Legislature(2001 - 2002)

04/10/2002 03:42 PM NGP

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
                       ALASKA LEGISLATURE                                                                                     
            JOINT COMMITTEE ON NATURAL GAS PIPELINES                                                                          
                         April 10, 2002                                                                                         
                            3:42 p.m.                                                                                           
SENATE MEMBERS PRESENT                                                                                                        
Senator John Torgerson, Chair                                                                                                   
Senator Rick Halford                                                                                                            
Senator Pete Kelly                                                                                                              
Senator Donald Olson, alternate                                                                                                 
SENATE MEMBERS ABSENT                                                                                                         
Senator Johnny Ellis                                                                                                            
HOUSE MEMBERS PRESENT                                                                                                         
Representative Brian Porter                                                                                                     
Representative Mike Chenault, alternate                                                                                         
Representative Reggie Joule, alternate                                                                                          
HOUSE MEMBERS ABSENT                                                                                                          
Representative Joe Green, Vice-Chair                                                                                            
Representative Scott Ogan                                                                                                       
Representative John Davies                                                                                                      
Representative Hugh Fate, alternate                                                                                             
COMMITTEE CALENDAR                                                                                                            
UPDATE ON CALGARY CONFERENCE:  SENATOR TORGERSON                                                                                
UPDATE ON FEDERAL LEGISLATION:  PATRICK COUGHLIN                                                                                
INTRODUCTION OF SB 360 - "ALASKA NATURAL GAS PROJECT ACT"                                                                       
ECONOMIC MODELS OF PIPELINE PROJECTS:  DR. DOUG REYNOLDS                                                                        
PREVIOUS COMMITTEE ACTION                                                                                                     
WITNESS REGISTER                                                                                                              
PATRICK COUGHLIN, Special Consultant                                                                                            
to the Senate Resources Committee                                                                                               
Alaska State Legislature                                                                                                        
Capitol Building, Room 427                                                                                                      
Juneau, Alaska  99801                                                                                                           
POSITION  STATEMENT:     Discussed   federal  legislation   before                                                              
Congress  and  contrasted  it with  provisions  suggested  by  the                                                              
DOUGLAS B. REYNOLDS, Ph.D.                                                                                                      
Northern Economic Research Associates                                                                                           
Fairbanks, Alaska                                                                                                               
POSITION STATEMENT:   Gave slide presentation on  "Economic Models                                                              
of Pipeline Projects"; provided handout and answered questions.                                                                 
ACTION NARRATIVE                                                                                                              
TAPE 02-6, SIDE A                                                                                                             
Number 0001                                                                                                                     
CHAIRMAN  JOHN TORGERSON  called  the Joint  Committee on  Natural                                                            
Gas Pipelines  meeting to order at  3:42 p.m.  Members  present at                                                              
the  call  to  order  were  Senators   Torgerson  and  Olson,  and                                                              
Representatives  Porter and Joule.   Arriving  as the meeting  was                                                              
in progress  were Senators Halford  and Kelly, and  Representative                                                              
UPDATE ON CALGARY CONFERENCE:  SENATOR TORGERSON                                                                              
Number 0039                                                                                                                     
CHAIRMAN  TORGERSON  announced the  first  order  of business,  an                                                              
update  on  the Global  Petroleum  Show  to  be held  in  Calgary,                                                              
Alberta,  on June  11-13,  2002.   He surmised  that  the show  is                                                              
probably  the  largest  in  North  America.   [In  packets  was  a                                                              
memorandum from  Chairman Torgerson to the  committee; information                                                              
from  the   International  Alaska   Highway  Pipeline   Committee,                                                              
including a mission  statement and principles; and  a registration                                                              
packet and related backup materials.]                                                                                           
CHAIRMAN  TORGERSON  informed  members  that the  charge  for  the                                                              
committee's portion  of the conference  had been settled  on three                                                              
days before.  Invitations  for one panel had been  extended to the                                                              
chairman of  Canada's National Energy  Board (NEB) and  to Patrick                                                              
Henry  Wood III,  Chairman, Federal  Energy Regulatory  Commission                                                              
(FERC).   Also invited  were the  Regulatory Commission  of Alaska                                                              
(RCA)  and the  equivalent provincial  and territorial  regulatory                                                              
agencies from British Columbia, Alberta, and Yukon Territory.                                                                   
CHAIRMAN TORGERSON noted  that the focus would be  on NAFTA [North                                                              
American  Free  Trade Agreement]  issues,  including  cross-border                                                              
contractors' going back  and forth and what kind  of problems that                                                              
could entail;  he said at least  one NAFTA attorney  has confirmed                                                              
thus  far.    In  addition,  the  university  is  to  speak  about                                                              
training  and any  reciprocity  agreement  that might  be  entered                                                              
into  for cross-border  training.   Furthermore,  a  panel of  the                                                              
"ministers and commissioners  of labor" will discuss  other labor-                                                              
related issues.                                                                                                                 
CHAIRMAN TORGERSON  advised members of  the intention to  hold the                                                              
foregoing  discussions  on  June   12,  although  he  indicated  a                                                              
possibility  of extending  into June  13  if necessary.   He  said                                                              
[the  conference] is  cosponsored by  the international  committee                                                              
he'd  established  [the  International   Alaska  Highway  Pipeline                                                              
Committee],   which  includes  members   from  British   Columbia,                                                              
Alberta,  and  Yukon  Territory.    In  addition,  there  will  be                                                              
representatives from  the Northwest Territories,  including people                                                              
from  its   university,  although  it   has  no  members   on  the                                                              
international committee.                                                                                                        
CHAIRMAN TORGERSON  noted that  the show will  be large,  but with                                                              
no registration  fee because most of  the money will be  made from                                                              
the  trade  show itself.    There  will  be  a reception  for  the                                                              
international group, which he indicated the show is paying for.                                                                 
Number 0236                                                                                                                     
CHAIRMAN TORGERSON  advised members  that he most  likely wouldn't                                                              
call a  meeting of the  Joint Committee  on Natural Gas  Pipelines                                                              
at  the  show, but  encouraged  as  many  members as  possible  to                                                              
participate.  He  noted that a booth has been rented  and said the                                                              
Division  of   Oil  &   Gas  will   hand  out  promotional   lease                                                              
information  in  order  to  foster  interest  from  companies;  in                                                              
addition, the booth  will be available to any  Alaskan businesses,                                                              
25-30  of  which   have  shown  interest  so  far   in  sending  a                                                              
representative.   Details are pending, with few  people confirmed.                                                              
Chairman Torgerson  concluded by  indicating the process  had just                                                              
begun, with invitations already extended to many people.                                                                        
UPDATE ON FEDERAL LEGISLATION:  PATRICK COUGHLIN                                                                              
Number 0325                                                                                                                     
CHAIRMAN  TORGERSON  announced  the  next order  of  business,  an                                                              
update  on federal  legislation  currently  before  Congress.   He                                                              
introduced   Patrick  Coughlin,   a  consultant   to  the   Senate                                                              
Resources Committee,  by saying he has been invaluable  in working                                                              
with the  attorney hired  in Washington,  D.C., regarding  federal                                                              
