Legislature(2007 - 2008)BUTROVICH 205
03/16/2007 03:30 PM Senate RESOURCES
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| SB104 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
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+ teleconferenced
= bill was previously heard/scheduled
| = | SB 104 | ||
ALASKA STATE LEGISLATURE
SENATE RESOURCES STANDING COMMITTEE
March 16, 2007
3:41 p.m.
MEMBERS PRESENT
Senator Charlie Huggins, Chair
Senator Lyda Green
Senator Gary Stevens
Senator Bill Wielechowski
Senator Thomas Wagoner
MEMBERS ABSENT
Senator Bert Stedman, Vice Chair
Senator Lesil McGuire
COMMITTEE CALENDAR
SENATE BILL NO. 104
"An Act relating to the Alaska Gasline Inducement Act;
establishing the Alaska Gasline Inducement Act matching
contribution fund; providing for an Alaska Gasline Inducement
Act coordinator; making conforming amendments; and providing for
an effective date."
HEARD AND HELD
PREVIOUS COMMITTEE ACTION
BILL: SB 104
SHORT TITLE: NATURAL GAS PIPELINE PROJECT
SPONSOR(s): RULES BY REQUEST OF THE GOVERNOR
03/05/07 (S) READ THE FIRST TIME - REFERRALS
03/05/07 (S) RES, JUD, FIN
03/14/07 (S) RES AT 3:30 PM BUTROVICH 205
03/14/07 (S) Heard & Held
03/14/07 (S) MINUTE(RES)
03/16/07 (S) RES AT 3:30 PM BUTROVICH 205
WITNESS REGISTER
Patrick Galvin, Commissioner
Department of Revenue
Juneau, AK
POSITION STATEMENT: Presented SB 104
Kevin Banks, Acting Director
Division of Oil and Gas
Department of Natural Resources
Juneau AK
POSITION STATEMENT: Commented on SB 104
Marcia Davis, Deputy Commissioner
Department of Revenue
Juneau, AK
POSITION STATEMENT: Commented on SB 104
Donald Shepler
Greenberg Traurig, LLP
Consultant to the Legislative Budget and Audit Committee
Juneau AK
POSITION STATEMENT: Commented on SB 104
ACTION NARRATIVE
CHAIR CHARLIE HUGGINS called the Senate Resources Standing
Committee meeting to order at 3:41:19 PM. Present at the call to
order were Senators Wielechowski, Green, Wagoner, Stevens and
Huggins.
SB 104-NATURAL GAS PIPELINE PROJECT
CHAIR HUGGINS announced SB 104 to be up for consideration.
PATRICK GALVIN, Commissioner, Department of Revenue (DOR), said
that he would be giving the second half of his presentation
covering the topics of what the state receives in return for its
inducements, evaluation criteria, provisions for predictability,
and the status of the fields on the North Slope.
He said that there are three points for addressing in-state use:
a mandated agreement to include at least five off-take points
within Alaska, distance-sensitive tariffs, and recognition of
the importance of the expansion provisions.
3:46:59 PM
SENATOR WIELECHOWSKI asked how the provisions will make low-cost
gas available for Alaskans.
KEVIN BANKS, Director, Division of Oil and Gas, Department of
Natural Resources (DNR), said that in-state off-take points
allow a gas consumer to pay for just the trip to the off ramp
instead of through the whole pipeline. He explained how the
mileage-based rate will be lower for those off-taking in
Fairbanks, for example.
SENATOR WIELECHOWSKI asked if that provision differs from the
Stranded Gas Act.
MR. BANKS replied yes; the Stranded Gas Act relied on FERC
mandatory expansion regulations.
3:52:09 PM
COMMISSIONER GALVIN said he would talk about the criteria that
are going to be used to evaluate proposals. The first is to
determine if an applicant has met the "must-have" requirements.
If one is missing, the proposal will not be considered. There
are two primary drivers for the project: value to the state and
how much money the project provides, which is based on how
quickly the cash will flow in. The feasibility and work plan of
the project will also be considered, as well as financial
strength. Cost overrun and cost sharing are also considered.
There's a number of criteria that deal with the likelihood of
success as well; roadblocks need to be identified and
anticipated.
3:56:25 PM
He explained that for the application process, applications are
received, and there's a public comment period, although some
information may ultimately be kept confidential. After the
commissioners select a licensee the process will return to the
legislature which can approve or reject the decision.
