 
     the operator  of the pipeline etc. and the Port  Authority                                                                 
     might be.                                                                                                                  
     What  I've  done  at  the bottom  of  this  is  include  a                                                                 
     sensitivity   table  for   the  use   of  the  committee.                                                                  
     Basically,  what that  does is  show you  what happens  if                                                                 
     various  things happen  to the price  of gas, to interest                                                                  
     rates,  price  of NGLs,  etc.  So, basically,  a  10  cent                                                                 
     increase in the price of  the gas will increase the amount                                                                 
     of  revenue  by  $200 million  per  year.  A  decrease  in                                                                 
     interest  rates of .5  percent would  increase the amount                                                                  
     available  by $120 million  per year.  An increase in  the                                                                 
     sales price  of the NGLs and LPGs of $2.50 would  increase                                                                 
     the  amount   available  by  $300  million  per   year.  A                                                                 
     reduction  in  the EPC  construction  cost of  $1 billion                                                                  
     increases  the amount available by $120 million  per year.                                                                 
     We thought  it would be useful  for you to have some  kind                                                                 
     of sensitivity, but I think  what this also illustrates is                                                                 
     that because of the $532  million per year cushion that we                                                                 
     have, we could  actually absorb and decrease in  the sales                                                                 
     price at the  Chicago, for example, of about 20  cents and                                                                 
     maybe  more (40  cents)  if the decrease  is  only on  the                                                                 
     Chicago price and not on the LNG side, as well.                                                                            
     There  has  been  a  lot of  discussion  as  to  what  the                                                                 
     benefits  of this Port Authority  are and what difference                                                                  
     would  be if this  were a  private project  versus a  Port                                                                 
     Authority  project. What  this slide  is designed to  show                                                                 
     you  that basically  the private  project  would pay  $516                                                                 
     million  in taxes; the  Port Authority  doesn't pay  those                                                                 
     taxes.  That money would be used  to increase payments  to                                                                 
     other  people or to pay debt  or what-have-you. Also,  you                                                                 
     can  because the Port  Authority isn't  paying taxes,  its                                                                 
     unlevered  project return is  12.9 percent. For a private                                                                  
     project,  its 6.8 percent  and that's  only by decreasing                                                                  
     the  amount of  payment to the  producers to  69 cents  as                                                                 
     opposed to the 75 cents in the Port Authority case.                                                                        
     This slide  is basically one  of a group of slides at  the                                                                 
     end  of the financial  presentation that  we gave and  the                                                                 
     primary  reason I wanted  to put it up  there was to  give                                                                 
     you an idea  of the liquids in this project. In  the third                                                                 
     column  second  line, you  can see  that the  liquids  are                                                                 
     producing approximately  $1.5 billion of revenue per year.                                                                 
     That's a lot of money.                                                                                                     
     What  I'd like to  do if it's  alright is  start with  the                                                                 
     questions  that were  posed by the committee  to the  Port                                                                 
     Authority.  The first question deals with the  benefits of                                                                 
     the Port Authority  concept and why is there a  difference                                                                 
     between what we're saying  and what the producers (sponsor                                                                 
     groups) are  saying. We don't know why they don't  believe                                                                 
     this structure  provides any  benefits. We've had limited                                                                  
     discussions  with them; they have not had any  significant                                                                 
     discussion  with us that would explain to us why  this tax                                                                 
     benefit  has no value. We will  give you where we see  our                                                                 
     value  coming from.  In  the first  place, we  do not  pay                                                                 
     federal  income taxes  and money that  would otherwise  be                                                                 
     used  to pay  those  taxes can  be used  to pay  debt  and                                                                 
     increased payments to stakeholders.                                                                                        
     We've  just gone through  the slide,  which shows you  the                                                                 
     producers  in our example of a two-project line  would pay                                                                 
     approximately  $516 million  in taxes;  they can use  that                                                                 
     money  to increase  the netback  to do  other things  that                                                                 
     would  be a benefit to the producers  and the citizens  of                                                                 
     the  State of Alaska.  We have  heard it  said that if  we                                                                 
     gave all of  that money that's the difference  between the                                                                 
     revenue  that's generated  by the Port  Authority and  the                                                                 
     revenue  that would be generated  by a private individual                                                                  
     to the  producers, they would  end up having to pay  taxes                                                                 
     on  that  money  and  they  would  be  left  in  the  same                                                                 
     situation. That's not exactly  true, because if they owned                                                                 
     the  pipeline,   they  would  pay  $516  million   on  the                                                                 
     pipeline. If we gave them  that $516 million, for example,                                                                 
     they would  only pay a tax of 35 percent roughly,  not the                                                                 
     entire  $516 million. I don't  understand that particular                                                                  
     argument, at least.                                                                                                        
     In addition,  one thing  you should  know that the income                                                                  
     taxes  for a private  project will increase  over time  as                                                                 
     debt  is paid,  because of  the increased  debt payments,                                                                  
     interest  will not be  a deduction and  you're payment  of                                                                 
     taxes will increase.                                                                                                       
     One of the biggest benefits  of the Port Authority is that                                                                 
     they are seeking  a much lower return on the project  than                                                                 
     would  be required by  the sponsor of  a private project.                                                                  
     The  return  requested  by  the  Port  Authority  is  $370                                                                 
     million,  which equates  to a  negative  2.6 percent.  The                                                                 
     return is negative because  the $370 million doesn't start                                                                 
     until  five years  out in the  project. If  you take  into                                                                 
     account the  time value of money, it basically  erodes the                                                                 
     principle that you would end up recovering.                                                                                
     Typically,  a company  like BP  requires 14  - 15 percent                                                                  
     unlevered  return in order to invest in a project  of this                                                                 
     type. There is no way we  believe they would get that kind                                                                 
     of a return  if they owned this project. Consequently,  it                                                                 
     becomes  very difficult for a  private company to build  a                                                                 
     project like this, we believe.                                                                                             
     The  next benefit  that we feel  addresses  a lot of  this                                                                 
     committee's  concerns is the fact that the Port  Authority                                                                 
     project would  be exempt from FERC regulation.  This would                                                                 
     give Alaska  an ability to better control capacity,  usage                                                                 
     and rates.  Some of the companies  the Port Authority  has                                                                 
     talked to  believe the FERC exemption could substantially                                                                  
     increase their interest in the pipeline.                                                                                   
     Some of the debt could be  financed with tax exempt bonds.                                                                 
     The Port Authority  believes that between $3 -  $6 billion                                                                 
     of debt  can be financed with  tax-exempt bonds depending                                                                  
     on how the  contracts for the sale of gas are  structured.                                                                 
     Tax-exempt  bonds   basically  sell  for  2 percent   than                                                                 
     taxable debt on average for a project like this.                                                                           
     The project  will not cost the  producers any capital  and                                                                 
     will be  non-recourse to the  producers, the state or  the                                                                 
     Port  Authority. This  project will  be project financed.                                                                  
     That  means that  the banks  will  not lend  money to  the                                                                 
     project unless they believe  that the contracts which form                                                                 
     the  basis  for  this  project  -  the  contract  for  the                                                                 
     construction of the project,  the contract to buy the gas,                                                                 
     the  contracts to sell  the gas, the  operation contracts                                                                  
     for  whoever is  operating  the pipeline  -  all of  those                                                                 
     various  contracts  have got  to be  sufficiently precise                                                                  
     that  the  banks will  rely  on  them to  lend  the  money                                                                 
     required  for this project. It's  sort of a self policing                                                                  
     mechanism,  because if the contracts  aren't good enough,                                                                  
     you can't  borrow the money. If they are good  enough, you                                                                 
     can borrow the money.                                                                                                      
     There  are  also  benefits  to  the  State  of  Alaska.  I                                                                 
     mentioned  earlier  the $370  million; there's  also  much                                                                 
     more  certainty  for  gas  for  instate  usage.  The  Port                                                                 
     Authority  will ensure that a  spur line will be built  to                                                                 
     allow  Anchorage,   etc.  access  to  the  gas.  The  Port                                                                 
     Authority  can  use  retained  earnings   to  develop  LNG                                                                 
     transport  to  other communities  accessible  by  road  or                                                                 
     water.  There's  also  more  control  over  price  to  the                                                                 
     consumer  of  instate  gas usage  -  for example,  gas  to                                                                 
     Anchorage  or Fairbanks could be in the $1.80  per million                                                                 
     BTU  range. That's  a little  bit simplistic;  the actual                                                                  
     price will probably be over  $1.80, because you'll have to                                                                 
     add on the costs of tapping  into the line and all of that                                                                 
     kind  of thing, but  it shouldn't  be substantially  above                                                                 
     that at the wholesale level.  Although, probably a private                                                                 
     entity might look at pricing  that at the marginal cost of                                                                 
     other  fuels as opposed to just  subtracting off what  the                                                                 
     transportation  cost  might be  for the  distance the  gas                                                                 
     didn't have to travel.                                                                                                     
     There's  no need to give up tax  revenue, royalties,  etc.                                                                 
     to subsidize  the project. We  modeled this and found  out                                                                 
     that  the benefits  from the tax  exemption substantially                                                                  
     exceed  the  benefits,  if they  were  given  the maximum                                                                  
     benefits permitted by HB  393. And if in addition to those                                                                 
     benefits,  you eliminated  royalties,  this benefit  still                                                                 
     exceeds that amount.                                                                                                       
     The  second   question  posed  was  the  ability   of  the                                                                 
     Authority  to operate outside the municipal boundaries  of                                                                 
     the  initial founders  of the Port  Authority. Basically,                                                                  
     the short  answer is that there's no limiting  language in                                                                 
     the enabling  statutes that precludes  the Port Authority                                                                  
     from   doing  business  or  owning   assets  outside   the                                                                 
     boundaries  of the member utilities.  The only limitation                                                                  
     is  we do  not have  condemnation  authority  outside  the                                                                 
     boundaries   of   these  communities,   but   within   the                                                                 
     boundaries we do have that authority.                                                                                      
     The third question deals  with cost over runs with respect                                                                 
     to  the construction  contract.  First of  all, the  total                                                                 
     contingency  contained in our  design and financial  model                                                                 
     for  this  project  is  $2.7 billion  -  $1.8  billion  of                                                                 
     contractors'  contingency  and  $900  million  of owner's                                                                  
     contingency.  Bechtel  obtained  two or three  quotes  for                                                                 
     most of  the equipment in their  design study. A critical                                                                  
     feature  of this project  is that it  will be 100 percent                                                                  
     financed  on a  project  financed basis.  In  order to  do                                                                 
     that, the construction contract  must be for a fixed price                                                                 
     with a  fixed delivery date and  meet certain performance                                                                  
     criteria.  Failure  to meet  the performance  criteria  or                                                                 
     delivery date will result  in liquidated damages, which in                                                                 
     this case can be quite substantial.                                                                                        
     Only a few  companies in the world are capable  of forming                                                                 
     a consortium to take this  kind of risk. Bechtel is one of                                                                 
     them.  Basically, the bottom  line is that banks will  not                                                                 
     finance  the project if the contract  does not adequately                                                                  
     address  over run risk. If the  project is late, does  not                                                                 
     meet performance  criteria, or has over runs in  excess of                                                                 
     the contingencies, Bechtel  and any partners it has in the                                                                 
     project  will  be responsible  if they  end  up being  the                                                                 
     The  next  question  deals  with  the  value  of  LPGs.  I                                                                 
     mentioned  a little bit earlier that that value  including                                                                 
     the NGLs  on the Slope amounts  to about $1.5 billion  per                                                                 
     year. The gas that's produced  on the North Slope contains                                                                 
     a  substantial  amount  of propane  and  butane; however,                                                                  
     these liquids  are too volatile to be transported  in TAPS                                                                 
     to  Valdez. Consequently,  over 100,000  barrels of  these                                                                 
     liquids  are  reinjected into  wells  on the  North  Slope                                                                 
     every day.                                                                                                                 
     In the  past, gas pipeline design  and technology did  not                                                                 
     permit the  transport of propane and butane. However,  the                                                                 
     new designs  and technologies that are being proposed  for                                                                 
     the  transportation  of North  Slope gas  will enable  the                                                                 
     pipeline  to transport  propane  and butane  in a gaseous                                                                  
     form.  This  propane  and butane  is  very valuable  as  I                                                                 
     mentioned  earlier and  depending on  the sales price  can                                                                 
     generate sufficient revenue  to basically pay for both the                                                                 
     conditioning plant and pipeline.                                                                                           
     The propane and butane in  the Lower 48 branch of the line                                                                 
     will probably  be extracted in Alberta or Chicago.  If the                                                                 
     instate  consumption in Fairbanks  and from the spur  line                                                                 
     to Anchorage  is large enough,  it might be economical  to                                                                 
     extract  the  propane  and butane  from  that gas  in  the                                                                 
     Fairbanks  or Glennallen area. At the price of  $12.50 per                                                                 
     barrel,  the  LPG  from  the  two  branches  of  the  line                                                                 
     generates  $3.25 million of revenue per day or  about $1.1                                                                 
     billion  per year.  A price  increase of  $2.50 would  add                                                                 
     approximately $200 million of revenue per year.                                                                            
     The fifth  question, the committee  heard testimony  about                                                                 
     the problem  of dealing with FERC for sizing the  line for                                                                 
     instate  gas  usage.  As  I  mentioned   earlier,  a  Port                                                                 
     Authority   project   would  not   be  subject   to   FERC                                                                 
     jurisdiction. In addition,  the line would be owned by the                                                                 
     Port Authority.  Facilitating  instate gas supply is  part                                                                 
     of the  mission of the Port Authority.  The line has  been                                                                 
     designed  to supply up to 500  MCF/D of instate gas  usage                                                                 
     at relatively  little incremental  cost. If instate  usage                                                                 
     expands to  a higher amount, the Port Authority  has every                                                                 
     incentive  to add  compression  stations,  etc. to enable                                                                  
     increased delivery.                                                                                                        
     The  sixth  question  had  to  do  with  whether  Bechtel                                                                  
     reviewed the cost estimates  for other routes including an                                                                 
     over-the-top  route. We've heard a lot of estimates  for a                                                                 
     lot  of different projects.  Most of  the estimates  don't                                                                 
     specify  what's  comprised   in  the estimates.   Do  they                                                                 
     include   contingency   money?   Do   they   include   the                                                                 
     conditioning  plant? Do they  include working capital?  Do                                                                 
     they  include  a  debt  service  reserve?  So,  it's  very                                                                 
     difficult to compare these  projects, in fact, it's pretty                                                                 
     much  impossible. The  only things we  did do is when  the                                                                 
     arc  numbers were  first announced  for  the over-the-top                                                                  
     route, we asked Bechtel  to give us a back-of-the envelope                                                                 
     estimate  of the all  end costs of a  similar project  and                                                                 
     basically  the  conclusion  we reached  was that  all  the                                                                 