issues.    He then  explained  that  the  starting point  was  the                                                              
principles adopted  by the  current committee.   "We got a  lot of                                                              
those in the bill,"  he said.  "A lot of the language  in the bill                                                              
was ours.   So  we did relatively  good work  there - not  winning                                                              
every issue, but coming close."                                                                                                 
Number 0371                                                                                                                     
PATRICK  COUGHLIN,  Special  Consultant to  the  Senate  Resources                                                              
Committee,  Alaska State  Legislature,  informed  members that  he                                                              
would go  through the federal Alaska  Natural Gas Pipeline  Act of                                                              
2002 ("the  Act"), which  is part  of the  national Energy  Policy                                                              
Act  of 2002  being debated  by  the U.S.  Senate  now, and  would                                                              
compare it with recommendations made by the current committee.                                                                  
MR.  COUGHLIN noted  that during  February and  early March,  many                                                              
amendments  were made  to the Act,  and there  were suggested  and                                                              
rumored  amendments  as well.   Tracking  what  was  going on  was                                                              
difficult,  he said,  but was  helped  by Karol  Newman, a  lawyer                                                              
retained by  the legislature  in Washington, D.C.   He  noted that                                                              
Chairman  Torgerson  had  spent   many  hours  talking  with  U.S.                                                              
Senator  Frank Murkowski's  staff,  other legislative  staff,  and                                                              
"our attorneys  in D.C."  to keep  abreast of  what was  happening                                                              
Number 0453                                                                                                                     
MR. COUGHLIN  reported  that the  most recent  version of the  Act                                                              
was  proposed  as a  bipartisan  amendment  on  March 21  by  U.S.                                                              
Senators Murkowski  and Bingaman.   He  reminded members  that the                                                              
first proposal  put forth  by the Joint  Committee on  Natural Gas                                                              
Pipelines,  on September  19, 2001,  was  a provision  to ban  the                                                              
"over-the-top"  route;  that is  currently  in the  [U.S.]  Senate                                                              
version  of the  Act.   Under  the  next proposed  amendment,  any                                                              
certificate  FERC  would issue  for  the project  "shall"  require                                                              
that access be granted  for the state's royalty share  of its gas;                                                              
the current  version of  the Act,  by contrast,  says it  "may" be                                                              
provided,  and only  if  it  doesn't increase  existing  shippers'                                                              
costs.    Mr. Coughlin  noted  that  it  is  a  little  weaker  in                                                              
protecting  the  state's  rights  than the  current  provision  in                                                              
ANGTA  [the  federal  Alaska Natural  Gas  Transportation  Act  of                                                              
1976], which says "shall".                                                                                                      
MR.  COUGHLIN highlighted  other  provisions  in  the Act  dealing                                                              
with state access.   For example, the applicant  for a certificate                                                              
to build the pipeline  must conduct a study of  in-state needs and                                                              
present  it to  FERC;  the study  must  include  a description  of                                                              
potential  tie-in points  within Alaska.   Also regarding  access,                                                              
the  current committee  has requested  that RCA  and FERC  jointly                                                              
set  rates for  the  in-state portion  of  the transportation;  by                                                              
contrast,  the Act  allows FERC  to set  the rate  by itself,  but                                                              
FERC must consult with the state before doing so.                                                                               
Number 0595                                                                                                                     
MR.  COUGHLIN  turned  attention  to  issues  regarding  "explorer                                                              
access"  for  oil   and  gas  companies.    These   explorers  are                                                              
companies  that have  lease rights  on  the North  Slope and  that                                                              
currently are  either exploring  or planning  to explore  for gas;                                                              
they  would have  no  ownership interest  in  the  pipeline.   Mr.                                                              
Coughlin  reminded members  that this committee  has requested  an                                                              
open-season provision  that would allow the explorers  to at least                                                              
bid  in  a  consistent  or  fair  manner.    Under  the  requested                                                              
provision,  FERC would  establish  regulations to  govern an  open                                                              
season; FERC would  consider effective competition  in determining                                                              
how to conduct the  open season - in other words,  it would set up                                                              
an open  season such  that it  would continue  competition  in the                                                              
oil and  gas industry in  Alaska; and for  any open  season beyond                                                              
the   very  first   one,  the   procedures   would  maximize   the                                                              
opportunity  to  ship  gas  from  oil and  gas  units  other  than                                                              
Prudhoe  Bay or  Point  Thomson,  which are  held  by the  current                                                              
producers.    The  Act  contains   that  type  of  provision,  Mr.                                                              
Coughlin reported.                                                                                                              
Number 0677                                                                                                                     
MR. COUGHLIN  reminded members  of this  committee's request  that                                                              
FERC  have  authority   to  expand  the  pipeline   under  certain                                                              
circumstances;  he said the  Act currently  grants that  expansion                                                              
authority, although  it requires FERC  to make more  findings than                                                              
requested.   With regard  to the request  that the explorers  only                                                              
would  pay  for  conditioning services  they  use,  however,  that                                                              
provision was not adopted and isn't currently in the Act.                                                                       
MR.  COUGHLIN  noted  this  committee's   request  that  the  term                                                              
"Alaska North Slope  gas" be expanded to include  gas resources in                                                              
the so-called  foothills area  of the  state and  as far  south as                                                              
Nenana;  he explained  that  there  is a  potential  gas basin  in                                                              
Nenana  that might benefit  if the  pipeline goes  south and  goes                                                              
through there;  that provision was  adopted by the  [U.S.] Senate.                                                              
Mr. Coughlin  pointed out that  one of the  three purposes  of the                                                              
Act  is  to establish  a  process  for providing  access  to  such                                                              
transportation  projects  "in  order to  promote  competition  and                                                              
exploration, development, and production of Alaska natural gas."                                                                
Number 0805                                                                                                                     
MR. COUGHLIN  reminded members that  this committee has  wanted to                                                              
ensure  that  supporting this  "producers'  enabling  legislation"                                                              
doesn't  hinder  "those  that  had   ANGTA  rights."    Therefore,                                                              
provisions have been  requested to reaffirm ANGTA and  allow it to                                                              
be modernized; those  provisions have been adopted as  part of the                                                              
Act.   Furthermore, he said,  the current committee  was concerned                                                              
about  the  Yukon  Pacific  Corporation   (YPC)  project  and  had                                                              
specifically  requested a  provision to  protect the  presidential                                                              
waiver granted for the YPC project; that also has been adopted.                                                                 
MR. COUGHLIN  said the  other request relating  to ANGTA  "fell by                                                              
the  wayside when  the  'foothills group'  decided  that they  ...                                                              
would no  longer oppose  the producers'  legislation."   He added,                                                              
"We  did request  them, but  I'm  not sure  that they're  relevant                                                              
Number 0830                                                                                                                     
MR.  COUGHLIN turned  attention to  requests  relating to  Alaskan                                                              
jobs.  He noted  this committee's request for  a provision calling                                                              
for approval  of a project  labor agreement  "in the sense  of the                                                              
Senate provision";  he reported that  the U.S. Senate has  said it                                                              
urges the  sponsors of  the project  to agree  to a project  labor                                                              
agreement."  He  noted that Congress didn't grant  a preference to                                                              
Alaskan  workers,   but  passed  several  provisions   to  enhance                                                              
opportunities  for   Alaskan  employees  and  contractors.     Mr.                                                              
Coughlin said those include the following:                                                                                      
     The Secretary  of Labor is required to prepare  a report                                                                   
     setting  forth a program  to train  Alaska residents  in                                                                   
     the  skills and  crafts required  to design,  construct,                                                                   
     and  operate  a  pipeline,  to  enhance  employment  and                                                                   
     contracting  opportunities for  Alaska  residents.   The                                                                   
     report  should  recommend  needed  changes  to  laws  or                                                                   
     regulations that  act as a deterrent to  hiring Alaskans                                                                   
     or  contracting with  Alaskans.   And  the Secretary  of                                                                   
     Labor must  establish, within  one year after  preparing                                                                   
     the  report, training  centers  within  Alaska to  train                                                                   
     ...  Alaskans  in  the skills  necessary.  ...  And  $20                                                                   
     million is  appropriated to  the Secretary to  carry out                                                                   
     the purposes of this particular provision.                                                                                 
Number 0906                                                                                                                     
MR. COUGHLIN addressed  financing proposals.  He  reminded members                                                              
that this committee  has recommended opposition to  any incentives                                                              
for foreign LNG  production that is being brought  into the United                                                              
States; the  Act currently provides  for none.  In  addition, this                                                              
committee   has  supported   having  an   accelerated-depreciation                                                              
provision;  although  one  was  adopted,  it was  for  ten  years,                                                              
rather than  seven.   That disagreement  between the [U.S.]  House                                                              
and Senate  versions  of the  bill likely  will be  taken up  in a                                                              
conference  committee if  the  Senate passes  the  Act, he  noted.                                                              
Furthermore, this  committee has  supported a provision  to reduce                                                              
price risk  uncertainty so  long as  state finances aren't  harmed                                                              
by  such   a  provision;  that   provision  is  being   worked  on                                                              
currently.   He  said  he expected  to see  an  amendment to  that                                                              
effect the coming Friday.                                                                                                       
MR.  COUGHLIN concluded  by  offering  his understanding  that  if                                                              
there is  a conference [committee]  between the [U.S.]  Senate and                                                              
the House  on the energy  bill, Chairman  Torgerson plans  to work                                                              
with such a committee  to try to change some of  the provisions in                                                              
the pipeline Act portion to further benefit Alaskan citizens.                                                                   
Number 0995                                                                                                                     
REPRESENTATIVE  PORTER referred  to  Mr. Coughlin's  mention  that                                                              
[under  the Act]  FERC  is required  to  consult  with the  state,                                                              
rather  than having  RCA participate.   He asked  whether the  Act                                                              
says who in the state is supposed to be consulted.                                                                              
MR.  COUGHLIN  answered no,  specifying  that  it just  says  "the                                                              
REPRESENTATIVE  PORTER asked  what  the state  would  do if  there                                                              
were no guaranteed  access for royalty gas.  Would  the state have                                                              
to stand in line at the open season, like everybody else?                                                                       
MR.  COUGHLIN  answered  that  it  is unclear.    Like  any  other                                                              
entity, the state  would have the right to petition  FERC; as long                                                              
as the state  could show that the  gas could be taken  off without                                                              
harming  other shippers,  and would  pay that  cost, it could  get                                                              
access.    He  added,  "As I  understand  it,  under  the  current                                                              
version,  there's  no special  protection  for  the state  as  was                                                              
contemplated in ANGTA."                                                                                                         
Number 1057                                                                                                                     
CHAIRMAN  TORGERSON explained,  "Clearly,  we have  in our  leases                                                              
that the  producers  have to ship  our royalty  gas, ...  whatever                                                              
our percent  is.  So the  confusion comes from  future discoveries                                                              
where we  have royalty  gas, where it  would require  an expansion                                                              
of  the line  or  less  producer gas  shipped  down  the line,  to                                                              
accommodate  our  royalty."    He  reiterated  that  he  is  still                                                              
working on  it and that there  will be a conference  committee [if                                                              
it passes the U.S. Senate].  He thanked Mr. Coughlin.                                                                           
INTRODUCTION OF SB 360 - "ALASKA NATURAL GAS PROJECT ACT"                                                                     
[This was not  a scheduled hearing, but an explanation  before the                                                              
Joint Committee on Natural Gas Pipelines.]                                                                                      
Number 1098                                                                                                                     
CHAIRMAN  TORGERSON  announced  the  next order  of  business,  an                                                              
explanation  of SB  360,  which was  introduced  that  day by  the                                                              
Senate  Resources Committee.   As  chairman of  that committee  as                                                              
well, he explained the intention behind the legislation.                                                                        
CHAIRMAN  TORGERSON  expressed hope  that  SB  360 will  become  a                                                              
vehicle  for "passage  of any  of  the work  that we're  currently                                                              
doing."   He  said  it accomplishes  a  lot of  necessary  things.                                                              
First,  it recognizes  that there  won't be a  project built  this                                                              
year.   There isn't a  lot of work  that the legislature  needs to                                                              
do this  year, he  explained.   However, there  has been  a public                                                              
expectation  that  something  would  happen, such  as  passage  of                                                              
legislation  to  provide  incentives  or help  spur  the  project.                                                              
"I've said, from  day one, that I would not leave  my negotiations                                                              
with  an incentive,"  he said.   "I  still believe  that, that  we                                                              
shouldn't  until all the  details are  laid on  the table  of what                                                              
we're doing, what the project economics are."                                                                                   
CHAIRMAN  TORGERSON  noted that  the  timeline for  receiving  the                                                              
project economics  has continued to slide backwards,  with nothing                                                              
received;  he  said  he  isn't  sure   that  information  will  be                                                              
received this  session, but believes  it is important to  at least                                                              
put the parameters  together that would direct  the administration                                                              
to start  negotiations, for example,  with municipalities  on some                                                              
of their issues.   In some cases,  he noted, it will  come back to                                                              
the legislature for approval later.                                                                                             
Number 1194                                                                                                                     
CHAIRMAN TORGERSON  highlighted provisions  of SB 360.   It allows                                                              
the project  to be  phased under  the Alaska Right-of-Way  Leasing                                                              
Act.    It  gives  all  agencies   the  full  cooperation  of  the                                                              
Department  of  Natural  Resources (DNR)  commissioner,  "more  or                                                              
less,"  for expedited  permitting.   It  allows  the governor,  if                                                              
he/she finds  provisions of  the law that  impede the  project, to                                                              
propose   a  waiver.      Furthermore,   any  decisions   by   the                                                              
commissioner  or  other  agencies  shall  be  subject  to  limited                                                              
judicial review.   He remarked, "These are all part  of ANGTA that                                                              
we  wanted to  have part  of our  laws."   It also  says that  any                                                              
judicial action brought must be done within 60 days, he noted.                                                                  
CHAIRMAN  TORGERSON  continued,  noting  that SB  360  allows  the                                                              
commissioner of  the Department of  Revenue to start  negotiations                                                              
with local governments  on property tax "after they  are sure that                                                              
the  project   is  not   economically  feasible,   and  then   the                                                              
commissioner  will put together  a ...  [socioeconomic] report  on                                                              
the impacts  of local governments,  and then ... he  may recommend                                                              
to us whether to  waive it all, reduce it, defer  it, or whatever;                                                              
and that  would require  legislative approval  after that  work is                                                              
done."  The  bill also directs  the commissioner of DNR  to waive,                                                              
reduce,  or defer  all  or part  of the  royalty  payments on  the                                                              
project;  again,   this  takes   legislative  approval,   he  told                                                              