     costs  were not included in the  arc numbers, because  the                                                                 
     difference in the numbers were very substantial.                                                                           
     The  next question deals  with the  CERA presentation;  in                                                                 
     particular,  we focused  on the answers  to the questions                                                                  
     that CERA  gave in written form to this committee  on July                                                                 
     17 of this  year. The questions posed to CERA  indicate an                                                                 
     interest by the state to  promote instate usage of gas for                                                                 
     residential, industrial  and petrochemical use and reserve                                                                 
     in some fashion  capacity on a line should a large  demand                                                                 
     develop in the future. There's  also considerable interest                                                                 
     in  natural gas  liquids that  could be  transported in  a                                                                 
     high-pressure  dense phase  line. On  the whole, the  CERA                                                                 
     answers to  the questions in these areas we felt  were not                                                                 
     very encouraging.                                                                                                          
     However,  the  answers  might  be more  favorable  if  the                                                                 
     questions  were  not  so limited  in  scope. Most  of  the                                                                 
     question  limit the answer to  only a Lower 48 project  or                                                                 
     only an LNG  project. It is almost as if there's  a silent                                                                 
     agreement  to only talk about  a Lower 48 pipeline with  a                                                                 
     possibility  of a limited use spur line to carry  liquids,                                                                 
     for example, to tidewater or only an LNG line.                                                                             
     The proverbial elephant  sitting in the corner of the room                                                                 
     - a  combination of  both an  LNG and Lower  48 line -  is                                                                 
     ignored.  Inclusion  of  this elephant  in  the questions                                                                  
     might  lead  to more  favorable  answers  to a  number  of                                                                 
     issues  critical to  this committee  and  the citizens  of                                                                 
     this state.  Basically, the two-project line will  deliver                                                                 
     6 BCF  along 550 miles to Delta  Junction; then 3 BCF  156                                                                 
     miles  to the  Canadian  border  and 3  BCF 250  miles  to                                                                 
     Valdez. This  concept should have more benefit  than the 4                                                                 
     BCF  minimum suggested  in the  answer to  question 16  by                                                                 
     CERA for a $15 billion pipeline.  It also avoids having to                                                                 
     take over  3 BCF through Canada,  which some testimony  in                                                                 
     Anchorage  indicates might  be a problem.  It enables  the                                                                 
     extraction of gas liquids  in Valdez for export or instate                                                                 
     use. The  liquids in the economics  of a larger size  line                                                                 
     to  Delta  Junction  makes the  LNG  competitive  in  Asia                                                                 
     especially  when one considers  security of supply issues                                                                  
     and  it gives Alaska  LNG a very  substantial competitive                                                                  
     advantage  over other  LNG resources  to  delivery to  the                                                                 
     West Coast of the United States and Mexico.                                                                                
     We've  outlined in our statement  a couple of examples  of                                                                 
     the effects  of limited answers to limited questions.  The                                                                 
     first is CERA  question 11 - capacity for instate  gas use                                                                 
     expansion.  CERA  discusses   the  problems  and  cost  of                                                                 
     expanding  the use of instate  gas only in the context  of                                                                 
     the  Lower 48 project.  In short, a  concern is expressed                                                                  
     that  if the amount  and timing of the  expansion are  not                                                                 
     fairly  predictable,   the  producers  might  design   the                                                                 
     pipeline to  maximize delivery to the Lower 48.  In such a                                                                 
     case, use  of the Alaskan portion of the line  for instate                                                                 
     gas could  result in underutilization of the more  distant                                                                 
     parts of the line. A two-project  line might afford a much                                                                 
     greater  degree  of leeway,  because  the North  Slope  to                                                                 
     Delta  Junction portion  of the  line will  be very  large                                                                 
     diameter   pipe,   56  inches,   to  which   adding   more                                                                 
     compression  at  existing stations  will  add substantial                                                                  
     capacity  at a  relatively  small incremental  cost.  Most                                                                 
     instate  usage  is  likely  to occur  at  or  above  Delta                                                                 
     Junction  and along  the Valdez  branch of  the line  and,                                                                 
     thus,  should not affect  the Lower  48 branch from  Delta                                                                 
     Junction, if instate usage  is increased to as much as 500                                                                 
     CERA's  question 6 asks how much  gas needs to go through                                                                  
     the  line  to  make  it economically   viable  and second                                                                  
     whether  there will  be sufficient capacity  in Canada  to                                                                 
     deliver  that  amount  of gas  to  the American  markets.                                                                  
     CERA's  answer is basically  that a  $15 billion pipeline                                                                  
     will require  at least a 4 BCF/D throughput and  a Chicago                                                                 
     price  of $3 to offer  a netback in the  range of 74  - 95                                                                 
     cents per  thousand cubic feet. However, testimony  at the                                                                 
     Anchorage  hearing indicated  that there  may be Canadian                                                                  
     resistance  to permitting  a throughput  of  over 2.5 -  3                                                                 
     BCF/D.  Clearly,  CERA  recognizes  that  the  larger  the                                                                 
     throughput for a green field  pipe, the cheaper the gas is                                                                 
     to transport on a per unit  basis. A two-project line that                                                                 
     splits  at  Delta Junction  achieves  these  economies  of                                                                 
     scale.  The  main  trunk  line carrying  6  BCF  to  Delta                                                                 
     Junction  only requires 3 BCF  to transit Canada, because                                                                  
     the  other 3 BCF  goes to Valdez  for delivery  of LNG  to                                                                 
     Asia, the West Coast of the United State or Mexico.                                                                        
     The  CERA question  8 basically  asks what  changes  would                                                                 
     make  a stand-alone  Alaskan  LNG project  delivering  its                                                                 
     product  to  the Asian  market  economic. Here  again,  we                                                                 
     agree  with CERA. The possibility  of a single project  to                                                                 
     Valdez just  for LNG without the Y-line, probably  at best                                                                 
     is marginally  economic. It's the Y-line, the  combination                                                                 
     of the two  projects that makes the LNG economic,  as well                                                                 
     as the  value of the liquids.  CERA really didn't go  into                                                                 
     much analysis  of the value of  those liquids in terms  of                                                                 
      offsetting the cost of making the LNG in the pipeline.                                                                    
     The  CERA  question  2  and  3,  regarding  petrochemical                                                                  
     industry  possibilities - basically,  CERA's view is  that                                                                 
     the  liquids to  service a  petrochemical  industry  would                                                                 
     basically  have to be delivered to a coastal location  and                                                                 
     instead  of assuming  this might be  combined with an  LNG                                                                 
     branch of  the line to Valdez, they assume that  basically                                                                 
     just a pipe  would be put in to carry the liquids  only to                                                                 
     Valdez   and  they   concluded   that  would   be  fairly                                                                  
     uneconomic.  They  are probably  right  on that,  but  the                                                                 
     combination with the LNG  project, taking the liquids out,                                                                 
     which  will  be from  a  very substantial  volume  of  gas                                                                 
     there,  changes  the equation  and would  probably change                                                                  
     CERA's answer.                                                                                                             
     Lastly,  you've asked  for our  view of the  Lower 48  and                                                                 
     Canadian  gas  markets.  We  don't  have  a  view  of  the                                                                 
     Canadian  gas market. We didn't  do any research on  that;                                                                 
     we  haven't asked  any people  to  do research  on that  -                                                                 
     other  than to look at the issue  of whether they thought                                                                  
     Canada  would  permit  large  volumes of  Alaskan  gas  to                                                                 
     transit Canada. We do believe  that Canada is not going to                                                                 
     embrace  the  transit  of gas  through  it to  the United                                                                  
     States,  which may  preclude  or reduce  their ability  to                                                                 
     market additional Canadian gas.                                                                                            
     Frankly, we  think, were it not for ANGTA we would  have a                                                                 
     serious problem here. We  do believe that if the Foothills                                                                 
     project is implemented as  part of this overall scheme, it                                                                 
     would be pretty  difficult for Canada to stop  the transit                                                                 
     of 2.5 BCF,  at least, and probably 3 BCF. But  we believe                                                                 
     additional volumes will be very problematic.                                                                               
     With respect to the Lower  48, the Port Authority believes                                                                 
     this market  as it relates to  Alaskan gas is critical  to                                                                 
     both the Lower 48 line and  LNG to the West Coast. Some of                                                                 
     our research  indicates that the sheer volume  of new gas-                                                                 
     fired electric  generation has been planned over  the next                                                                 
     4 - 5  years in the Lower 48  will substantially increase                                                                  
     demand.  Conversations  with gas marketers  in the United                                                                  
     States indicate they have  seen shortages in certain areas                                                                 
     of the  country over the next  4 - 5 years. This shortage                                                                  
     is  so serious that  independent power  producers are  now                                                                 
     integrating into the gas  market because they believe that                                                                 
     they  may have  a  better ability  to  protect themselves                                                                  
     against gas  shortages if they go in and start  buying gas                                                                 
     reserves  and  perhaps  building  gas  pipelines.  A  good                                                                 
     example of  this is the gas pipeline that Calpine,  one of                                                                 
     the  leading independent  power  producers  in the United                                                                  
     States,   has  announced  it's  going  to  build   in  the                                                                 
     California area.                                                                                                           
     A number  of companies  have also stated  to us that  they                                                                 
     are working  on LNG regasification permitting  issues with                                                                 
     respect  to a number  of sites in California,  as well  as                                                                 
     Mexico.  We have also  researched the  Asian markets  with                                                                 
     respect to LNG. It is believed  that demand in this market                                                                 
     is largely dependent on  three factors, which for the most                                                                 
     part are all interrelated,  because this market is rapidly                                                                 
     becoming  a global  market. The  factors are  the pace  of                                                                 
     economic  recovery  in  Asia,  especially  as  it  may  be                                                                 
     affected  by  the  United  States.  Second,  the  pace  of                                                                 
     deregulation  of the electricity  and gas markets in  Asia                                                                 
     and the consequent growth  of independent power producers,                                                                 
     especially those that integrate  into the fuel sector. And                                                                 
     lastly,  the growth of the Indian  market and the [END  OF                                                                 
TAPE 01-15, SIDE B                                                                                                            
MR. BOYKIN continued:                                                                                                           
     The  Indian market  has  the potential  to absorb  a  very                                                                 
     large  amount of LNG  over the next  decade. I would  note                                                                 
     that  recently a contract  for 7.5 million  tons per  year                                                                 
     was  recently  signed   for an  Indian   project.  It  was                                                                 
     announced  not long  ago. To  give you an  idea of scale,                                                                  
     that represents  basically 10 percent of the entire  Asian                                                                 
     demand in  one swoop, roughly half of the 15 million  tons                                                                 
     that this project would produce in Valdez.                                                                                 
     We believe, based on the  research that the Port Authority                                                                 
     and its  consultants have done,  that the market is  there                                                                 
     for Alaskan  gas, particularly at the prices set  forth in                                                                 
     our financial  model. The Port Authority agrees  with CERA                                                                 
     that  there's a window  of opportunity  now, but the  Port                                                                 
     Authority  also believes it may be extremely difficult  or                                                                 
     a very  long time before the  window reopens for the  size                                                                 
     project that  is required by the economics of  an 800 mile                                                                 
     pipeline through Alaska.  As announcements to build lines,                                                                 
     announcements  of  drilling  discoveries  in the  Gulf  of                                                                 
     Mexico and off the coast  of Canada, announcements for the                                                                 
     LNG terminals  in Mexico, the  Bahamas and the West  Coast                                                                 
     of the  United States, those  announcements are not  going                                                                 
     to wait for Alaska to get its act together.                                                                                
     All of these facilities  require contracts for the sale of                                                                 
     gas  or  LNG  to  get  their  financing.   Many  of  these                                                                 
     negotiations are taking  place today. An example is the El                                                                 
     Paso letter of intent to  buy LNG for delivery on the west                                                                 
     coast   of  Mexico  from  Phillips   from  a  yet  to   be                                                                 
     constructed  facility  in Australia. If  this contract  is                                                                 
     realized,  it takes away an opportunity to sell  5 million                                                                 
     tons of LNG to a location,  Mexico, where Alaskan LNG will                                                                 
     have a substantial transportation cost advantage.                                                                          
     The  bottom line  is there are  two projects  that are  at                                                                 
     least  partially permitted. Endorsement  of both of  these                                                                 
     projects  by the Alaskan  government may  be the only  way                                                                 
     North  Slope gas  can meet  this window.  We believe  this                                                                 
     window is  a lot shorter than most people believe;  people                                                                 
     are  contracting for  huge amounts  of gas  and LNG  right                                                                 
     now. It would  be nice to have a perfect project,  nice to                                                                 
     have  perfect   legislation  and  perfect  protection   of                                                                 
     Alaskan  interests. I  think if we wait  for all of  that,                                                                 
     Alaska will miss the current window.                                                                                       
REPRESENTATIVE OGAN said he shares his frustrations watching the                                                                
different projects. He would love to ship gas to Mexico. He asked                                                               
how you get the producers to sell the gas.                                                                                      
MR. BOYKIN responded:                                                                                                           
     I think  we stated in our earlier  testimony that we  have                                                                 
     sort  of  given  up  on  the  producers  doing  something                                                                  
     themselves  in a short  timeframe. We  don't think that's                                                                  
     probably  going to happen.  So, we've  focused instead  on                                                                 
     trying  to get  big users  of  gas interested  in putting                                                                  
     something  on the table  for the producers  up here.  That                                                                 
     means going  to the Enrons of the world, the Dukes  of the                                                                 
     world, the El Pasos, etc.  and try and get them interested                                                                 
     in  putting an  offer  on the  table, because  we believe                                                                  
     without  an  offer  on  the table,  it  will  be probably                                                                  
     difficult  if  not impossible  for the  state  to get  the                                                                 
     producers  to do  anything. But,  if there  is a bonafide                                                                  
     offer  from a credible player,  such as an Enron, Duke  or                                                                 
     El  Paso,  or  a consortium  of  those  players,  then  it                                                                 
     becomes  very difficult  for the producers  to say,  'Hey,                                                                 
     we're  not building it and by  the way we're not going  to                                                                 
     sell it to those guys either.'                                                                                             
     At  that point  in time they've  got to  decide, I think,                                                                  
     either  we will build  it or  we'll sell  the gas to  that                                                                 
     consortium.  I  think  it  places  a lot  of  pressure  on                                                                 
     something  to happen. Whether  that's a realistic goal,  I                                                                 
      don't know, but it's the only game in town that I see.                                                                    
REPRESENTATIVE OGAN agreed  with that and said if there were any way                                                            
to help, he would be glad to assist.                                                                                            
MR. BOYKIN responded that  there was something that could be done to                                                            
assist that and that is:                                                                                                        
     The  state   government  needs  to  get  together.   These                                                                 
     companies have come to us  and said, 'Where's the state on                                                                 
     this?  Will the state  support this?  What's happening  in                                                                 
     the   governor's   office?   What's   happening   at   the                                                                 
     legislature? Where is all of this?                                                                                         
     I think that whole effort  would be helped immeasurably if                                                                 
     there is sort of one unified  stance within the state that                                                                 
     would encourage this effort.                                                                                               