members,  upon discovery  that  the  project is  not  economically                                                              
feasible without taking  such action.  Furthermore,  it allows the                                                              
Alaska Railroad  Corporation (ARRC) to issue tax-exempt  bonds for                                                              
the project.                                                                                                                    
CHAIRMAN TORGERSON  mentioned the commissioners of  the respective                                                              
agencies  and  noted that  under  SB  360, companies  must  agree,                                                              
before  receiving any  benefits, to  train and  hire Alaskans  and                                                              
use Alaskan  businesses in the  construction and operation  of the                                                              
project,  consistent with  constitutional provisions.   They  also                                                              
must complete  a study on in-state  demand and submit a  plan that                                                              
must  be  approved  by  RCA;  complete  a  study  on  natural  gas                                                              
resources  in northern  Alaska; and  submit  a plan  that must  be                                                              
approved  by  RCA  to  maximize access  to  the  project  so  that                                                              
competition   for   Alaskan  oil   and   gas  can   be   promoted.                                                              
Furthermore,  they must update  the studies  after ten  years, and                                                              
they  must  agree to  the  provisions  in the  right-of-way  lease                                                              
[providing]  for  in-state  use   of  gas  and  expansion  of  the                                                              
Number 1329                                                                                                                     
CHAIRMAN  TORGERSON characterized  SB  360 as  a  carrot-and-stick                                                              
approach  intended to  bring everybody  to  the table.   He  noted                                                              
that it  would be  heard [by  the Senate  Resources Committee]  on                                                              
Monday  [4/15/02],  when the  commissioners  and  so forth,  along                                                              
with  the oil  companies, if  ready, would  testify by  invitation                                                              
only; he  expressed the hope  of moving  it from committee  at the                                                              
following hearing so  it could go to the Senate  Finance Committee                                                              
for debate.  Again  suggesting that SB 360 is the  vehicle to use,                                                              
he acknowledged  that it is major  legislation to get  through the                                                              
process in  the time  remaining.  He  concluded the discussion  of                                                              
SB 360  by encouraging members of  the Joint Committee  on Natural                                                              
Gas Pipelines to read it and provide any suggestions.                                                                           
ECONOMIC MODELS OF PIPELINE PROJECTS:  DR. DOUG REYNOLDS                                                                      
CHAIRMAN  TORGERSON  announced  the  final order  of  business,  a                                                              
presentation  by Dr.  Douglas B.  Reynolds, whose  Fairbanks-based                                                              
economic firm was  hired by the committee in February  through the                                                              
work  of the  Legislative Council.    He mentioned  the series  of                                                              
models  that  have been  reviewed  and  the frustration  from  not                                                              
having figures  from the producers.   He explained that  there had                                                              
been a need  to narrow it to  a few models, rather than  having so                                                              
many variations.   Therefore,  a  couple of weeks  ago he'd  asked                                                              
Dr. Reynolds  to have  economists from  the Department  of Natural                                                              
Resources  (DNR) and  the Department  of Revenue  meet along  with                                                              
Bonnie [Robson] of [the Division of] Oil and Gas.                                                                               
CHAIRMAN  TORGERSON indicated  that  the handout  provided to  the                                                              
committee, which  duplicates Dr. Reynolds' slide  presentation, is                                                              
the  product  of   that  discussion.    Indicating   there  wasn't                                                              
agreement on  every point,  he said  Dr. Reynolds would  highlight                                                              
the parts  for which there  is insufficient  data.  He  also noted                                                              
that extensive work  had been done with Yukon  Pacific Corporation                                                              
(YPC) on  its model,  as well  as with  the [Alaska Gasline]  Port                                                              
Authority, which had  provided a lot of data and  information.  In                                                              
addition, there  has been input from  Canada.  "They kind  of took                                                              
the best of all  inputs," he added, turning the  presentation over                                                              
to Dr. Reynolds.                                                                                                                
Number 1501                                                                                                                     
DOUGLAS   B.   REYNOLDS,   Ph.D.,   Northern   Economic   Research                                                              
Associates  (NERA), came forward,  noting that  he is a  professor                                                              
of economics  at the University of  Alaska Fairbanks (UAF)  and is                                                              
working  as  a  consultant  for the  legislature  along  with  Dr.                                                              
Robert R. Logan  and Dr. H. Charlie Sparks of UAF.   He introduced                                                              
his  assistant,  Michael  Backus,  noting  that he  is  an  Alaska                                                              
Scholar.   Elaborating  on the  slide  presentation, Dr.  Reynolds                                                              
told members:                                                                                                                   
     Building  a model has  been really complicated,  because                                                                   
     what  we're trying  to  do  is compare  three  different                                                                   
     types  of models.    And there's  a  lot  of ...  issues                                                                   
     involved.   Before  we  started, we  looked  at a  large                                                                   
     number of other  models.  We looked at  Canadian models,                                                                   
     Cambridge  Energy Research Associates  models, YPC,  and                                                                   
     many  others,  and  also  the   Department  of  Revenue,                                                                   
     Department of  Natural Resources, and worked  with their                                                                   
     economists.   We had updates with Senator  Torgerson and                                                                   
     Patrick Coughlin.   And ... we finally came  down to ...                                                                   
     the three  major models, because  you can always  change                                                                   
     things  - and  we can  change  things ...  in our  basic                                                                   
     model  - but we  had to  narrow it  down to three  basic                                                                   
     models to look at.                                                                                                         
Number 1581                                                                                                                     
DR.  REYNOLDS presented  a  slide  [page 3  of  the handout]  that                                                              
called rate  of return (ROR) "a  cash flow concept."   Noting that                                                              
this is a general  concept with many variations, he  said it would                                                              
be used to  compare the projects.   He paraphrased from  the slide                                                              
from  page  4  of  the  handout,   which  provided  the  following                                                              
information:  ROR  is like interest from a bank;  higher ROR means                                                              
a better  investment and more  profit; if  ROR is low,  then firms                                                              
choose alternative  investments;  and producers  want to sell  gas                                                              
to high-ROR projects.   He said producers will want  to sell their                                                              
gas  to  the  best project  out  of  all  possible  projects,  and                                                              
usually will want a higher rate of return.                                                                                      
Number 1629                                                                                                                     
DR. REYNOLDS turned  attention to the first issue  that can affect                                                              
ROR, which  is leveraging [page 5  of the handout].   He explained                                                              
that  most companies  start  with 100  percent  equity to  compare                                                              
projects,  but then  may  do some  leveraging  -  some debt,  some                                                              
equity - once they  actually do the project.  He  added, "And then                                                              
when  you do  the leveraging  you'll have  to weight-average  what                                                              
your whole return is."                                                                                                          
DR.  REYNOLDS turned  to  the second  issue,  natural gas  liquids                                                              
(NGLs) [page 6 of the handout].  He said:                                                                                       
     Now, NGLs  are already used  for miscible injectants  on                                                                   
     the Slope for producing more  oil.  And the heavier NGLs                                                                   
     can  ...  already  be shipped  down  TAPS  [Trans-Alaska                                                                   
     Pipeline  System] ...  because they're  heavy enough  to                                                                   
     get into  the ... pipeline, and  they can be sold.   The                                                                   
     lighter  NGLs would  go through  the  pipeline with  the                                                                   
     methane - which  is the usual gas for natural  gas - and                                                                   
     then be  stripped out at the  end of the pipeline.   The                                                                   
     NGLs  are more  valuable.   So, obviously,  if you  sell                                                                   