CHAIRMAN  TORGERSON asked why  Enron, Duke  or El Paso weren't  here                                                            
today to talk to them. "We haven't been hiding from them."                                                                      
MR. BOYKIN said  he understood that, but he thought  they had talked                                                            
to individuals in the legislature and the state administration.                                                                 
     They  believe  rightly  or wrongly  that  they  have  been                                                                 
     getting  some conflicting  messages. One  sort of thought                                                                  
     they  were being  told,  'Don't  meddle in  our business.                                                                  
     We'll get  this all squared away and the pipeline  will be                                                                 
     built by the producers eventually.'                                                                                        
     Whether  that is an accurate  view of what they were  told                                                                 
     or not is another question.                                                                                                
REPRESENTATIVE OGAN noted  the Duke was there, although they weren't                                                            
testifying.  He said they are producing  Scotia gas and shipping  it                                                            
to the east coast  and he thought it would be advantageous  to get a                                                            
presentation from them  on some issues shipping from Canada into the                                                            
U.S. He knew that El Paso  had been at a meeting in the past. He had                                                            
spent some  time with them at a conference  in Whistler a  couple of                                                            
weeks ago. He said that  the Japanese and Pacific markets view us as                                                            
dysfunctional  because the governor says one thing,  the legislature                                                            
says something  else. The  governor does not  want to consider  LNG,                                                            
but he  thought with the  two projects piggy  backing on each  other                                                            
made the economies of scale possible.                                                                                           
CHAIRMAN   TORGERSON  said   he  wasn't   commenting  about   people                                                            
physically being  there taking notes, but proposals  that are laying                                                            
in front of them for review.                                                                                                    
MR.  BOYKIN  responded  that  he thought  there  were  a  number  of                                                            
companies doing  the due diligence  that is required to make  such a                                                            
CHAIRMAN  TORGERSON  responded  that  he understood  that,  but  Mr.                                                            
Boykin  said that the  legislature  is not listening  or talking  to                                                            
them.  "They're not  putting  anything on  the table…When  they  get                                                            
their act together,  they're welcome  to sit where you are  too, and                                                            
tell us they want to buy  a couple billion feet a day. An then there                                                            
may be some action happen!"                                                                                                     
MR. BOYKIN  replied that in putting  their proposals together,  they                                                            
are making  assessments now as to  where the state stands  and there                                                            
is  some concern  that  they  can't determine  that.  "Perhaps  they                                                            
haven't been talking to the right people."                                                                                      
CHAIRMAN TORGERSON  said, "My guess is that it's happening  in board                                                            
rooms  in the  Lower  48 like  the producers  are  doing.  Decisions                                                            
aren't necessarily made  within this state. Do you agree with that?"                                                            
MR. BOYKIN agreed.                                                                                                              
REPRESENTATIVE  FATE explained how gas utilization  was applied as a                                                            
throughput LNG  plant to Valdez, gas to Canada, etc.  and extraction                                                            
of  LPGs, etc.  He then  went  in to  instate  use and  asked for  a                                                            
clearer picture:  "If the state wanted to embark in  a petrochemical                                                            
industry, which  is being driven offshore in the Lower  48, and fill                                                            
that vacuum,  how would you go about  releasing enough gas  for that                                                            
industry without  harming the throughput into the  LNG plant or, for                                                            
that matter,  another spur to the  Cook Inlet, which we all  know is                                                            
going to require some in about 12 years."                                                                                       
MR. BOYKIN responded:                                                                                                           
     The  petrochemical industry  that would  probably best  be                                                                 
     put here, if that's what  you wanted to do, would probably                                                                 
     be based on  propane or butane and that will be  taken out                                                                 
     at Valdez. So, it could be used very easily.                                                                               
REPRESENTATIVE  FATE said he was talking cash back,  not utilization                                                            
of those by the  state or any other part of the gas  in state usage.                                                            
MR. BOYKIN responded:                                                                                                           
     The propane and butane that's  produced in Valdez, whether                                                                 
     it's  used instate or  out of state,  the price should  be                                                                 
     the same for it. So, the  economics of the project are not                                                                 
     adversely affected. It just  makes those liquids available                                                                 
     there in Valdez  without damaging the LNG at all,  because                                                                 
     the propane and butane would  not be used to make the LNG.                                                                 
     The plant  is designed that way and everything.  There's a                                                                 
     possibility you could use  some of the ethane, as well. We                                                                 
     really didn't look at ethane;  we basically only looked at                                                                 
     the  propane and butane  and assumed  that the ethane  and                                                                 
     methane  would  be sold  as LNG. But,  the  line has  been                                                                 
     sized  to also  permit  a substantial  amount  of gas  for                                                                 
     instate  usage making ammonia,  perhaps, as well as  power                                                                 
     generation or what have you at very minimal cost.                                                                          
REPRESENTATIVE FATE said  he was speaking in generic terms and other                                                            
presentations  have  a  finite idea  of  what  royalty gas,  for  an                                                            
example, would be in instate  usage. He didn't get that feeling from                                                            
his presentation.  "What was  their requirement  going to be  at the                                                            
LNG plant in Valdez?"                                                                                                           
MR. BOYKIN replied:                                                                                                             
     The  highest  estimates we've  heard  so far  for instate                                                                  
     potential  usage  out  into the  future  is .5  BCF/D.  We                                                                 
     believe we have designed  that so that it can be delivered                                                                 
     with  minimal incremental  cost. The  liquids can also  be                                                                 
     used instate  and it's immaterial  to us whether they  are                                                                 
     used instate  or out of state,  because it doesn't affect                                                                  
     any of our downstream operations.                                                                                          
REPRESENTATIVE  DAVIES asked if he knew what the sale  price was for                                                            
the 7.5 contract in India he referred to.                                                                                       
MR. BOYKIN replied that  he didn't know; he guessed that it was more                                                            
of a commodity  type price  rather than a  basket of oils,  which is                                                            
the historic way  of pricing. He said there was an  excellent report                                                            
on  LNG by  Deutch  Bank prepared  in  May that  gives  a very  good                                                            
background on what's going on in the LNG markets.                                                                               
CHAIRMAN TORGERSON  thanked them for testifying today  and said they                                                            
would take a short break (3:47 - 3:50).                                                                                         
                          PRODUCER GROUPS                                                                                     
CHAIRMAN  TORGERSON said  they would  next have  presentations  from                                                            
producer groups.                                                                                                                
MR. ROBBIE  SCHILHAB, Alaska  Gas Producers  Pipeline, said  Mr. Joe                                                            
Marushack  was  with him  and  he had  addressed  them  at the  last                                                            
meeting in Anchorage with Ken Conrad of BP. He said:                                                                            
     Today,  what I would like to  do is address primarily  the                                                                 
     question that  you sent to us, Senator Torgerson,  to give                                                                 
     an analysis  of the proposed  legislation. With that,  let                                                                 
     me start.  Since July  when we last  met with you there's                                                                  
     one thing I'd like to stay  in the forefront, our team has                                                                 
     continued  to  progress  and  work. We've  got  about  100                                                                 
     company  employees and about  400 contract employees  that                                                                 
     are  working through  the  engineering  and environmental                                                                  
     work we've  talked about. Hopefully,  in the near future,                                                                  
     we'll be wrapping  up a phase of that and be able  to come                                                                 
     back to  you with some information  on that on an interim                                                                  
     Thus  far, our analysis  indicates that  a project is  not                                                                 
     economic. I think we've  heard a lot of information that's                                                                 
     related   to  that  today.  So,  that's  probably   not  a                                                                 
     surprise.  With  that  we  continue  to look  at  ways  to                                                                 
     develop  and create an economic  project. Because we  have                                                                 
     not found an economic project,  obviously we've not made a                                                                 
     decision on route either.                                                                                                  
     Many of  the issues that are  being evaluated by the  team                                                                 
     include  looking at the optimization  around a pipe  size,                                                                 
     around  the pressure, the volume  that we could handle  in                                                                 
     the  pipeline,   construction  techniques,   both  in  the                                                                 
     Beaufort  and in the  terrain going  through the mountain                                                                  
     passes  through Alaska and into  the Yukon area of Canada                                                                  
     and  then,  finally,  the  route  center  lines  which  is                                                                 
     critical for us to have  that so we can continue to finish                                                                 
     our environmental work.  We're still targeting for the end                                                                 
     of   the  year   for   both  the   engineering   and   the                                                                 
     environmental  work  to be concluded  and  at some point,                                                                  
     we'll  then be able to come forward  with maybe some  more                                                                 
     firm decisions.                                                                                                            
     As I mentioned,  my presentation  today will really  focus                                                                 
     on  the proposed  federal  enabling  legislation  that  is                                                                 
     summarized  on the next  page of the  handout. In general                                                                  
     terms,  this proposed  legislation  seeks  to enhance  the                                                                 
     existing  FERC  processes   to provide   a simpler,   more                                                                 
     efficient  process for permitting  an Alaska gas pipeline                                                                  
     project  or projects.  Absent  this legislation,  parties                                                                  
     wanting to  build a pipeline could do so under  the normal                                                                 
     FERC process in 7(c) in the Natural Gas Act.                                                                               
     This  legislation   creates  a  market  driven  expedited                                                                  
     regulatory process for any  viable Alaska pipeline project                                                                 
     or projects.  The project  would still  be subject to  the                                                                 
     FERC regulations  including the fair and reasonable  terms                                                                 
     and provide  for an open access  consistent with the  FERC                                                                 
     rules.   The  project   would  be  subject   to  all   the                                                                 
     environmental  laws and regulations with an environmental                                                                  
     impact  statement completed within  18 months. It creates                                                                  
     the  Office of Federal  Pipeline Director  in the U.S.  in                                                                 
     the White  House to coordinate all the related  government                                                                 
     activities  and  provides  for  timely  judicial  review.                                                                  
     Finally,  in summary, the legislation  helps mitigate  the                                                                 
     uncertainty  in the risk associated  with what could  be a                                                                 
     protracted  regulatory approval  process for a high  risk,                                                                 
     high  cost  project.  That's  really the  essence  of  the                                                                 
     Before I go into the details  of the proposed legislation,                                                                 
     a  commonly asked  question  is how  does this  relate  to                                                                 
     ANGTA.  Let me go through a couple  of points and then  we                                                                 
     can   talk  about   them   later.  First,   the  proposed                                                                  
     legislation  does not alter ANGTA. ANGTA remains  in place                                                                 
     and a  project can proceed under  it. ANGTA is a specific                                                                  
     statute  for a specific  project passed  in the 70s  where                                                                 
     certain  permits were  given to specific  parties, rights                                                                  
     now  held  by Foothills  and  TransCanada.  ANGTA  is  not                                                                 
     something  anyone can file under,  only the holder of  the                                                                 
     permits can use it.                                                                                                        
     I'd also  like to point out that  a lot has changed  since                                                                 
     ANGTA  was  passed  25  years  ago.  Relative  to today's                                                                  
     market,  we have a  deregulated gas  market, which really                                                                  
     has  changed the pipeline  industry. FERC  has moved to  a                                                                 
     market driven climate, technologies  have greatly changed,                                                                 
     the modern  environmental standards  are higher than  they                                                                 
     were 25 years ago, and finally,  ANGTA has obligations and                                                                 
     liabilities  that were  probably appropriate  at the  time                                                                 
     they were  made 25 years ago  that could be a significant                                                                  
     drain or downside  to a modern project. And finally,  it's                                                                 
     also not route neutral.                                                                                                    
     Let me turn  to the next slide. This is an outline  of the                                                                 
     contents of the sections  of the proposed legislation. The                                                                 
     essence  of the bill is really  contained in sections  5 -                                                                 
     9, so I'd like to just go  through those five sections and                                                                 
     give you some of the background behind them.                                                                               
     First, under section 5,  FERC would be required to issue a                                                                 
     certificate  for  the  Alaska  portion of  a  pipeline  to                                                                 
     Alberta  if  three  criteria  are  satisfied.  First,  the                                                                 
     applicant  must have reached  an agreement with a shipper                                                                  
     of Alaska  natural gas for the transportation  of that gas                                                                 
     with  the  intent  that  all  or a  portion  of  that  gas                                                                 
     ultimately  be delivered to the  Lower 48 states. Second,                                                                  
     that FERC  is satisfied with the shipping rates  and terms                                                                 
     and  conditions  including  access.  Third, that  FERC  is                                                                 
     satisfied   that  the   project  will   comply  with   all                                                                 
     applicable  environmental laws. FERC would be  directed to                                                                 
     act  within 18  months of  receiving an  application.  And                                                                 
     finally,  FERC may issue a certificate  for an Alberta  to                                                                 
     the  Lower 48, what  we all B to C,  segment by following                                                                  
     their  normal FERC procedures.  So, in  effect, this  bill                                                                 
     separates  the  two large  segments,  the Prudhoe  Bay  to                                                                 
     Alberta and then Alberta into the Lower 48 markets.                                                                        
     The  next  page   discusses  section  6,  which  requires                                                                  
     separate  environmental impact  statements for the Alaska                                                                  
     to Alberta  segments and for  Alberta to the Lower 48.  It                                                                 
     designates  FERC as the lead agency for both segments.  It                                                                 
     sets the deadline  for completing the draft environmental                                                                  
     impact statement to within  12 months of the filing of the                                                                 
     completed  FERC  certificate  application  and  the  final                                                                 
     environmental   impact  statement  within  18  months.  It                                                                 
     requires consistency between  the scope of the EIS and the                                                                 
     scope  of the  FERC certificate  application.  This  means                                                                 
     that the EIS  would focus FERC's jurisdiction  on the U.S.                                                                 
     portion  and the Canadian's portion  would be reviewed  by                                                                 
     the  Canadian agencies,  which is consistent  with FERC's                                                                  
     purview today.                                                                                                             
     Section 7  on the next page would establish the  Office of                                                                 
     Federal   Pipeline  Director.   The   director  would   be                                                                 
     appointed  by  the President  and  confirmed by  the  U.S.                                                                 
     Senate.  The  responsibilities  of  the  Federal Pipeline                                                                  
     Director  include coordinating  the expeditious discharge                                                                  
     of all  federal agency activities  on Alaska gas projects                                                                  
     including  all environmental and other studies.  This role                                                                 
     includes the  coordination with federal, state,  local and                                                                 
     tribal agencies as well  as coordination with the Canadian                                                                 
     agencies.   This  section  authorizes   the  funding   and                                                                 
     requires regular reporting to the U.S. Congress.                                                                           
     Section 8  directs the federal agencies to expedite  their                                                                 
     handling  of all Alaska gas project  actions. It requires                                                                  
     the federal agencies to  cooperate and coordinate with one                                                                 
     another  to expedite  the  decision making  process  doing                                                                 
     this  through MOU's,  joint documents,  joint meetings  or                                                                 
     the  like. It  prevents federal  agencies  from including                                                                  
     discretionary   terms  in  the  permits  if  the  federal                                                                  
     pipeline director  finds that such terms would  prevent or                                                                 
     impair  the  expeditious  completion  of  an economically                                                                  
     viable and environmentally sound system.                                                                                   
     Finally, under section 9,  challenges to the action of the                                                                 
     federal  agencies  or  officers  under this  act  must  be                                                                 
     brought   forward  within   60  days   of  such  actions.                                                                  
     Challenges would be brought  directly to the D.C. Court of                                                                 
     Appeals,  with the  court  directed to  provide expedited                                                                  
     consideration  of  these.  The judicial  review  would  be                                                                 
     limited  to  claims  of constitutionality   and statutory                                                                  
     authority of FERC.                                                                                                         
     So, in summary the enabling  legislation has five keys: to                                                                 
     provide   for  expedited  review   and  approval  of   the                                                                 
     applications,  it authorizes the appointment of  a federal                                                                 
     director,  expedites the resolution  of disputes, focuses                                                                  
     on the North Slope to Alberta  segment, and specifies FERC                                                                 
     as  the  lead  agency.  The  proposed  legislation  is  an                                                                 
     essential step to the market  based effort to bring Alaska                                                                 
     gas  to consumers  in  a manner  consistent  with today's                                                                  
     environmental  standards.  We see  this legislation  as  a                                                                 
     positive  step to expedite  getting Alaska  gas to market                                                                  
     and we hope  you see it the same way and will  support the                                                                 
     Before  I close, let me address  two other questions  that                                                                 
     you  had in your letter.  First, in  the area of Canadian                                                                  
     legislation, we have not  proposed any legislative changes                                                                 
     in Canada,  nor do we  see a need to  do so. We don't  see                                                                 
     the need  for that forthcoming.  Finally, in the handouts                                                                  
     of the  last meeting, we had  included a commercial  issue                                                                 
     on  gas valuation  for royalty  and taxes and  I think  we                                                                 
     heard  some of the testimony  earlier about that. At  this                                                                 
     time,  we do not  have a  specific proposal  to offer  up.                                                                 
     Again,   what  we're  trying   to  do  is  initiate   some                                                                 
     discussion  around this  so we can  start identifying  the                                                                 
     issues  that would then lead  to specific proposals.  That                                                                 
     concludes my prepared remarks.                                                                                             
MR. MARUSHACK, Alaska Gas Producers Pipeline Team, said it's                                                                    
important to talk about his enabling legislation. He said:                                                                      
     If you recall, the three  companies came together under an                                                                 
     MOU in December.  It took us a while to get there  because                                                                 
     the  companies had  different  views, but  a project  like                                                                 
     this  requires huge  assets and  huge commitments  and  it                                                                 
     made sense  to come together.  In February, I believe,  we                                                                 
     met with both the legislative  hearings and in it we said,                                                                 
     'Here's  where we're going and  here's what our timetable                                                                  
     is; here's what we're trying to do.'                                                                                       
     The  legislature came  back and said,  'What can we do  to                                                                 
     help?' and our statement  at the time says, 'Please let us                                                                 
     do our work. Let us figure  out what we've got. Let me see                                                                 
     if we've  got an economic project.  Please just let  us do                                                                 
     our work.  We'll be back when we need help.' So  far we've                                                                 
     been  on our plan;  we're on  our timeline  to do all  our                                                                 
     engineering  work,  figure  out  if we  have  an economic                                                                  
     project,  make route  decisions  by the end  of the  year.                                                                 
     We're  starting  to get  more and  more engaged  with  the                                                                 
     state  on the fiscal  plans, on the  tax requirements,  on                                                                 
     setting  up what is the wellhead  value as well as trying                                                                  
     to get  more information out  now, now that we're getting                                                                  
     some information, out to groups such as yourself.                                                                          
     Currently,  we have a very tight thin project.  Even as we                                                                 
     work the economics and work  the technology, it's going to                                                                 
     remain  tight. So,  what does  that cause us  to do?  That                                                                 
     means  we  have  to  reduce  the uncertainty.   So,  we're                                                                 
     focusing  on technical aspects  and now we're moving  into                                                                 
     how  do  we  reduce   that  uncertainty.  The  risks   are                                                                 
     associated  with the market and  the costs. The costs,  we                                                                 
     can work  that ourselves; the  market, we have no control                                                                  
     over,  although every  company will do  its own marketing                                                                  
     and  there are  different things  you can  do there.  But,                                                                 
     timing is  also an extremely important issue.  Our plan is                                                                 
     to systematically  address how we reduce risk  and improve                                                                 
     the economics.                                                                                                             
     The first step is to address  timing issues and permitting                                                                 
     issues.  What  we're  trying  to  do  with  this enabling                                                                  
     legislation  is achieve a known  and as rapid response  as                                                                 
     possible.  We are going  to apply and  make a modern  EIS;                                                                 
     there's  no shortcuts;  there's  nothing in  here that  we                                                                 
     think is damaging.  In fact, we think it ought  to be very                                                                 
     much  supported by  Alaska. It  is route  neutral at  this                                                                 
     point  in time.  There is no  question about  that and  we                                                                 
     understand there is an issue  there. However, I do not see                                                                 
     any way that we do a project  eventually without the state                                                                 
     supporting  in  anyway. So  yes,  it's route  neutral;  we                                                                 
     don't  know which way we're going  to be going yet;  we do                                                                 
     not as a team  spending all this money, we don't  know the                                                                 
     technical  aspects well enough of the Beaufort  Sea versus                                                                 
     the South, yet to make that decision.                                                                                      
     What the proposal does,  it works for any pipeline - ours,                                                                 
     others,  Foothills.  It  doesn't affect  ANGTS;  it  could                                                                 
     still  be used by any party that  wanted to use the  ANGTS                                                                 
     proposal.  It does  not affect  state control  of the  gas                                                                 
     resource,  of native rights,  of subsistence, and I  don't                                                                 
     know why I'm  saying this other than I'm getting  feedback                                                                 
     from  our team  that  there's been  all these  claims  out                                                                 
     there.  It  doesn't  affect any  of  those  things,  which                                                                 
     brings  me  quickly  to  the start.  You  asked  what  the                                                                 
     legislature  could do to help us move this project  along.                                                                 
     This is the  first time we asked for help. It's  difficult                                                                 
     to see how any project can  go forward without the state's                                                                 
     support  and without this enabling  legislation. We  think                                                                 
     it's  good  for the  project;  it's  good for  Alaska.  It                                                                 
     improves  our  chances  of success  and  we can  get  this                                                                 
     enabling  legislation  done,  but I  think it's  going  to                                                                 
     require  help from Alaska  to see it  done. With that  I'm                                                                 
     ready to respond to questions.                                                                                             
CHAIRMAN TORGERSON said he appreciated them talking to the                                                                      
     Our  own John Katz  and Robert Loeffler  don't agree  with                                                                 
     your assertion  that this has nothing to do with  enabling                                                                 
     '77  legislation…I  just  read  you  the basically   three                                                                 
     things. One, is it could  be seen as an alternative to the                                                                 
     1976 with  respect to the southern route because  it takes                                                                 
     some  of the  provisions of  that - the  limited judicial                                                                  
     review and some others -  and applies it to any route. The                                                                 
     amendments  would give  the applicant  the control of  the                                                                 
     gas a  significant leg up in  a modified FERC application                                                                  
     process,  which  you're asking  for  that to  happen.  The                                                                 
     other   comment  that  he  made   is  what  the  enabling                                                                  
     amendments  do, for example, with respect to the  northern                                                                 
     route,  would be  to apply  the expedite  process to  that                                                                 
     route and possibly to the  same expedited project would be                                                                 
     applied  under that amendment  to the southern, or in  the                                                                 
     case of Foothills,  using the expedited process  to ANGTA.                                                                 
     So,  clearly the  two sides  don't necessarily  agree  and                                                                 
     we'll  hear from Foothills  next to see  what they say.  I                                                                 
     just  make that as a  statement; if  you want to respond,                                                                  
     you can.                                                                                                                   
MR. MARUSHACK responded:                                                                                                        
     I  think  the first  one;  you're right  on  the southern                                                                  
     route. It  is potentially something different  rather than                                                                 
     being  ANGTA. That's  a clear  statement;  hopefully  that                                                                 
     came out  in here. It works for  both north and south.  On                                                                 
     your  third  statement:  yes, it  would  provide enabling                                                                  
     legislation  for  the  north.  On  the second  statement,                                                                  
     though, I don't buy into  that one. We worked the language                                                                 
     for  several months and  tried to come  up with something                                                                  
     that  we thought  was  palatable to  all the  parties  out                                                                 
     there.  We're not in  love with all  the language. People                                                                  
     think  there's something in there  that precludes someone                                                                  
     else from  being able to use  that. We're open to working                                                                  
     on that. In fact, we expected  that there would be changes                                                                 
     made to  the language. It's just  a matter if I write  it,                                                                 
     it's  going to have  one thing, if you  do, it's going  to                                                                 
     have  another. But, the  provision was  never to give  the                                                                 
     guys who  owned the gas a leg  up other than to say  right                                                                 
     now we're  the guys trying to  do the project. We're  also                                                                 
     trying  to do a pipeline  and we believe  it allows us  to                                                                 
     get some sort of certainty  and clarity in that permitting                                                                 
     and time process,  but if there's something in  there that                                                                 
     looks  like it doesn't work other  pipelines, that wasn't                                                                  
     the intent.                                                                                                                
CHAIRMAN  TORGERSON  said the  committee  had not  had  a chance  to                                                            
debate  the  issue,  but they  plan  on  having  a meeting  in  mid-                                                            
September  on the  legislation.  "…We  hope to  work  that with  the                                                            
administration  so that we'll have a unified voice  when we go back,                                                            
if Senator  Murkowski is successful  in getting hearings  before the                                                            
committee,  but we haven't had a chance,  yet. What you'll  hear now                                                            
will be individual remarks on it."                                                                                              
REPRESENTATIVE  FATE had two questions based on things  he saw under                                                            
current analysis,  which indicates  the project is not economic.  It                                                            
says  that  they  are  still  targeting  the end  of  the  year  for                                                            
engineering studies. He  asked when they first testified, they had a                                                            
project that  cost $10 -  $12 billion and  then "all of a  sudden it                                                            
goes up to $15 - $20 billion  without the engineering completion and                                                            
now I see here that it  is not economic, at least at this point your                                                            
analysis says that. How  did we ever arrive at these figures at this                                                            
late date?"                                                                                                                     
MR. SCHILHAB answered:                                                                                                          
     Let me  address that because  the danger there is numbers                                                                  
     and we  heard it earlier today.  Numbers come out and  you                                                                 
     really have to understand  what's in the numbers. Earlier,                                                                 
     when we talked a $10 - $12  billion project, those numbers                                                                 
     weren't  including a  gas treatment plant,  NGL plant;  it                                                                 
     may not have  even included some of the lines  all the way                                                                 
     into the  Lower 48 and some of  the development costs.  We                                                                 
     talk about  a higher cost and it really includes  a ringed                                                                 
     fence  around the  entire  project. Unfortunately,  as  we                                                                 
     start  talking about these other  numbers, we really  need                                                                 
     to be explaining  that these aren't any different  because                                                                 
     we really are working off  the preliminary numbers that we                                                                 
     were  sitting  down and  talking  with  you in  the  April                                                                 
     timeframe.   We're  starting  to  refine  some   of  those                                                                 
     numbers,  but a  lot of that  is around  adding or taking                                                                  
     away compressor  stations, doing some modification  to the                                                                 
     gas treating plant or getting  a little bit firmer numbers                                                                 
     through the engineering.  Those numbers still haven't been                                                                 
     modified.  Those are the numbers that we really  feel like                                                                 
     that  by the end  of the year  we will  have modified  and                                                                 
     then  be able  to  look and  make  a decision  of whether                                                                  
     there's an economic project.  In today's terms it's really                                                                 
     not too much different than  it was in the spring when we,                                                                 
     again,  didn't have an economic  project that we felt  was                                                                 
     robust and we could go out  and start sanctioning and move                                                                 
     forward. I would think that  by the end of year before the                                                                 
     end  of the year, we're  going to be  in that position  of                                                                 
     where we can do that.                                                                                                      
REPRESENTATIVE FATE said he hope as they refined their figures that                                                             
it would lower and become economic.                                                                                             
MR. MARUSCHACK said that was their hope, too.                                                                                   
     Just to be clear. The reason  that Ken mentioned the $15 -                                                                 
     $20  million last  time is  because people  are out  there                                                                 
     with all sorts  of numbers and we talk that number,  we're                                                                 
     talking  about the gas treatment  plant, the pipeline  all                                                                 
     the way  to the Alaskan border,  a brand new pipeline  all                                                                 
     the way to Chicago and the  NGL system. So, that's a fully                                                                 
     integrated  project  that has  all the  pieces  in it  and                                                                 
     there's  a lot of things  we're trying  to do in order  to                                                                 
     make that  more economic. One  of the things we can  do is                                                                 
     address  timing  uncertainties  and  that's  part  of  the                                                                 
     legislative enabling action that we're looking for.                                                                        
REPRESENTATIVE FATE said he had one more question:                                                                              
     The next  page over says that  enabling legislation  would                                                                 
     be  market driven,  expedited regulatory  process for  any                                                                 
     viable  project, then under that  it says it's subject  to                                                                 
     FERC regulation,  fair and reasonable terms, open  access,                                                                 
     which leads me to another  question. If one of these third                                                                 
     parties,  and  we've  mentioned  Enron  and  Williams  and                                                                 
     Foothills.  If one of these third parties came  to you and                                                                 
     said  I'm ready to  buy your  gas and I'll  buy it at  the                                                                 
     wellhead  that gives  you a heck  of a  profit. Would  you                                                                 
     sell that gas?                                                                                                             
MR.  MARUSHACK  replied,  "We do  things  like  that all  the  time,                                                            
Representative  Fate. Most  of our gas is  sold at the wellhead,  so                                                            
that would not be unusual."                                                                                                     
REPRESETNATIVE  FATE said that was  a hypothetical answer  and asked                                                            
if  he wanted  to build  a  pipeline and  own  the gas  and build  a                                                            
pipeline or would he sell to some other project group?                                                                          
MR. SCHILHAB answered:                                                                                                          
     What you're  getting into is  the individual companies  as                                                                 
     opposed to  a joint project team. A joint project  team is                                                                 
     together to  try to come up with the lowest cost  solution                                                                 
     to get gas  to market so that we can sell it.  If somebody                                                                 
     came  in with an alternative  and had  a better mousetrap                                                                  
     that would  be lower than something we have on  paper that                                                                 
     we're  looking at, I think the  answer is yes. As long  as                                                                 
     you felt  like they would control  it, they were going  to                                                                 