     more NGLs, you're  going to make more money.   So that's                                                                   
     a big issue  in a lot of these different  projects.  And                                                                   
     if you sell more, you'll get a higher rate of return.                                                                      
     However,  one of the  last things I  should say  is that                                                                   
     it's questionable  how much these NGLs  are sustainable.                                                                   
     In other words,  ... if you start taking a  lot of NGLs,                                                                   
     especially  propane, the  amount of  propane's going  to                                                                   
     start to decline over time.   And so, some of the models                                                                   
     ... that we've  looked at have very high  propane levels                                                                   
     that they're  trying to extract and use, and  those high                                                                   
     levels cannot be  sustained for ... a long time.   So it                                                                   
     would impact their models.                                                                                                 
Number 1710                                                                                                                     
DR.  REYNOLDS  turned  to  the third  issue,  economies  of  scale                                                              
[page 7].   He emphasized  the importance  of  this big factor  in                                                              
terms of costs,  as brought up by the port authority,  since for a                                                              
larger-diameter pipeline, costs per  bcf [billion cubic feet] will                                                              
be  lowered.   With regard  to liquefied  gas  (LNG), however,  he                                                              
     As  far as LNG  - liquefied  natural gas  - plants,  you                                                                   
     will usually  build one plant, and then, when  that's at                                                                   
     capacity,  you'll build  another plant,  and you're  not                                                                   
     going  to get a  lot of economies  of scale,  especially                                                                   
     for the  larger Alaskan projects,  because they  have to                                                                   
     build  these LNG  plants all  at one time.   They  can't                                                                   
     build  one  and then  build  another and  then  another,                                                                   
     which is  what is usually  done.  In  order to  make the                                                                   
     economies  of these  projects work,  they ...  basically                                                                   
     have to build  them all at one time.  Of  course, if you                                                                   
     get lower costs, you increase your rate of return.                                                                         
Number 1752                                                                                                                     
DR. REYNOLDS addressed a graph labeled  "Economies of Scale" [page                                                              
8]  that he  described as  an example  of how  economies of  scale                                                              
work.  As  the bcf output increases,  he noted, costs per  bcf for                                                              
[LNG]  plants  and  tankers  won't  decline,  but  costs  for  the                                                              
pipeline will.                                                                                                                  
DR. REYNOLDS discussed a diagram  labeled "Typical Y Line Concept"                                                              
[page 9].   He asked  that members not  focus on the  numbers, but                                                              
focus instead  on the  big circle  on the  lower right-hand  side,                                                              
which read,  "Total cost of Valdez  LNG line:  $7.2 billion."   He                                                              
reported that in  this particular model, that $7.2  billion is for                                                              
the 2 bcf going  from Delta Junction to Japan.  It  takes 4 [bcf a                                                              
day], with  a split after  Delta Junction  that provides 2  bcf to                                                              
Japan, at a cost  of $7.2 billion, and 2 [bcf]  to Alberta.  There                                                              
are economies of scale from the North  Slope to Delta Junction, he                                                              
DR. REYNOLDS  addressed  a diagram labeled  "Typical ALCAN  Route"                                                              
[page 10].   If all 4 bcf [a  day] went to Alberta,  he noted, the                                                              
cost of  getting that extra  2 bcf to  market in Alberta  would be                                                              
$3.2 billion, less  than half [of the cost to  Japan], because the                                                              
pipeline would  be made  larger from  the planning stages  onward.                                                              
That will be a big factor for the rate of return.                                                                               
Number 1853                                                                                                                     
DR. REYNOLDS  turned attention to  the fourth issue, the  price of                                                              
the  product  [pages  11-12].     He  noted  that  there  are  two                                                              
different markets:   the Pacific Rim and North  America.  Although                                                              
potentially there is  "20 new million tons of LNG  per year demand                                                              
in the  Pacific Rim," there  is a lot  of supply, especially  from                                                              
the Middle East;  he cited Iran, Saudi Arabia, and  Qatar as being                                                              
on  or close  to the  shoreline, so  that a  large pipeline  isn't                                                              
needed.   He  also  mentioned  Indonesia, Australia,  and  Russia.                                                              
Dr. Reynolds  said the only way to  outcompete those is  to have a                                                              
lower  price.   The  problem  with  the  models or  projects  with                                                              
Alaskan LNG  is the need  to sell a lot  of LNG once  the pipeline                                                              
is finished; it needs  to be sold all at one time,  which is a lot                                                              
for that  particular market.   He added, "You  also have to  do it                                                              
for Alberta,  but the percentage of  the market is a  little lower                                                              
for  Alberta than  for  ... the  Pacific  Rim."   Historic  prices                                                              
cannot be  used to  determine the  price of  sale for the  Pacific                                                              
Rim,  he  added, noting  that  lower  prices  reduce the  rate  of                                                              
DR. REYNOLDS explained  why he believes North America  is a better                                                              
market.   In the North  American market,  demand is increasing  at                                                              
about  2 percent  [a year].   One  advantage Alaska  will have  is                                                              
that  the mid-continent  supply is  close to  or on  the verge  of                                                              
being in decline.   He mentioned onshore natural  gas supplies and                                                              
then  said  LNG  imports  are "difficult  to  do  into  the  U.S."                                                              
because of  difficulties with  permits or  high expense,  and they                                                              
take time.   He said there probably will  be 1 or 2 new  bcf a day                                                              
of demand  in the  U.S. every  year, "and  so prices  in the  U.S.                                                              
could  ...  be  a  lot  higher."     Indicating  Alaska's  primary                                                              
competition would be Texas, he said:                                                                                            
     Texas  has  saturated  everything  they've  looked  for,                                                                   
     everything there,  and they're on the verge  of decline,                                                                   
     just like  in 1970,  when their  oil production went  in                                                                   
     decline.   And  once it  went  in decline,  it ...  went                                                                   
     down pretty fast.   And the same thing's  probably going                                                                   
     to  happen  with  their gas  supply,  and  that's  where                                                                   
     Alaska  will  have  a  great   advantage.    So,  in  my                                                                   
     opinion,  the North  American  market is  a much  better                                                                   
Number 1980                                                                                                                     
DR. REYNOLDS turned  to the fifth issue, risk [page  13].  He told                                                              
     Producers have  to guarantee  a "ship or pay"  contract.                                                                   
     It  really   doesn't  matter  who  owns   the  pipeline.                                                                   
     They're going  to take the risk; they have  to guarantee                                                                   
     the contract.                                                                                                              
     Another part  of the risk is  that this is a  very large                                                                   
     ... project.  Not many projects  have been done that are                                                                   
     this  large. ...  Really, the  only comparable  projects                                                                   
     are the TAPS  oil pipeline and the natural  gas pipeline                                                                   
     ... built in the Soviet Union  to Western Europe back in                                                                   
     the '80s.   But  both of those  projects had better  ...                                                                   
     economics  than  this project.    For example,  the  oil                                                                   
     pipeline  had tremendous revenue  potential compared  to                                                                   
     the  costs; even  though the  costs were  high and  they                                                                   
     could have  been higher, you'd  still make money  on ...                                                                   
     that  oil pipeline.   On  the Soviet  ... gas  pipeline,                                                                   
     they  had much lower  costs compared  to Western  Europe                                                                   
     because  in  the '80s  the  Soviet  Union had  a  closed                                                                   
     market;  its  ruble  was  nonconvertible,   and  so,  in                                                                   
     essence,  they had much  lower costs  ... than what  was                                                                   
     available for their revenues  ... in Western Europe. ...                                                                   
     This  [Alaska]  gas pipeline  has  huge costs,  and  the                                                                   
     revenues  are just on  the verge  of making or  breaking                                                                   
     ... the economics of building  that.  And so it's a much                                                                   
     ... tighter  fit between revenue  and costs  than either                                                                   
     of  those  large  pipelines.     So  you  have  a  large                                                                   
     pipeline.   It has  to be  all or  nothing:  you  either                                                                   
     build it  or you don't.  And  you have to sell  that gas                                                                   
     once it's  built or you're not  going to make  money, so                                                                   
     you  have to sell  it right  from the  start.  And  that                                                                   
     makes it  ... a pretty risky  affair. ... If you  have a                                                                   
     lot  of risk, then  you have  to have  a higher rate  of                                                                   
     return to compensate for that risk.                                                                                        
Number 2062                                                                                                                     
DR. REYNOLDS  addressed  the sixth issue,  federal tax  exemptions                                                              
[pages  14-15   of  the  handout].    Mentioning   tax-free  [bond                                                              
financing] proposed  for the  Alaska Railroad Corporation  (ARRC),                                                              
he said  tax-free bond financing  could lower the  financing costs                                                              
and help the rate  of return somewhat.  However,  a tariff income-                                                              
tax exemption  "may or  may not  really help."   For example,  one                                                              
idea for  a port authority or  other authority would be  having an                                                              
income-tax  exemption to  lower costs.   But the  problem is  that                                                              
there needs to be a way to hand that  value over to the producers,                                                              
who  otherwise  don't  benefit.     Although  that  might  not  be                                                              
important to  the State  of Alaska, he  suggested, it  probably is                                                              
important  with  regard  to  the  desire to  do  "one  or  another                                                              
project."   He said it isn't possible  to hand over a  tax benefit                                                              
to the  producers without its  being taxed in  some way; if  it is                                                              
handed to  the producers as  a fee or  a higher wellhead  [price],                                                              
then it will be taxed.                                                                                                          
Number 2119                                                                                                                     
DR.  REYNOLDS  turned  to  the  seventh   issue,  in-state  demand                                                              
[page 16].  Noting that in-state  demand obviously is important to                                                              
the  State of  Alaska, he  said one  problem  is when  it will  be                                                              
needed.  He explained:                                                                                                          
     We  have Kenai gas  right now,  and eventually  sometime                                                                   
     it's  ... going  to run  out, and  so ...  the state  is                                                                   
     going to want  some gas from the North Slope.   Well, if                                                                   
     you build a  pipeline with some extra capacity  for that                                                                   
     in-state demand, you have to  pay [for it].  And if it's                                                                   
     not used  right away, then you  have a lot of  cost that                                                                   
     is not productive; it's like  nonperforming assets.  And                                                                   
     that's going to lower the rate  of return for the entire                                                                   
     project.  So  either somebody has to pay  for that extra                                                                   
     capacity or  it has to  be used right  away.  And  since                                                                   
     right now the Kenai does have  gas reserves for at least                                                                   
     ... five  or ten  years, then  ... it might  potentially                                                                   
     sit idle.                                                                                                                  
     According  to the Department  of ... Natural  Resources,                                                                   
     they had a  ... demand scenario, and ...  by maybe 2020,                                                                   
     if Kenai gas does decline, the  in-state demand could be                                                                   
     ... 1 bcf per day.  And the  normal project for this gas                                                                   
     line  is somewhere  around 4  bcf  per day.   So  you're                                                                   
     talking about an extra bcf.   You either have to take it                                                                   
     out of  that capacity - which  would mean there's  a ...                                                                   
     lot of  pipeline ... going  to Alberta that's  not being                                                                   
     used, and so  you're not paying for that asset  - or you                                                                   
     have to  build the extra asset  and pay for  it somehow.                                                                   
     So that's important to remember.                                                                                           
Number 2185                                                                                                                     
DR. REYNOLDS  turned attention to the  next slide [page  17 of the                                                              
handout],  "Producer Numbers,"  which read  simply, "We  asked for                                                              
but  have  not  yet received  producer  study  numbers  for  their                                                              
DR.  REYNOLDS  discussed  the  next  slide  [pages  18-19  of  the                                                              
handout, labeled "Approximate Model  Cost Assumptions"].  He said:                                                              
     After  looking at  a lot  of  different ...  engineering                                                                   
     reports  and   estimations,  we  come  out   with  about                                                                   
     $140,000 per  inch mile, less in Canada.   This includes                                                                   
     the  pipe  and compressor  and  installation.   You  can                                                                   
     separate  these  costs,  but  when  you  put  them  back                                                                   
     together again, you get roughly  140,000 [dollars], give                                                                   
     or take  - obviously, it's only  an estimate.   Now, ...                                                                   
     for example, if  we have a ... 4-bcf project,  you might                                                                   
     need a 46-inch  pipe.  One mile of that would  cost $6.4                                                                   
     million.   You just multiply  ... 46 times  ... $140,000                                                                   
     times  one  mile. ...  So  if  you had  a  thousand-mile                                                                   
     pipeline, that's $6.4 billion.                                                                                             
DR. REYNOLDS  offered the following  estimates:   for conditioning                                                              
plants, roughly  $600 million per  bcf plus some fixed  costs; for                                                              
LNG plants,  roughly $1.6  billion per bcf;  and for  LNG tankers,                                                              
approximately  $170 [listed as  $175 on  the handout] million  per                                                              
ship, with  about three ships needed  per bcf.  He alluded  to the                                                              
following  statement  on page  19:   "There  are  some gas  losses                                                              
during gas  shipping which  reduces revenues."   He remarked  that                                                              
these were just the rough numbers used in the model.                                                                            
Number 2252                                                                                                                     
DR. REYNOLDS discussed  the final model [page 20  of the handout],                                                              
noting that  for comparing the  different projects, the  same cost                                                              
structure  and  "rate  of  return"   concept  was  used  for  all.                                                              
However, there  will be a higher  amount of NGLs sold  for smaller                                                              
projects than  for bigger ones,  and it  is tough to  compare them                                                              
for these different projects.  He  indicated that after talking to                                                              
a lot  of people  to try  to figure  out the  best way to  compare                                                              
them, he believes this is the best comparison possible.                                                                         
[Dr.  Reynolds continued  his slide  presentation, discussing  the                                                              
unnumbered  three  pages  of  models  found at  the  back  of  the                                                              
handout.    At  the  top  of  each  page  it  said  "30  Years  of                                                              
Production"  and  listed the  following  categories  from left  to                                                              
right:    Capital  Cost (millions)  (2002$),  bcf/day,  Return  on                                                              
Equity,  Return to  Project,  Wellhead, State  Revenue  (millions)                                                              
(2002$),  Federal  Revenue  (millions)  2002$),  Canadian  Revenue                                                              
(millions) (2002$), and Undiscounted Profit (millions) (2002$).]                                                                
Number 2292                                                                                                                     
DR. REYNOLDS noted  that the first set of numbers  relates to YPC.                                                              
He pointed  out that  the "Return to  Project" category  should be                                                              
"Return to Earnings."   Including tax exemptions and  so forth, he                                                              
said  [YPC] would  get  about 14.8  percent,  whereas [the  state]                                                              