     maintain that at that lower  cost and they had the backing                                                                 
     to ensure  a high degree of confidence  that it was  going                                                                 
     to  get built.  If somebody  came  to you that  you  never                                                                 
     heard of,  that you don't know whether or not  they really                                                                 
     understand  the pipeline  business  at all  and said  they                                                                 
     were  willing to buy  your gas, you  would probably  think                                                                 
     twice.  Because what  you're trying to  do is market  that                                                                 
     gas at  the best price, lowest  cost to market so that  we                                                                 
     can   compete  and   compete  against   all  these   other                                                                 
      alternatives that are going to be in the market place.                                                                    
REPRESENTATIVE  FATE said the parties  he was thinking of  certainly                                                            
qualify under the criteria he presented.                                                                                        
CHAIRMAN TORGERSON asked  if anyone had made an offer to buy the gas                                                            
on the North Slope, like Duke or Enron?                                                                                         
MR. SHCILHAB  answered  that to  his knowledge  no one  has made  an                                                            
offer to Exxon Mobil.                                                                                                           
MR. MARSHACK said:                                                                                                              
     A proposal  is a difficult thing  to say. Let me tell  you                                                                 
     what  has happened  and then  you can interpret  that.  We                                                                 
     talk  with marketers  all the  time. We talk  to the  ones                                                                 
     you're  talking  about, we  talk to  other ones.  We  have                                                                 
     talked  about his project, too.  We have talked about  the                                                                 
     possibility  of long  term fixed, we've  talked about  the                                                                 
     possibility  of spot, we've talked about buying  it at the                                                                 
     wellhead, down in the Chicago,  all these other places. We                                                                 
     have  not done any firm  deals on it,  yet, and there's  a                                                                 
     whole  myriad of  reasons for  that. It  really gets  into                                                                 
     anybody  has got  the same  dilemma that  we've got  right                                                                 
     now. But we're exploring  all those sorts of things. Do we                                                                 
     have a bonafide  offer on the table, but could  you sign a                                                                 
     contract? No.                                                                                                              
REPRESENTATIVE  OGAN said he wanted to talk about  the congressional                                                            
statement of purpose  in section 3. "It looks to me  like subsection                                                            
(a)  they are  relying on  competitive  market forces  to  determine                                                            
which  set  system  or systems  can  be  built and  operated  in  an                                                            
economically viable manner."                                                                                                    
He  said  it sounds  to  him  like  an  end  run around  a  law  the                                                            
legislature passed  last year saying the only thing  that's legal is                                                            
an Alaska Highway route. He asked if he was wrong.                                                                              
MR. SCHILHAB answered:                                                                                                          
     I don't  think the intent was  to fly back in the face  of                                                                 
     the state.  The intent was to try to get legislation  that                                                                 
     would allow  a project to go forward. That's through  this                                                                 
     legislation  or to have  just an open  market driven  type                                                                 
     process  that would  allow a  project that's  economic  to                                                                 
     move  forward and compete  with other  projects. If  other                                                                 
     projects  want to move  forward, there's  competition  and                                                                 
     the  one that's going  to be the strongest  will probably                                                                  
     get built.                                                                                                                 
REPRESENTATIVE  OGAN said if  the northern  route is the one  that's                                                            
economic,  and it's in the  federal law that  this is what  happens,                                                            
that could  supercede state  law and they  could build the  northern                                                            
route. He asked if that's what this legislation would do.                                                                       
MR. SCHILHAB responded:                                                                                                         
     As I mentioned  earlier, before a project is going  to get                                                                 
     built, there's  going to have to be full support  from the                                                                 
     state  that they  would want  the project  to go forward.                                                                  
     That  would  be  a  northern  route,  a  southern  route,                                                                  
     whatever  that project is. At  that time, they would  have                                                                 
     to  address legislation  or other  rules  that are there.                                                                  
     There will  be other things we'll have to work  out. We'll                                                                 
     have to change the field rules.                                                                                            
MR. MARUSCHACK interrupted:                                                                                                     
     Representative  Ogan, the intent  was not to specifically                                                                  
     find  some  way  of getting  around  the  state  164.  The                                                                 
      procedure is route neutral right now. That was not our                                                                    
     primary…We weren't trying to take a hammer to 164.                                                                         
REPRESENTATIVE  OGAN said he was confused  and asked if the  federal                                                            
legislation, as written, enabled them to build a northern route.                                                                
MR. SCHILHAB said, "It doesn't preclude it."                                                                                    
TAPE 01-16, SIDE A                                                                                                            
[THE FOLLOWING  14 MINUTES OF TRANSCRIPT  WERE DONE MOSTLY  WITH THE                                                            
HELP OF NOTES, BECAUSE OF RECORDING DIFFICULTIES]                                                                               
REPRESENTATIVE  OGAN  said he  was glad  to hear  that, because  the                                                            
state doesn't support the northern route.                                                                                       
CHAIRMAN TORGERSON said  he wasn't sure there wasn't another barrier                                                            
with Representative  Young's  amendment.  "You're not  going to  get                                                            
them both in the same bill."                                                                                                    
SENATOR KELLY asked what their assumptions were for pricing.                                                                    
MR. SCHILHAB  replied that it wasn't  the same as CERA's  testimony.                                                            
They used an interest free number.                                                                                              
CHAIRMAN TOGERSON asked what the timeline was on these projects.                                                                
MR. SCHILHAB replied that  they are still committed to finishing the                                                            
interior and environmental studies by the end of the year.                                                                      
MR. MARUSHACK  replied  that to do  the work they  needed to  do and                                                            
have an open season  so people could try to respond  to it, and then                                                            
do a  filing pushed  them back three  months. "There  will not  be a                                                            
hard yes  or no on  this thing.  I hope that  we will see  continued                                                            
progress to try to get this thing on line…decade."                                                                              
REPRESENTATIVE  OGAN said  their legislation  seems to preclude  any                                                            
LNG project  that specifically  addressed  gas to  the Lower  48 and                                                            
asked if they would consider adding LNG to it.                                                                                  
MR. MARUSHACK said he didn't think it was necessary…                                                                            
There were continued questions  from Representative Davies and Ogan,                                                            
with answers from Mr. Schilhab and Marushack.                                                                                   
[TAPE RESUMES]                                                                                                                  
                     FOOTHILLS PIPE LINES LTD.                                                                                
MR. ELLWOOD, Vice President, Engineering and Operations, Foothills                                                              
Pipe Lines Ltd., said:                                                                                                          
     FERC had no preference for  receiving an application under                                                                 
     NGA or under  ANGTA and while that may be so,  I think the                                                                 
     truth  is that there is no provision  in ANGTA for anyone                                                                  
     to  apply for  a  certificate of  public  convenience  and                                                                 
     necessity.  That statute is specific to the ANGTS  project                                                                 
     and can  be used in the same  way the Natural Gas Act  can                                                                 
     be used.                                                                                                                   
     Turning, then, to the proposed  legislation, we have had a                                                                 
     look  at this  and we  have reached  the  conclusion  that                                                                 
     legislation of this type  is required. It is not needed to                                                                 
     provide  the legal  and regulatory  framework to expedite                                                                  
     the construction  and operation of an Alaskan  natural gas                                                                 
     pipeline.   That  legal   and  regulatory   authority   or                                                                 
     framework  already   exists  in  the Alaska   Natural  Gas                                                                 
     Transportation  Act  (ANGTA)  and  the proposed  producer                                                                  
     legislation  in our view contradicts  the very purpose  of                                                                 
     ANGTA.  If enacted, it's our  view that it would create  a                                                                 
     very   chaotic  and  confusing   parallel  procedure   for                                                                 
     authorization  of  a natural  gas  pipeline  from Alaska.                                                                  
     Clearing  up that very  confusion and  chaos was the  very                                                                 
     purpose of ANGTA in 1977.                                                                                                  
     We   believe  that   the   enactment  of   that  producer                                                                  
     legislation   as  drafted  would  be  justified   only  if                                                                 
     congress  desired  to accomplish  two objectives.  One  of                                                                 
     those  would  be  if  congress  desires   to revisit   the                                                                 
     previous careful and deliberative  selection of the Alaska                                                                 
     Highway route  as the most economical and environmentally                                                                  
     sound  route   and  if  congress  desired  to  allow   for                                                                 
     consideration of other routes  including the over-the-top.                                                                 
     The second provision would  be that this might be the kind                                                                 
     of legislation one would  enact if you wanted to authorize                                                                 
     a  filing of  new producer  sanctioned  applications  that                                                                 
     could  exclude any independent  pipeline participation  in                                                                 
     the ownership  and the governance of the Alaska  pipeline.                                                                 
     Our evidence to support  those conclusions is found in the                                                                 
     legislation  itself, in that each of the major  provisions                                                                 
     designed  to expedite  construction and  operation of  the                                                                 
     pipeline is copied almost  directly from the existing law,                                                                 
     the ANGTA.                                                                                                                 
     As you are  aware, ANGTA engaged the regulatory  expertise                                                                 
     of the federal  agencies, the international expertise  and                                                                 
     jurisdiction  of  the president  and the  public decision                                                                  
     making process of congress  before selecting the route and                                                                 
     the  project to  deliver Alaska  gas to the  Lower 48.  In                                                                 
     contrast,   this  legislation   would   appear  to   place                                                                 
     responsibility  for those critical judgments in  the hands                                                                 
     of  the North  Slope  gas  producers.  In our  view,  this                                                                 
     raises  profound  public   policy  issues,  not  only  for                                                                 
     congress,  but  also for  natural  gas consumers  and  for                                                                 
     Finally,  we would note that  the proposed legislation  is                                                                 
     not  needed  because the  parties  already  authorized  to                                                                 
     construct    and   operate   the   Alaska   Natural    Gas                                                                 
     Transportation   System,  that is  ourselves,  Foothills,                                                                  
     TransCanada and West Coast,  we are ready willing and able                                                                 
     to build that pipeline as  soon as the producers decide to                                                                 
     market their  gas. In this regard, Foothills continues  to                                                                 
     explore  avenues  to establish  a collaborative  dialogue                                                                  
     with  the ANS producer  group and we  urge this committee                                                                  
     and through  it the legislature to publicly encourage  all                                                                 
     stake  holders  to  initiate  some  real and  substantive                                                                  
     collaboration   and  discussion  regarding  the  proposed                                                                  
     Alaska Natural Gas Pipeline.                                                                                               
     One  more issue that  I would  like to comment  on here  -                                                                 
     there's   been  a  suggestion  from  time  to  time   that                                                                 
     proceeding  under ANGTA is some how a way to shortcut  the                                                                 
     environmental process or  circumvent it or fail to proceed                                                                 
     in an environmentally  sound manner. I want to  assure you                                                                 
     that in our view that is absolutely false.                                                                                 
     Proceeding  under ANGTA  will provide  the same degree  of                                                                 
     environmental  protection as under any other statute.  The                                                                 
     laws of  the country are the  laws and we will obey  them;                                                                 
     we will meet or exceed all standards.                                                                                      
     I  would like  to  say a  few words  about  the withdrawn                                                                  
     partner  issue. I'll  be very,  very brief  here. We  just                                                                 
     want to inform  the committee that the remaining  partners                                                                 
     in  the Alaska  partnership -  the ANNGTC  (Foothills  and                                                                 
     TransCanada  Pipe Lines) - we are making progress  towards                                                                 
     eliminating  any potential future contingent liability  to                                                                 
     the  withdrawn partners.  Discussions  with the withdrawn                                                                  
     partners have commenced  and although the specifics of the                                                                 
     matter  is being discussed,  it must  remain confidential                                                                  
     until  resolution  is achieved.  We do fully  expect  that                                                                 
     these discussions will lead  to removal of issues that are                                                                 
     perceived to impede implementation of this project.                                                                        
     Finally,  I would like to say  a few words about where  we                                                                 
     stand relative to the Mackenzie  Valley project and how we                                                                 
     see  both  Alaska  gas  and  Mackenzie   Delta  gas  being                                                                 
     developed.  Firstly, we are strongly of the view  that the                                                                 
     market  can absorb  production  from both  Alaska and  the                                                                 
     Mackenzie  Delta.   We have  publicly   advocated  a  two-                                                                 
     pipeline  approach.   In  our  view  it  is important   to                                                                 
     acknowledge   that  the  long-standing   concern  of   the                                                                 
     government   of  Canada   about  possible   stranding   of                                                                 
     Mackenzie  Delta  reserves.  That  is  an  issue  for  our                                                                 
     government; we think it  is a legitimate issue for them to                                                                 
     consider and we are trying  to address their concern. From                                                                 
     a historical  perspective,  that's the  same concern  that                                                                 
     existed when ANGTA was passed.  In the context of a recent                                                                 
     question  on how to expedite  that Mackenzie development,                                                                  
     shareholders  of Foothills have suggested to the  Canadian                                                                 
     officials  that  they focus  on  a stand  alone Mackenzie                                                                  
     Delta  project, separate  it from any  combining or  over-                                                                 
     the-top route. Similarly,  we would urge Alaskans to focus                                                                 
     on  committing  to get the  Alaska  gas to  market and  we                                                                 
     believe  that  the  way  forward here  is  for  Alaska  to                                                                 
     endorse  ANGTA and the  ANGTA process  and openly support                                                                  
     the Alaska  Natural Gas Transportation System.  That's the                                                                 
     end of my non-controversial remarks.                                                                                       
CHAIRMAN TORGERSON said, "You kept it pretty clean. I have to give                                                              
you credit."                                                                                                                    
REPRESENTATIVE DAVIES said the previous group testified that they                                                               
had discussions with a number of independent pipeliners and asked                                                               
if that included Foothills.                                                                                                     
MR. ELLWOOD answered yes, they are talking with the North Slope                                                                 
producer group and they intend to continue that.                                                                                
REPRESENTATIVE DAVIES said they also heard from them that there is                                                              
no bonafide offer on the table that one could sign tomorrow if the                                                              
sanctions were given and asked why that was the case.                                                                           
MR. ELLWOOD replied:                                                                                                            
     I believe  that discussion was in the context  of an offer                                                                 
     to purchase their gas and  that's not our business. We are                                                                 
     transporters of gas, not  purchasers. So, we would not put                                                                 
     an offer  forward to  buy gas. Marketers  will do that  or                                                                 
     end users  might do that. But we are the trucking  company                                                                 
     of the  gas business and we don't  own the goods that  are                                                                 
     in our truck.                                                                                                              
     To  put  forward  an offer,  to  jointly  develop  such  a                                                                 
     project  is a  long and  complicated  process  and is  not                                                                 
     something that we could  envision putting forward an offer                                                                 
     that they  could simply sign. We need to understand  their                                                                 
     objectives,  where the markets are and all these  matters,                                                                 
     which are a matter of some  lengthy discussion between the                                                                 
     parties  before a commercial  deal could be written  up on                                                                 
REPRESENTATIVE  DAVIES  asked,  "But if  you're a  trucking  outfit,                                                            