would get about  13.21 percent.  More important, he  said, is that                                                              
on the basic model, "our 1.5 model"  [labeled "NERA LNG 1.5 on the                                                              
handout], at 100 percent equity,  uses the same kinds of inputs as                                                              
for the next models, and shows about  a 12 percent rate of return.                                                              
He said  there are  similar costs  for the  NERA model versus  the                                                              
YPC, but that  YPC's uses a higher  price in Japan.   He explained                                                              
that  the  gas  must  be  sold  within   a  year  of  the  end  of                                                              
construction;  otherwise, money is  lost quickly  and the  rate of                                                              
return starts  going down.  To  do that, he suggested,  there must                                                              
be a little  lower price.  He  said YPC deals with that  issue [in                                                              
its model]  by selling some to  Japan and some to  California; the                                                              
second price  is a California  price.   By contrast,  Dr. Reynolds                                                              
said, "We  just ...  sell it all  to Japan at  one price,  so it's                                                              
kind  of a  medium  ground  for that.    They  also sell  some  to                                                              
Alaska."  He said the "outputs" are fairly close.                                                                               
TAPE 02-6, SIDE B                                                                                                             
Number 2352                                                                                                                     
DR. REYNOLDS  turned to  the next  slide [the  second page  of the                                                              
models].   He noted that the  port authority model [for  a "Y-Line                                                              
6"]  is  a  huge,  6-bcf  project,  although  the  producers  also                                                              
envision having 6  bcf going to the Lower 48;  therefore, he said,                                                              
it  isn't out  of the  question.   He  pointed out  that the  port                                                              
authority's capital  costs are  only for Alaska,  so it's  hard to                                                              
compare them exactly because the [NERA] model includes all the                                                                  
Canadian costs.  He explained:                                                                                                  
     They don't have  a rate of return because  ... they have                                                                   
     theirs  100  percent debt  financed,  which  is hard  to                                                                   
     compare.  In  order to get close to their  model, we put                                                                   
     85/15 ...  debt/equity.  And  we get maybe ...  a higher                                                                   
     wellhead  [price].   And as  far as  state revenues  are                                                                   
     concerned, ... in order to get  what they got, we had to                                                                   
     put it at a 7.3 percent net  present value, and we get a                                                                   
     little bit  lower than what they  got.  When you  put it                                                                   
     on a 100-percent-equity  basis, we get a rate  of return                                                                   
     of 4.31 percent;  that's compared to about  a 12 percent                                                                   
     for the YPC project. ...                                                                                                   
     I know  this whole  thing is  complicated, but what  you                                                                   
     might want to  look at is this "ALCAN  marginal" [listed                                                                   
     under "NERA Y-LINE 6"] and what  that is saying is, what                                                                   
     if, instead of  having a 6 bcf where 3 goes  one way and                                                                   
     3 goes  the other  way, let's  put the 3  to the LNG  in                                                                   
     with  the 3  to  Alberta and  make it  a  total 6  [bcf]                                                                   
     project,  and what's  the marginal benefit  for those  3                                                                   
     bcf that  went to the  LNG?  And  we would get  a higher                                                                   
     return on that.  Now, that's  assuming that prices don't                                                                   
     change in  the Lower  48, ... which  could be the  case.                                                                   
     Anyways, the total  6, if we just did an  ALCAN 6 [shown                                                                   
     on  handout], we  would get  something on  the order  of                                                                   
     almost 17  percent rate  of return.   And ... the  costs                                                                   
     are pretty  similar, only they  don't have the  Canadian                                                                   
     costs, so we  had to put those in.  They  think they can                                                                   
     get a $3.35 price in Japan; we say $3.10.                                                                                  
Number 2259                                                                                                                     
DR. REYNOLDS continued comparing models:                                                                                        
     The port  authority used  to say that  they could  get a                                                                   
     $3.10, and  then recently -  because of violence  in the                                                                   
     Middle East  and so  on - they  think they can  probably                                                                   
     get a  higher price, which may  be true, but if  ... you                                                                   
     get  a  20-year  contract with  a  little  higher  price                                                                   
     because  there's  violence  in  the  Middle  East,  what                                                                   
     you're saying  is that you think  there's a lot  of risk                                                                   
     involved with not getting ...  gas from the Middle East.                                                                   
     If you're  saying you can't  get the gas, you  might not                                                                   
     be able to  get the oil.  And if you can't  get the oil,                                                                   
     the price of  oil and gas is just going to  go sky high.                                                                   
     And then  you get a high price  in the Lower 48 too  - a                                                                   
     much higher price.                                                                                                         
     So I'm reluctant  to go with the $3.35; I  would go with                                                                   
     $3.10, and  even that's  going to be  ... hard to  sell.                                                                   
     ... I'm  thinking I'm giving  the benefit of  the doubt;                                                                   
     they might  argue it's  just my  opinion I'm giving  the                                                                   
     benefit of  the doubt to give  a $3.10 price.   It could                                                                   
     be  lower because  ...  that's a  very  high number,  14                                                                   
     million  tons per  year, when  we only  expect maybe  10                                                                   
     [extra] million tons in the  next 10 years to be needed.                                                                   
     So they're going  to have to sell a lot of  gas; they're                                                                   
     going to sell  it to China, Korea, and so  on, and China                                                                   
     ... could be  a problem.  In their basic  model, they're                                                                   
     selling 14;  in our basic  model, we're selling  upwards                                                                   
     of 18.   They're selling a  lot of propane; we  cut down                                                                   
     those numbers  because we don't think ...  their numbers                                                                   
     are  sustainable.  We  do give  a lot  of ethane -  this                                                                   
     "NGL" is the ethane - which  may or may not be possible.                                                                   
     And then  they sell a lot  of pentane, which  we believe                                                                   
     the producers  would just  take for themselves,  because                                                                   
     it's not  hard to take  out ... the  pentane.   It's the                                                                   
     heavier  NGLs.  ...  It doesn't  really  make  too  much                                                                   
     difference on the rate of return,  but for their project                                                                   
     it ...  probably makes  a lot  of difference.   Anyways,                                                                   
     the number to remember is 14.31  percent rate of return.                                                                   
Number 2114                                                                                                                     
DR. REYNOLDS  addressed the  final slide [last  page of  models in                                                              
the handout], calling  it a "basic ALCAN 4."  He  said the numbers                                                              
are from the  producers' midsummer report last year,  and that the                                                              
$13  billion includes  Point Thomson's  development, which  wasn't                                                              
included in  the ["NERA ALCAN 4"]  model in order to get  close to                                                              
[the producers']  numbers.  He explained,  "If we tried  to get as                                                              
close to what  they are doing as  possible, we get ...  almost [a]                                                              
15.5 percent return."                                                                                                           
DR. REYNOLDS told members, "There's  been a lot of confusion about                                                              
the state  and federal revenues.   These numbers are  not adjusted                                                              
for inflation, whereas  we always adjust for inflation."   He said                                                              
although  it  may   be  common  practice  elsewhere   not  to  use                                                              
inflation-adjusted  numbers, he  wouldn't  feel comfortable  doing                                                              
that.  He then explained that the  base model ["NERA ALCAN 4"] was                                                              
made to  compare with  the other  models; he  pointed out  the 100                                                              
percent equity and over-15-percent  rate of return.  He added, "We                                                              
have very  similar costs,  very similar  prices,  and ... I'm  not                                                              
sure if  we have exactly  all their numbers  on propane  and such,                                                              
and they may or may not sell ethane."  He then said:                                                                            
     If this is  a comparison with the other projects  on ...                                                                   
     an equal footing where propane  and ethane are sold, and                                                                   
     ...   in  some  sort   of  proportion   -  not   exactly                                                                   
     proportional  to the size  of the  project, but in  some                                                                   
     sort of comparable basis - then  the "ALCAN 4" [has] got                                                                   
     the  better numbers.   It's  got  a 15.5;  the ...  port                                                                   
     authority had about a 14.5;  and the YPC had about ... a                                                                   
     12  percent.    So,  in a  comparison  basis,  with  all                                                                   
     similar costs  - similar way  of adjusting for  NGLs and                                                                   
     so on - the ALCAN 4 is about the best way.                                                                                 
Number 2060                                                                                                                     
CHAIRMAN TORGERSON inquired about the loss of oil [in the                                                                       
calculations relating to gas].                                                                                                  
DR. REYNOLDS answered:                                                                                                          
     We did  not include the loss  of oil.  We are  going ...                                                                   
     to try and  include that right now.  We had  it included                                                                   
     previously,  and  it  was very  complicated  to  put  in                                                                   
     because  this is  already a  complicated  model.   We're                                                                   
     trying to model three different  scenarios; actually, we                                                                   
     have many  scenarios we  could do,  but we're trying  to                                                                   
     focus on the three scenarios.   And the problem with the                                                                   
     oil loss is, you'll have a small  project versus a large                                                                   
     project,  and you'll  probably  have  low losses,  large                                                                   
     losses, but it's not going to be proportional.                                                                             
     And a lot of  the oil losses tend to happen  later on in                                                                   
     the years, and  so ... the effect on the rate  of return                                                                   
     was  very minimal;  so we decided  to take  it out,  and                                                                   
     we're thinking  about putting it in - we're  starting to                                                                   
     try and put  it in again.  But I don't  think it's going                                                                   
     to make  much difference,  especially on the  comparison                                                                   
     ... of these.  And I also believe  that they're going to                                                                   
     mitigate  those losses, and  it's just  a matter of  how                                                                   
     much cost to mitigate them -  more than the ... value of                                                                   
     the lost oil  is the cost to mitigate, and,  again, then                                                                   
     I'd have  to have  numbers from  the producers on  those                                                                   
Number 2010                                                                                                                     
CHAIRMAN TORGERSON asked, "Just to be fair, because you said the                                                                
YPC has the lowest rate of return, ... isn't it because the port                                                                
authority has a higher volume - isn't that the primary reason?"                                                                 
DR. REYNOLDS answered:                                                                                                          
     To be fair with the port authority,  there's a couple of                                                                   
     things that you should be fair  about with them.  Number                                                                   
     one, ... we're  ... doing larger amounts of  propane and                                                                   
     ethane,  and   ...  how  much  propane  and   ethane  is                                                                   
     sustainable is  a big issue; it's not been  resolved, or                                                                   
     it's  not officially  resolved,  and from  what I  hear,                                                                   
     it's not even resolved between  the different producers.                                                                   
     So to be  fair, theirs probably has a better  chance ...                                                                   
     of sustaining the levels of propane and ethane.                                                                            
     The  other  thing  is,  because   they  have  a  smaller                                                                   
     project,  they  probably  have  less risk.    A  smaller                                                                   
     project is  a little less  risky than a larger  project.                                                                   
     And,  to be  fair,  even if  they get  a  lower rate  of                                                                   
     return, they  probably would  have a lower hurdle  rate,                                                                   
     and,  therefore,  have  possibly  a  little  bit  better                                                                   
     chance of succeeding.                                                                                                      
Number 1964                                                                                                                     
CHAIRMAN TORGERSON  turned attention  to the interactive  model [a                                                              
computer program  whereby scenarios can  be plugged in  to produce                                                              
relevant numbers that are shown on the slide screen].                                                                           
DR. REYNOLDS, using "the basic 4-bcf  ALCAN," plugged in property-                                                              
tax incentives, using the assumption  that during the construction                                                              
period of  about four years, and  for ten years  afterwards, there                                                              
would be no  property tax.  He  pointed out that there  would be a                                                              
higher  rate of  return;  whereas  it had  been  15.5, under  this                                                              
scenario it would  rise to almost 16.5.  He suggested  the need to                                                              
look at  the rate  of return,  not the  wellhead [price],  because                                                              
there are differences of opinion on how the wellhead will work.                                                                 
DR. REYNOLDS then  plugged in numbers [relating  to bond financing                                                              
through the ARRC].  Using 70/30 debt/equity,  he said it will be a                                                              
little  more complicated  "than what  we have"  because there  are                                                              
many different tax implications.   "Roughly, you get almost a half                                                              
percent better  rate of  return ... on  a railroad financing,"  he                                                              
[There were other  numbers plugged in, but the  discussion on tape                                                              
wasn't clear without seeing the slide screen.]                                                                                  
DR. REYNOLDS  remarked that  the producers  never do a  comparison                                                              
with debt/equity;  rather, they  go with 100  percent equity.   In                                                              
response  to Chairman  Torgerson,  he said  that if  there is  100                                                              
percent  equity,  the  railroad  bond  cannot  be  shown  [in  the                                                              
interactive model]; the only way  to show that is if there is some                                                              
debt.   He offered  to show  it with  the property-tax  incentive.                                                              
Plugging in  numbers, he said, "We're  at about a 15  percent rate                                                              
of  return  with 100  percent  equity."    He plugged  in  further                                                              
numbers and  then said, "On  an equity  basis, which is  what they                                                              
would  normally do,  you'd get  at  least a  half percent  better.                                                              
And,  again, that  could be  the difference,  depending on  hurdle                                                              
rates  and so  on,  between  a good  project  and a  bad  project,                                                              
depending on their risk analysis."                                                                                              
Number 1695                                                                                                                     
DR. REYNOLDS asked his assistant to change the price in Alberta                                                                 
[in the interactive model].  He said:                                                                                           
     A 5  percent change in  Chicago is  about 15 cents  - so                                                                   
     put  $2.45.   And it  goes up  a  half percent.   So  no                                                                   
     matter how  much we  give to this  project, a 5  percent                                                                   
     change in  Chicago is probably  going to be  bigger than                                                                   
     what  we can  do in  Alaska,  incentivewise.   And a  10                                                                   
     percent  change in Chicago  is going  to be really  big.                                                                   
     So, obviously,  that price in  Chicago - or  whatever we                                                                   
     get in Alberta - is going to have a big effect.                                                                            
CHAIRMAN TORGERSON asked if there were questions; none were                                                                     
offered.  He thanked Dr. Reynolds.                                                                                              
There being no further business before the committee, the Joint                                                                 
Committee on Natural Gas Pipelines meeting was adjourned at                                                                     
4:48 p.m.                                                                                                                       

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