can't you give them your tariff?"                                                                                               
MR. ELLWOOD answered:                                                                                                           
     The tariff is one thing,  but the toll when you don't know                                                                 
     how  far you  want  the goods  to  travel is  a different                                                                  
     matter, or what volume of  goods. All of those matters are                                                                 
     of  crucial importance,  of course, to  the producers  and                                                                 
     that just needs to be worked out over some time.                                                                           
REPRESENTATIVE  DAVIES asked if they were basically  a by-stander in                                                            
the process?                                                                                                                    
MR. ELLWOOD answered:                                                                                                           
     No,  I don't  think  that  we're a  by-stander.  We're  an                                                                 
     active  participant here.  We are in  discussion with  the                                                                 
     producer  group.  We are  in  discussions  with marketing                                                                  
     companies,  with  end  users, to  see  where and  how  the                                                                 
     various   parties  could  come  together  and  what   that                                                                 
     commercial arrangement might look like.                                                                                    
CHAIRMAN TORGERSON said  he wanted Mr. Ellwood to talk a little more                                                            
about  the Mackenzie  Delta  reserves,  because they  are  competing                                                            
projects and he didn't  disagree with his assertion that they should                                                            
be looking  at two, but he is in the  camp that the first  one ready                                                            
to go is going to be the  winner and the other may be stranded for a                                                            
few years.                                                                                                                      
     Clearly,  you said from the historical  perspective,  they                                                                 
     recognized that in the '77  law when they put the Dempster                                                                 
     lateral in  as part of that, but now we're suggesting  not                                                                 
     to  do that  and have  two stand  alone  projects. What's                                                                  
     their timeline for moving  Mackenzie Delta versus what you                                                                 
     think you think our timeline is in Alaska?                                                                                 
MR. ELLWOOD replied:                                                                                                            
     I only know what we read  in the papers about the timeline                                                                 
     for the Delta  producers and that's quite vague.  They are                                                                 
     in a similar  position as producers are here.  They have a                                                                 
     study  group; they are  looking at what  the economics  of                                                                 
     the  project might  be. Our  shareholders  have their  own                                                                 
     view of that matter and  I have seen some of their numbers                                                                 
     that suggest  that it would be  economic. With respect  to                                                                 
     the stranding issue and  which one goes first, most of the                                                                 
     discussion  that I have heard to date would center  around                                                                 
     a flow of  gas from the Mackenzie Delta between  800 MCF/D                                                                 
     and 1.5  BCF/D, which is a very  small quantity to absorb                                                                  
     in the market. I think we  heard from CERA today that they                                                                 
     are  expecting the  market to  grow about  1.5 BCF/D.  So,                                                                 
     that's  half  enough  to perhaps  fit  the growth  in  the                                                                 
     market next year and, in  my view, would not strand Alaska                                                                 
     gas  at all. Likewise,  I think the  market growth in  the                                                                 
     timeframe in which one can  do these fairly large projects                                                                 
     is  such that  if  Alaska gas  were  to reach  the market                                                                  
     first,  the  Mackenzie Delta  gas  would not  be stranded                                                                  
     either  by the time  we could get that  project to go,  by                                                                 
     "we"  I mean  the industry,  there  would be  room in  the                                                                 
     market for it as well.                                                                                                     
CHAIRMAN TORGERSON commented that he had mentioned to some of his                                                               
staff that the withdrawn partners is a bigger issue than he thinks                                                              
from what he heard back in congress.                                                                                            
     Foothills  has a $4  billion price tag  on it before  they                                                                 
     even start  throwing dirt around. So, it is a  major issue                                                                 
     and  they  all  seem  to  be  vaguely  familiar  with  the                                                                 
     withdrawn partners and the  debt that has accumulated over                                                                 
     a   period  of  time.   Somebody  suggested   that's   the                                                                 
     conspiracy  theory going with  the producers; they've  run                                                                 
     around  flopping this rumor all  over the capital, but  at                                                                 
     any degree,  it's all over and  you need to, I believe  at                                                                 
     least,  get this thing settled  so you, once and for  all,                                                                 
     come up with  a number of what it's worth or where  you're                                                                 
     starting from or what you  have to offer for sale, besides                                                                 
     the $4 billion.                                                                                                            
     The other  one is, and I think  you heard the remark  that                                                                 
     the committee  is going to be looking at this  legislation                                                                 
     soon  and I'd like to  request that you  give us a little                                                                  
     bit  more detail,  section by  section, if  you would,  on                                                                 
     your remarks about if it's  an identical section to ANGTA,                                                                 
     if you would reference that  section and just some general                                                                 
     remarks about what you think  those particular sections do                                                                 
     and I hope to get that from  the producers and then sit us                                                                 
     all  down and work through  this a little  bit at a  time.                                                                 
     We'll  be dealing section  by section  when we go through                                                                  
     this and word by word, more than likely…                                                                                   
REPRESENTATIVE  DAVIES  said they  also  heard that  the  producers'                                                            
legislation  could  be passed  and  leave  ANGTA entirely  in  tact.                                                            
"Assuming that were to  happen and that a project were to go forward                                                            
under  that new  legislation,  it seems  that  you would  be in  the                                                            
position where  a considerable grant of privilege  will have gone by                                                            
you. Do we then get into protracted court battles?"                                                                             
MR. ELLWOOD replied, "That's one possible outcome, yes."                                                                        
CHAIRMAN TORGERSON  asked if they had similar issues  surfacing with                                                            
the NEB (National  Energy Board) that we do with FERC  on the treaty                                                            
or on  any  of the  access questions  or things  that  we have  been                                                            
wrestling with our regulatory commissions.                                                                                      
MR. ELLWOOD answered:                                                                                                           
     To my knowledge,  Mr. Chairman, our National Energy  Board                                                                 
     has not  really indicated whether  they believe that  they                                                                 
     could hear an application  under the National Energy Board                                                                 
     Act as opposed  to the Northern Pipeline Act.  I know that                                                                 
     they are asking  themselves that question and  it may come                                                                 
     forward  as  it has  with the  FERC.  I don't  know  their                                                                 
     answer at this stage.                                                                                                      
REPRESENTATIVE  FATE  asked if  he had  any  idea of  what state  of                                                            
development  the Mackenzie  field is and off  shore of that?  He has                                                            
heard that  they are not  ready to transport  that gas out,  because                                                            
they aren't in the state of development that Prudhoe Bay is.                                                                    
MR. ELLWOOD replied:                                                                                                            
     That's clearly  the case. There has been some  exploration                                                                 
     done in  the Mackenzie Delta.  There was one well drilled                                                                  
     this  winter. Prior to  that, all of  the exploration  had                                                                 
     been done 15 - 25 years  ago, somewhere in that timeframe.                                                                 
     There is some  uncertainty and different numbers  floating                                                                 
     around as  to what is the size of the reserve  - somewhere                                                                 
     between  6 - 9  TCF as opposed  to 35 TCF  proven for  the                                                                 
     North Slope area. There  is one small bit of production in                                                                 
     the Mackenzie  Delta right now. There is one well  that is                                                                 
     in production  and is delivering gas through a  very small                                                                 
     pipeline a few miles into  the town of Inuvik, but there's                                                                 
     no  real production  facilities  of the  scale that  would                                                                 
     support a pipeline as there  is on the North Slope. So, in                                                                 
     terms  of the infrastructure  that will  be needed there,                                                                  
        the North Slope is clearly more developed than the                                                                      
     Mackenzie is right now.                                                                                                    
REPRESENTATIVE FATE said:  "As a comment for those of you who hadn't                                                            
seen his picture, he makes a very good director of the FBI."                                                                    
CHAIRMAN  TORGERSON  thanked   Mr.  Ellwood  for  joining  them  and                                                            
announced  they  would  take  a  short  break   before  calling  the                                                            
committee  meeting to order  in which they  would cover their  brief                                                            
               JOINT GAS PIPELINES COMMITTEE MEETING                                                                          
CHAIRMAN TORGERSON  called the Joint  Pipeline Committee  meeting to                                                            
order. The first item is  a discussion of the official protocol trip                                                            
that is  next Monday  and to  get that information  disseminated  to                                                            
everyone. The  rest is to set dates for the next two  meetings - one                                                            
for the draft  sponsors' legislation and the other  one for the next                                                            
regular meeting and then general discussion on the schedule.                                                                    
MS. RONDA THOMPSON, Special  Assistant on International Trade Policy                                                            
for  the  Alaska  Legislature,   asked  them  to  look  through  the                                                            
itinerary she  gave them for the Western  Canadian Protocol  Mission                                                            
on August 20 - 25, 2001.                                                                                                        
CHAIRMAN TORGERSON  thanked her for  all her work and discussed  the                                                            
committee's agenda.                                                                                                             
RERPESENTATIVE  DAVIES  said there  was a letter  from Commissioner                                                             
Pourchot and  asked what was the process  for coordinating  with the                                                            
Governor's Office for a united front on this issue.                                                                             
CHAIRMAN TORGERSON  said the Policy Council is meeting  in Anchorage                                                            
on August 17.  He had asked Foothills,  the producers and  John Katz                                                            
for a side  by side sectional analysis  so they could see  where the                                                            
real  conflicts are  and, at  this point,  will have  to invite  the                                                            
administration  to be  there. John  Katz and Bob  Loeffler would  be                                                            
REPRESENTATIVE DAVIES said  it would be helpful to have the Governor                                                            
designate someone to be at that meeting.                                                                                        
CHAIRMAN  TORGERSON  said he  thought  it would  be good  to have  a                                                            
meeting on the  same day as the Council since he thought  they would                                                            
be  taking  up  the   same  issue,  although  their  functions   are                                                            
different.  He said that he firmly  believes Alaska needs  a unified                                                            
                         PUBLIC TESTIMONY                                                                                     
MS.  KARA  MORIARTY,   President  and  CEO,  Fairbanks   Chamber  of                                                            
Commerce,   thanked  them  for  having   their  second  meeting   in                                                            
Fairbanks. She said:                                                                                                            
     Commercialization   of our  natural  gas  resources  is  a                                                                 
     massive  undertaking. As  we have heard  for the past  two                                                                 
     days  and as we  heard in  Anchorage as  I attended  those                                                                 
     meetings,  this project is very  much a work in progress.                                                                  
     Our chamber  put together a gas line committee  about nine                                                                 
     months   ago  to  begin  the   process  of  learning   and                                                                 
     understanding  the dynamics  involved  with this project.                                                                  
     Obviously,  it's a  lot for  community volunteers  to  get                                                                 
     their  arms  around,  but  our  goal  is  to  be  able  to                                                                 
     communicate  with all the parties involved including  your                                                                 
     committee  to  be  able to  make  sure the  needs  of  our                                                                 
     community  and state  are met.  As the  committee has  met                                                                 
     over the past  several months, we have definitely  learned                                                                 
     two things.  One, we have lots more to learn and  two, all                                                                 
     Alaskans need to work together on this project.                                                                            
     The  chamber  sees  much potential  and  benefit  for  our                                                                 
     community  with the  development of this  resource and  we                                                                 
     just  wanted to  stress  publicly and  on the  record  our                                                                 
     willingness  to work together with all involved  that this                                                                 
     project comes together…                                                                                                    
MR. GORDIE LEWIS, Golden  Valley Electric Association, said they are                                                            
a cooperative  serving  over 90,000  interior  Alaskan citizens  and                                                            
they  fully appreciate  the  value  and importance  of  open  public                                                            
participation.  He assured the committee that they,  "stand ready to                                                            
provide the power  necessary for any potential future  opportunities                                                            
throughout  the construction, operation  and maintenance  life cycle                                                            
of this most important and far reaching initiative."                                                                            
He said further that:                                                                                                           
     We're convinced that this  project must be integrated into                                                                 
     a  state sponsored  50-year long  range  energy plan  that                                                                 
     creates  the vision and goals  for addressing the state's                                                                  
     energy  needs and use  of our resources  for the next  50-                                                                 
     years. Such a plan should  at a minimum should direct free                                                                 
     and open access to gas as  stipulated in 18 CFR, governing                                                                 
     U.S.  gas  transmission   infrastructure,  create  common                                                                  
     carrier  status  under  a  State  Certificate   of Public                                                                  
     Convenience,  insure  access to  state gas  royalties  in-                                                                 
     kind,  which  provides  a real  and  lasting  price  point                                                                 
     benefit for  state residents, develop a price  for royalty                                                                 
     gas used in  state and designate royalty gas proceeds  for                                                                 
     the creation  of a state energy fund charter that  insures                                                                 
     future development of renewable energy supplies.                                                                           
     Fairbanks  already has the infrastructure and  trained and                                                                 
     ready  workforce needed for such  an undertaking and  such                                                                 
     routing  in turn  makes the  possible establishment  of  a                                                                 
     Fairbanks-based  gas hub  a reality.  This hub with  ready                                                                 
     and easy  access to cost competitive  fuel can serve  as a                                                                 
     cornerstone  of  renewed  economic  development  creating                                                                  
     opportunities for new industrial,  commercial and personal                                                                 
     value  adding  enterprises.  Ready  access  to  this  most                                                                 
     efficient  and cleaner  burning  fuel, when  added to  our                                                                 
     current   energy  mix  at  Golden  Valley  will   help  us                                                                 
     demonstrate responsible,  responsive leadership in meeting                                                                 
     increasingly   stringent  air   quality  standards   while                                                                 
     supporting  an on-going responsibility of serving  today's                                                                 
     citizenry while meeting  the future needs of the interior.                                                                 
     Your  crucial and timely  decisions will  ensure that  all                                                                 
     involved  are remembered as visionaries  and leaders  that                                                                 
     responded  to this moment  in history.  With business  and                                                                 
     government  working together,  we can develop a plan  that                                                                 
     results  in a  more robust  and diversified  economy  that                                                                 
     insures  current  and future  generations  the ability  to                                                                 
     continue to live and work in our great land.                                                                               
MR. PAUL METZ, Department of Mining and Geological Engineering,                                                                 
UAF, said that he was testifying on his own behalf. He said:                                                                    
     The economic  analysis of mineral  and energy projects  is                                                                 
     very sensitive to the quantities  of the resources and the                                                                 
     commodity  prices,  as you all  know. We're  dealing  here                                                                 
     with   an  energy  resource   that  there's  considerable                                                                  
     substitutability  for,  and therefore,  the prediction  of                                                                 
     prices  over  the  expected  life  of this  project  is  a                                                                 
     monumental  task. We've  seen how volatile  the prices  of                                                                 
     energy  commodities  have  been  over the  last  year  and                                                                 
     projecting that over a 20-year  life makes it a very great                                                                 
     challenging  to the engineers and economists dealing  with                                                                 
     this problem.                                                                                                              
     As important  as price is the quantity of the  commodities                                                                 
     and  we've heard a  lot about  the 30 -  35 TCF of proven                                                                  
     reserves  on  the Arctic  Slope  of Alaska.  These proven                                                                  
     reserves  have been  found without  the  expenditure of  a                                                                 
     dollar  of   exploration  dollars  for  gas.   This  is  a                                                                 
     byproduct  of oil  exploration  and development.  I  think                                                                 
     this is very  significant. What we haven't heard  over the                                                                 
     last  couple of the  days are the  producer's projections                                                                  
     that there's  an additional 60  - 65 TCF to be discovered                                                                  
     once there is an economic  incentive to do exploration for                                                                 
     gas on the  North Slope. This brings the sum total  to 100                                                                 
     TCF, plus or minus.                                                                                                        
     Again,  what we  haven't heard  in either  the discussion                                                                  
     today  or  in the  debate  with  respect  to ANWR  is  the                                                                 
     quantity of  gas that the U.S. Geological Survey  estimate                                                                 
     in  the coastal  plain of  ANWR. This  again  is based  on                                                                 
     limited  drilling data and limited  seismic work that  has                                                                 
     been  done   many  years  ago.  Again,  the  best  median                                                                  
     estimates  of  both  the  U.S.G.S.  and State  Geological                                                                  
     Survey are  60 - 65 TCF. This brings the sum total  of the                                                                 
     resource  on  the  Slope  to  165  -  170  TCF,  which  is                                                                 
     equivalent to all the natural  gas in the United States in                                                                 
     the  form of proven  reserves. I think  this is really  an                                                                 
     important  issue,   both with  respect   to the  economic                                                                  
     analysis  of  the  project, the  various  routes,  and  of                                                                 
     course  with  respect  to the  decisions  on  royalty  and                                                                 
     pricing  issues, but  also with respect  to the debate  on                                                                 
     the  opening  of ANWR  for development.  I  encourage  the                                                                 
     committee here to examine that.                                                                                            
     Those  are conventional gas reserves.  The unconventional                                                                  
     gas  reserves on the  North Slope are  much, much larger.                                                                  
     The Chair  very pointedly made some important  comments at                                                                 
     the Chamber  meeting yesterday  with respect to competing                                                                  
     resources  in Canada, particularly  in Alberta. The  total                                                                 
     gas  resources   of  Canada  exceed  500  TCF,  which   is                                                                 
     extremely large [END OF TAPE].                                                                                             
TAPE 01-16, SIDE B                                                                                                            
MR. METZ continued:                                                                                                             
     Those  resources  are  relatively small  compared  to  the                                                                 
     other  energy resources  in Alberta,  though, and I  would                                                                 
     encourage you to look at those on your visit there.                                                                        
     There's  300 billion  barrels of recoverable  oil and  the                                                                 
     Athabascan tar sands. There's  huge coal resources similar                                                                 
     to the huge  coal resources we have here. So,  in terms of                                                                 
     total  energy resources  in  North American,  Alberta  and                                                                 
     Alaska  have very large potential  resources that need  to                                                                 
     be considered.  We need to be considering these  resources                                                                 
     not in the  terms of oil or tar sands or gas or  coal, but                                                                 
     in the gas equivalent that  may be transmitted through the                                                                 
     pipelines, whatever routes are finally selected.                                                                           
     The  important   thing  here   is  that  there  are   huge                                                                 
     quantities of gas hydrates  in the Canadian Arctic Islands                                                                 
     as  well  as   in  Northern  Alberta  and  the  Northwest                                                                  
     Territories  and  Yukon  Territories,   but  there's  even                                                                 
     larger  quantities   of  gas  hydrates  here  in  Alaska.                                                                  
     Estimates  of 1,200 TCF  have been published  by the  U.S.                                                                 
     Geologic  Survey. So,  these gas hydrate  resources  dwarf                                                                 
     our conventional  gas resources.  The coal resources  that                                                                 
     could  be converted  - either  the extraction  of coal  by                                                                 
     methane  from those  coal resources or  the conversion  of                                                                 
     those coal resources to  gas - dwarf the gas hydrates that                                                                 
     are  available.  So, in  terms of  the resources  and  the                                                                 
     quantities and the valuation  of the economic feasibility,                                                                 
     we need to  look at certainly those resources  that can be                                                                 
     recovered within a reasonable  time period - 20 years from                                                                 
     an economic  standpoint. But from a policy issue  point of                                                                 
     view,  we  need  to  look  at  those  larger  resources  -                                                                 
     unconventional  gas, gas hydrates,  coal bed methane,  the                                                                 
     gasification  of  North  Slope  coal and  other  coals  in                                                                 
CHAIRMAN TORGERSON  said they had the MMS at their  last meeting had                                                            
run  through about  a  half hour  of known  reserves  and  potential                                                            
undiscovered  reserves on the  North Slope  as well as all  over the                                                            
federal jurisdiction  of the state.  "One of the interesting  things                                                            
you mentioned,  hydrates, they estimate that we have  170,000 TCF of                                                            
hydrates in Alaska."                                                                                                            
                        SENATOR TED STEVENS                                                                                   
CHAIRMAN TORGERSON then welcomed Senator Ted Stevens.                                                                           
SENATOR  TED STEVENS said  he was  glad to have  the opportunity  to                                                            
visit with the committee.  He said that Congressman Young had done a                                                            
terrific job  on the energy bill with  the help of a lot  of people,                                                            
particularly Jerry Hood of the Teamsters. He said:                                                                              
     That bill  has a very uncertain future right now  with the                                                                 
     opposition  of the majority  leader in  the Senate.  Under                                                                 
     our  procedure  only the  majority leader  can  call up  a                                                                 
     bill.  Senators can  offer amendments,  but  calling up  a                                                                 
     bill is  another matter. So,  we're going to have a  tough                                                                 
     job trying  to figure out what to do about that.  Clearly,                                                                 
     the  gas pipeline has  another set of  facts. Members  are                                                                 
     after  us all the time  asking when  will Alaska's gas  be                                                                 
     available  to the South 48. So,  I don't think if there's                                                                  
     anything  that has to be done  by the Congress that  there                                                                 
     will  be this  problem  at all  with  regards to  the  gas                                                                 
     There  is   a  draft  that  has  been  submitted   by  the                                                                 
     producers.  I'm not too  happy with that  bill, so far.  I                                                                 
     think there's a lot of explanation  we have to have before                                                                 
     we think  about that. Frank's  staff has that and I  don't                                                                 
     know what  they've told you, but they are reviewing  it. I                                                                 
     really  didn't have a chance  before I left on the second                                                                  
     of August  to really  read it. I had  some explanation  of                                                                 
     it. Justin [Stiefel] probably  knows a lot more about that                                                                 
     than I do right now. I'm  still convinced that the highway                                                                 
     route  is the best  route for  us and  I congratulate  the                                                                 
     legislature  for making  that clear.  Clearly, that's  the                                                                 
     option we  need to bring the gas down to where  we can use                                                                 
     it not  only to meet  some of our needs,  but also in  the                                                                 
     future if it's as great  as we think it is, to use it as a                                                                 
     commodity. And clearly we  have the option to go to Valdez                                                                 
     and Anchorage, as well as  the South 48, if it comes here.                                                                 
     As these  people have come to  my office, we have made  it                                                                 
     very plain that that's the case.                                                                                           
     As  a matter  of fact,  I had  a visit  with  some of  the                                                                 
     producers'  representatives  here recently  and they  said                                                                 
     the economics  didn't look too good if the gas  price goes                                                                 
     down  and asked  me what I  thought Alaskans  would do  if                                                                 
     that's  the  case -  if  the economics  require  a higher                                                                  
     sustained  gas  price  to  pay  for  this extremely   long                                                                 
     pipeline. And I said, 'We'll  wait. We've waited this long                                                                 
     so far.  I don't think  there's any rush  to take our  gas                                                                 
     out by  a pipeline that crosses  the top of the state  and                                                                 
     leaves and doesn't answer any of our needs.'                                                                               
     The  people that  propose that  will tell  you that  it'll                                                                 
     mean a massive  increase in our Permanent Fund,  if that's                                                                 
     the  case, but  that  massive increase  won't  offset  the                                                                 
     increased cost of energy  that we all predict out into the                                                                 
     second decade of this century.  So, I don't see any reason                                                                 
     for  us to even  consider  the other proposal.  I've  told                                                                 
     them very  seriously that we would do everything  we could                                                                 
     to join the  state legislation in getting the  Congress to                                                                 
     prohibit them  from taking that gas across the  Arctic. As                                                                 
     you know they plan on taking  it out in the ocean and take                                                                 
     it through  over to Canada and  pick up the Canadian  gas.                                                                 
     The Foothills  people have been in to see us and  they are                                                                 
     very disturbed  with that proposal as we are,  but clearly                                                                 
     what we're doing now is  trying to work with Frank and the                                                                 
     Energy  Committee as they review  the energy bill. I  hope                                                                 
     it  will not be  necessary for  us to take  any action  to                                                                 
     assure the gas pipeline  comes through Alaska, but I think                                                                 
     it may be possible.                                                                                                        
     That bill, by the way, I  should speak a little more about                                                                 
     that.  As you know, I was chairman  of the Appropriations                                                                  
     Committee  and now I'm  ranking member  of the committee.                                                                  
     Senator  Byrd confers  with me  quite often  as I used  to                                                                 
     with him,  but clearly we have  not sent to the President                                                                  
     any one of our 13 bills.  We have 13 appropriations bills;                                                                 
     we have  the patients'  bill of rights  bill; we have  the                                                                 
     bill  that deals with  campaign reform;  we have the  bill                                                                 
     that  deals  with issues  of  Medicare  particularly  with                                                                 
     payment for prescription  drugs and we have about 12 weeks                                                                 
     of  actual  session left  when  we go  back  into session                                                                  
     before  Thanksgiving. I don't  think it's possible for  us                                                                 
     to  contemplate  the energy  bill will  come up  and be  a                                                                 
     cause celeb in that time.  I don't know what their tactics                                                                 
     will be,  but I'm sure they're  going to try to take  some                                                                 
     action  to  defer at  least the  subject  of ANWR  in  the                                                                 
     Senate and deal with some  of the other issues involved in                                                                 
     that bill.  Frank will have to tell you what his  strategy                                                                 
     will  be with  regard to the  energy committee.  I'm  just                                                                 
     assessing  the situation  from  the point of  view of  the                                                                 
     time left on the floor this year.                                                                                          
     Under the  Senate procedures, as you know, there  would be                                                                 
     three  or four possible  filibusters  against one bill.  I                                                                 
     don't  see any  reason for us  to stand  back, if they're                                                                  
     going  to filibuster  if  ANWR's is  in the  bill. I  told                                                                 
     them,  'Okay, we'll filibuster  if it's not in the bill.'                                                                  
     We'll  just have to  see what comes  from tugging at  this                                                                 
     subject  as  far as  the new  majority  of the  Senate  is                                                                 
     concerned.  Clearly, back  to your subject,  I think  that                                                                 
     the  future is  very great  for gas  in our  country.  The                                                                 
     demand is increasing. Supplies  aren't that available. I'm                                                                 
     not  sure how high  the gas price  has to  go and stay  to                                                                 
     justify building  that gas pipeline, but it's  going to be                                                                 
     very interesting  to see the economics, which  as you know                                                                 
     are now being prepared.                                                                                                    
     Incidentally,  they  are  doing  the study  of  the  route                                                                 
     across the Arctic, but that  is a necessary thing from the                                                                 
     point  of view of  complying with  National Environmental                                                                  
     Policy  Act. In order  to be  able to deal  with the  EIS,                                                                 
     they  would  have  to  show  that  they've  examined   all                                                                 
     reasonable alternatives.  I looked at it as a RA study, in                                                                 
     terms of studying across  the Arctic. I do believe some of                                                                 
     the producers  would rather have that route, as  you know,                                                                 
     but I'm convinced a great  majority of Alaskans will stick                                                                 
      with us and say it must take the Alaska Highway route.                                                                    
CHAIRMAN  TORGERSON  explained  that this  committee  would  convene                                                            
again in  Anchorage on  September 19 along  with the administration                                                             
and  they would  look  over  that  legislation  in more  detail  and                                                            
prepare unified comments for Senator Murkowski. He asked:                                                                       
     Just  one  question  I had  on  ANWR, just  in  case  your                                                                 
     filibuster  approach doesn't  work, a couple of years  ago                                                                 
     it came across  in the budget reconciliation act,  is that                                                                 
     a possibility  that there'll be another similar  bill that                                                                 
     provisions  could  not  be filibustered  that  this  might                                                                 
     surface next year?                                                                                                         
SENATOR STEVENS  replied, "There won't be one this  year; there will                                                            
be one  next year. We've  had our reconciliation  act for this  year                                                            
and it contained the tax bill, as you know…"                                                                                    
CHAIRMAN TORGERSON asked,  "Even if we lost the debate in the Senate                                                            
this year, there is still  a strong possibility that that would be a                                                            
fallback  position to try  to put it in  the reconciliation  act for                                                            
the beginning of next year?"                                                                                                    
SENATOR STEVENS replied:                                                                                                        
     It's still a possibility.  Senator Conrad, Chairman of the                                                                 
     Budget  Committee would probably  oppose that because  his                                                                 
     colleague, Senator Daschle,  opposes bringing it up on the                                                                 
     floor  in any manner,  but it would  still be possible  to                                                                 
     offer  this amendment  to  that bill  when it  got to  the                                                                 
     floor.  That's sort  of one  of the last  resort measures                                                                  
     that  I see it  might be possible  to get  it within  this                                                                 
     Congress.  The President  is for it;  the House has  voted                                                                 
     for it  and I think the Senate  ought to at least have  an                                                                 
     opportunity to vote.                                                                                                       
     Back in the  days when we got the old pipeline,  there was                                                                 
     sort  of  a gentleman's  agreement  that  any  issue  that                                                                 
     involved national  security would not be filibustered  and                                                                 
     we were able  to reach the position that building  the oil                                                                 
     pipeline was  a matter of national security, although  the                                                                 
     vote was very  close, it would have never passed  if there                                                                 
     had been a filibuster.                                                                                                     
REPRESENTATIVE DAVIES asked what the timeframe was in the Senate                                                                
for the producers' bill and was there a need for legislative                                                                    
attention to the National Gas Act or ANGTA?                                                                                     
SENATOR STEVENS responded:                                                                                                      
     Senator Bingaman  is chairman of the committee  that Frank                                                                 
     used  to  chair and  the  producers  are a  very powerful                                                                  
     organization  in our  country.  If they  decide they  want                                                                 
     that  bill brought up  in spite of our  opposition, and  I                                                                 
     would opposed  that bill, it's going to be an  interesting                                                                 
     situation.  I don't think that bill will pass  without our                                                                 
     support  in the Senate.  As it stands  now I would oppose                                                                  
     it.  There has to be  some substantial  changes on it.  If                                                                 
     it's  a bill to really  accelerate the  capability of  the                                                                 
     producers  to get final  approval to  build the pipeline,                                                                  
     that's  good motivation for us  to get a bill passed.  But                                                                 
     if  it's one that  going to  assure that  they alone  will                                                                 
     have the decision  as to what route to take, then  I'm not                                                                 
     in favor of it at all.                                                                                                     
     The  timeframe is going  to be up to  Senator Bingaman.  I                                                                 
     think we could  get it to the point where it does  do what                                                                 
     I said,  it accelerates  the ability  to proceed with  all                                                                 
     other  clearances  that  are necessary  and  hopefully  we                                                                 
     would  get to the point of one-stop  shopping in terms  of                                                                 
     the approvals that are necessary  other than court review,                                                                 
     which I think will be inevitable.  That could be done very                                                                 
     quickly,  if  that's what  the  producers want.  They  did                                                                 
     discuss with us that problem,  the problem of the myriad o                                                                 
     of applications that are necessary to proceed.                                                                             
REPRESENTATIVE DAVIES asked if he thought that would preempt ANGTA?                                                             
SENATOR STEVENS replied:                                                                                                        
     No, I don't  see any preemption involved in the  bill that                                                                 
     would  be  the  kind of  thing  I'm  thinking  about.  The                                                                 
     timetable  is such that the building of it doesn't  have a                                                                 
     short  timeframe for  design and construction.  So,  we're                                                                 
     not to the point of crisis  yet the way we were in the old                                                                 
     pipeline  days when we had to  get a bill passed in  order                                                                 
     to start,  because we  had been delayed  already for  four                                                                 
     years by the environmental  litigation. Should we ever get                                                                 
     to that  point, I think  the bill would  have a different                                                                  
     characteristic than the one I envision right now.                                                                          
CHAIRMAN TORGERSON asked: "We heard today that one of the producers                                                             
is floating the idea of having the downside protection guaranteed                                                               
by the  federal government  basically if the  price of gas  got down                                                            
too low,  that they might  receive some royalty  credits for  future                                                            
federal things  - sort of sharing the risk a little  bit. Do you see                                                            
any chance of  any proposals or any incentives like  that passing in                                                            
the Senate?"                                                                                                                    
SENATOR STEVENS answered:                                                                                                       
     It would really come in  the point of view of a tax issue,                                                                 
     you know.  If you look at that from that point  of view of                                                                 
     saying  that the gas  price falls below  a certain level,                                                                  
     then there's  some special consideration of taxes  for the                                                                 
     producers,  that might be possible  for a project of  this                                                                 
     size.  One  of the  considerations,  of  course,  is  that                                                                 
     Canada is  going to get a sizeable payment for  the use of                                                                 
     a  pipeline that  travels 2,000  miles in  their country.                                                                  
     There's  so many things  involved in  this economic  study                                                                 
     that we really  don't know for sure how to quantify  them,                                                                 
     yet.  I think  it is  possible that  there  could be  some                                                                 
     escape  hatch for  this pipeline  in the  event the  price                                                                 
     dropped  down below a  level that there  would be special                                                                  
     tax considerations  for the producers  as they sold  their                                                                 
     gas  to assure  there  was a  market  price for  that  gas                                                                 
     coming through. On the other  hand, I'm also sure that the                                                                 
     people who  produce gas in the South 48 now wouldn't  like                                                                 
     that too  much, because it would  mean that this enormous                                                                  
     supply  would engulf the market  at a price stabilized  by                                                                 
     tax incentives, whereas  the others do not have that. It's                                                                 
     not  going to be an  easy fight for  the producers to  get                                                                 
     that  unless it's something  that is  worked out with  the                                                                 
     gas industry as a whole in the United States.                                                                              
REPRESENTATIVE FATE said:                                                                                                       
     Taking  up where Representative  Davies  left off on  both                                                                 
     the Alaska  Natural Gas Transportation System  and Act, it                                                                 
     was  suggested today  that a reconfirmation  of both  that                                                                 
     system and  that act either be undertaken by either  FERC,                                                                 
     and  there  was  a  question  of  whether  they  had  that                                                                 
     authority,  or  the congress,  itself.  Have you  got  any                                                                 
     comment on that, Senator?                                                                                                  
SENATOR STEVENS said:                                                                                                           
     I  haven't crossed  that bridge,  yet. We  have discussed                                                                  
     that   in  several  sort  of   think  sessions  with   the                                                                 
     producers, but they have  been unwilling to spell out what                                                                 
     they  are  willing  to take  on  as  far as  a  burden  of                                                                 
     legislative  effort to  assure the  early construction  of                                                                 
     the pipeline.  I don't think  there's a great hurry.  They                                                                 
     don't  appear  rushed  in terms  of  proceeding  with  the                                                                 
     pipeline.  We all know that.  It's been a long time  since                                                                 
     that gas  was discovered and  they haven't moved forward,                                                                  
     yet. There  is no urgency from the point of a  penalty for                                                                 
     not moving forward and I  don't think it would be possible                                                                 
     to  create one  that would  be acceptable.  I think  we'll                                                                 
     have to  wait and see how the  route they want to proceed                                                                  
     with  to see what has  to be done to  comply with federal                                                                  
     law  and determine  whether  we can  modify  any of  those                                                                 
     requirements to accelerate  the pipeline's construction. I                                                                 
     haven't  formed an  opinion on  that yet,  mainly because                                                                  
     they haven't asked us to consider any option, yet.                                                                         
CHAIRMAN TORGERSON said:                                                                                                        
     One  of the  confusions  is if  they file  an application                                                                  
     under the Natural Gas Act,  if they could do that over the                                                                 
     top  of the Foothills  application, which  is filed  under                                                                 
     ANGTA.  We've  been fencing  with FERC  trying  to get  an                                                                 
     answer  from  them of  which  one of  these  federal  laws                                                                 
     prevails  in Alaska. We  had the El  Paso proposal in  '77                                                                 
     and the over-the-top,  which is the ANWR proposal,  we had                                                                 
     almost  the same thing  as we do today  and the President                                                                  
     made  a decision under  the Natural  Gas Act and Congress                                                                  
     passed  the  ANGTA. Foothills  believes  and is  ready  to                                                                 
     defend  that in court that they  have the only authorized                                                                  
     route,  which   is  the  highway  route  down.  FERC   has                                                                 
     basically  said that if somebody gave them an  application                                                                 
     under  either  act, they  are required  to  respond.  What                                                                 
     Representative  Fate is talking  about is today they  said                                                                 
     maybe  the quickest fix would  be a congressional fix,  to                                                                 
     have congress  look at this and decide which one  of these                                                                 
     acts prevails today and  if there's any cleanup because of                                                                 
     the 20 - 25 years since  the old act passed, then congress                                                                 
     should maybe  look at that instead of a regulatory  agency                                                                 
     such as FERC.                                                                                                              
SENATOR STEVENS replied:                                                                                                        
     I think you can come to  the conclusion that congress made                                                                 
     a  decision  when  it  responded  to  President  Carter's                                                                  
     request and passed the act  that accompanied the treaty. I                                                                 
     really  think  Foothills has,  literally,  a foot  in  the                                                                 
     door.  On the other hand, the  other project going across                                                                  
     the  top of our state  was not contemplated  at that  time                                                                 
     and I don't think we could  say that project is prohibited                                                                 
     by existing  law. I do think that Foothills is  right that                                                                 
     as far  as Canadian  law is concerned,  they have all  the                                                                 
     rights  they need to proceed  to construct a pipeline  and                                                                 
     transport  that gas once it comes into their country.  The                                                                 
     problem is in our country  and I don't think FERC could do                                                                 
     other than just give an  off the cuff opinion right now. I                                                                 
     hope we don't see that day,  because I think it's going to                                                                 
     be a bloody day. If the  producers file an application for                                                                 
     a northern  route, we're  at a stalemate  as far as  we're                                                                 
     concerned.  I'll  be  very surprised  if  we get  to  that                                                                 
     point, because  they are part of our economy and  they are                                                                 
     going  to have to live with us  just like we have to  live                                                                 
     with them. I do not expect to see that come.                                                                               
CHAIRMAN TORGERSON  said hoped they wouldn't see an  application for                                                            
the over-the-top. It is banned in the energy bill, also:                                                                        
     It's no  longer just the state  of Alaska that has passed                                                                  
     legislation.  We  have  half  of  the congressional   part                                                                 
     passing it and we certainly  have plenty of testimony from                                                                 
     the North  Slope Borough that  they won't settle for  that                                                                 
     and the Whaling Commission and everything else.                                                                            
SENATOR STEVENS  said that could come  through the committee  if the                                                            
bill is reported. "On the  other hand, they are very strong people."                                                            
He said he would just as soon not have that fight.                                                                              
     We need  all the cooperation  we can. These producers  are                                                                 
     the  producers  of our  oil, too,  and are  the potential                                                                  
     bidders  on ANWR, if  it ever gets to  the point where  we                                                                 
     can issue  leases. It is open now, but the bill  has to be                                                                 
     passed   to  give  the   approval  of   congress  to   the                                                                 
     environmental  finding  under  the EIS  that there  be  no                                                                 
     permanent  harm to that area.  We ought to work together.                                                                  
     That's been my attitude…I've  told them what I told you. I                                                                 
     think  Alaskans would rather  wait than have the pipeline                                                                  
     go across  the top and  it's very clear  that our state's                                                                  
     position that you all have  expressed is a firm one and we                                                                 
     don't intend to waiver in congress on that.                                                                                
CHAIRMAN TORGERSON said  he appreciated that and that this committee                                                            
has told  the producers  and Foothills  that every  time they  get a                                                            
                         PUBLIC TESTIMONY                                                                                     
MS.  DEB MOORE,  Northern  Alaska  Environmental  Center,  said  she                                                            
wanted  to  present  their policy  on  natural  gas  development  of                                                            
Alaska's North Slope:                                                                                                           
     The  Northern Alaska  Environmental Center  believes  that                                                                 
     the United States as a member  of the world community must                                                                 
     aggressively   reduce  its  dependency  on  fossil   fuels                                                                 
     through   energy  conservation,   transition  to  cleaner                                                                  
     burning  fuels  and  increased   development  and  use  of                                                                 
     renewable  sources of energy.  To prompt this transition,                                                                  
     the Northern  tends to believe the State of Alaska  should                                                                 
     adopt   an  aggressive  policy   of  energy  conservation                                                                  
     standards  for  new  building  construction   and vehicle                                                                  
     purchases  and should  launch  a new program  using  state                                                                 
     funds  to support  rural  alternative  energy development                                                                  
     emphasizing renewable energies.                                                                                            
     The Northern Center also  recognizes that natural gas is a                                                                 
     cleaner   burning  fuel  than  are  others  used   in  the                                                                 
     Fairbanks  areas and in many parts of the world.  As such,                                                                 
     the Northern  Center considers natural gas a transitional                                                                  
     fuel   source  in  the  move   toward  reduced  and   more                                                                 
     conservative  use of  fossil fuels in  favor of renewable                                                                  
     energy  sources.  The  Northern  Center  recognizes   that                                                                 
     energy  is a strategic resource  required by all Alaskans                                                                  
     and  is essential  to  their physical  and  economic  well                                                                 
     being.  With this  consideration,  the Northern  tends  to                                                                 
     believe  that the development  of North Slope natural  gas                                                                 
     reserves to be a reasonable  certainty. However, unplanned                                                                 
     and   poorly   conceived   development   as   abetted   by                                                                 
     comparatively  low energy prices  can cause significantly                                                                  
     long-term  environmental,   economic  and health  damage,                                                                  
     particularly  for the pollutant  prone Fairbanks bowl  and                                                                 
     the fragile  interior Alaska  environment. Therefore,  the                                                                 
     Northern Center  wishes to remain as involved  as possible                                                                 
     in the public  debate and dialogue on natural  gas and its                                                                 
     impacts  on the Alaska  and Fairbanks  North Star Borough                                                                  
     environs and  seeks to participate and provide  assistance                                                                 
      throughout the process of permitting and construction.                                                                    
     If   Alaska's  proven   North  Slope   gas  reserves   are                                                                 
     developed,  the  Northern Center  believes  the following                                                                  
     conditions should be met:                                                                                                  
        · Any project must minimize deleterious impacts on local                                                                
          communities and traditional life styles and respect the                                                               
          basic human right to a clean, safe and healthy                                                                        
        · The pipeline should remain as close as possible to the                                                                
          present utility corridors, excluding RS 2477 rights-of-                                                               
        · No   pipeline  development   should  traverse   wilderness                                                            
          frontier  areas including off shore of the Arctic National                                                            
          Wildlife Refuge (ANWR)                                                                                                
        · The  State of Alaska should develop a comprehensive energy                                                            
          production  and management policy as a precondition to its                                                            
          issuance of a permit for construction of a pipeline.                                                                  
        · The  state and federal government  should conduct  studies                                                            
          that  assess all reasonably  anticipated impacts  accruing                                                            
          from   natural  gas  pipeline  including   the  degree  of                                                            
          pressure  on the Arctic  Refuge that may be expected  from                                                            
          the addition of a pipeline from the North Slope                                                                       
        · The project must go through a new EIS process.                                                                        
        · There  must be no regulatory shortcuts  in the issuance of                                                            
        · Any  project must  include best  available technology  and                                                            
          best  management practices including where environmentally                                                            
          appropriate, seasonal construction techniques.                                                                        
        · There   must  be   a  permanent   adequately  funded   and                                                            
          independent  formal citizens' advisory council for the oil                                                            
          and   gas  pipelines  that   includes  representation   by                                                            
          conservation  organizations as well as local citizens that                                                            
          reports directly to the governor                                                                                      
        · The  project must escrow sufficient funds for dismantling,                                                            
          removal  and  restoration of  all project  facilities  and                                                            
          impacts  in a way that regulatory agencies can insure that                                                            
          the  original  eco-characteristics  of  the corridor  have                                                            
          been  restored  as facilities  are taken  out of  service.                                                            
          This  return to  the original condition  standard  and the                                                            
          escrow's  of DR&R funds must be stipulated  in all permits                                                            
          and reviewed in the EIS.                                                                                              
CHAIRMAN TORGERSON thanked her for testifying.                                                                                  
MR. KEN  FREEMAN, Anchorage,  said he would  work with John  Katz to                                                            
make sure that he and others  in the administration are available on                                                            
September  19 and he would  definitely get  the word out to  the gas                                                            
policy  council,  as  well,  to  talk  about  the  proposed  federal                                                            
CHAIRMAN TORGERSON  said he might  come up on September 17  and work                                                            
with whatever  they have put together. He noted that  Lisa Robinson,                                                            
Community  and  Economic  Development  Coordinator,  had  written  a                                                            
letter for the record instead  of testifying. He said that concluded                                                            
the meeting and adjourned at 6:02 p.m.                                                                                          

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