3:57:36 PM
CHAIR HUGGINS asked if there is a minimum volume of initial
capacity.
COMMISSIONER GALVIN replied no; however, there is a recognition
that capacity is going to be a driving factor in the state's
received value. In the comparison between proposals, if there's
a low capacity there won't be any competition.
3:59:43 PM
SENATOR STEVENS asked for an explanation of legislative review
and the approval or denial process.
COMMISSIONER GALVIN replied that legislative review is more of a
stop-gap measure if a contract is off the mark; it's not a
reevaluation of the applications.
4:01:14 PM
SENATOR STEVENS asked if the legislature would have to vote.
COMMISSIONER GALVIN replied that if the commissioners make a
choice that the legislature feels is wrong, the legislature can
vote against the contract. The provision will not put the
legislature in the position of having to convene.
4:02:30 PM
SENATOR WIELECHOWSKI said that whatever decision is made is
likely to result in a lawsuit, and asked if legislative approval
lessens the possibility of a lawsuit or if the approval process
could have limitations.
COMMISSIONER GALVIN replied that having the legislative
capability means an additional sense of state unity that will
lessen the possibility of intervention. There was a
consideration of how specific the evaluation criteria should be;
the model the administration decided upon is similar to the
process the Department of Natural Resources (DNR) uses for oil
and gas lease sales. The commissioners will weight the criteria
and use their discretion to make the best decision for the
state. The applicants will want as much specificity as possible,
but there shouldn't be applications that are simply a reflection
of the scoring system.
4:06:47 PM
CHAIR HUGGINS asked which system would be more legally
challengeable in terms of recommendations and legislative
approval.
COMMISSIONER GALVIN replied that someone from the Department of
Law could best answer the question.
CHAIR HUGGINS asked how the legislature would treat the
commissioners' findings.
COMMISSIONER GALVIN explained that the findings would be a
comprehensive analysis of criteria against all three projects,
and applying the commissioners' judgment on the likelihood of
success. The structure of the bill is intended to provide the
legislature with the right to look at and approve or negate the
commissioners' decision; it's not an obligation.
4:10:53 PM
CHAIR HUGGINS asked about a scenario wherein one of the three
commissioners challenged the selection.
COMMISSIONER GALVIN replied if there was a challenge to the
decision there wouldn't be testimony on it. The court would make
the decision based on the findings.
4:12:04 PM
SENATOR WIELECHOWSKI said he would appreciate an eventual
analysis on how to make the process as bullet-proof as possible.
COMMISSIONER GALVIN replied that that would apply to Chair
Huggins' question as well, and explained that any challenge must
be made within 90 days of the license being issued.
SENATOR WIELECHOWSKI said that he doesn't want to see the
process wrapped up in years of litigation; there should be as
little opportunity to appeal as possible.
4:13:57 PM
CHAIR HUGGINS noted a 30-day period for the legislature's
approval, and asked if there has been discussion about extending
that period.
COMMISSIONER GALVIN replied yes. The 30-day period was due to
the likelihood that, with shorter sessions, only a quarter of
the year will be in session; 30 days will be the likely timing
of a special session.
CHAIR HUGGINS asked when the 30-day period would end, assuming
the passing of AGIA.
COMMISSIONER GALVIN replied that if the bill passes in May 2007,
applications would start to be submitted in July of that year
and would become public in the middle of October, the comment
period would end in December, and the commissioners' decision
would come at the end of January 2008. The whole process would
come to the legislative body in about a year.
4:16:33 PM
CHAIR HUGGINS commented that the session may begin in mid-
February, and asked what roadblocks for project applicants could
be.
COMMISSIONER GALVIN replied that the applicant will be required
to give a full airing of the entire process and where possible
risk points lie, and how they will be managed.
4:18:40 PM
SENATOR WIELECHOWSKI asked if a company that wasn't awarded a
contract could still apply for a license from the FERC.
COMMISSIONER GALVIN replied yes; the state is not granting an
exclusive right to build a pipeline, but rather the inducements.
4:20:01 PM
CHAIR HUGGINS commented on the amount of steel and other
resources that the pipeline will require, and asked how feasibly
an applicant could meet performance measures.
COMMISSIONER GALVIN replied that the level of specificity to be
expected from an applicant is an issue; the expectation is that
the applicant will provide the state with as much information as
possible about their plan and its possible problems.
4:22:19 PM
CHAIR HUGGINS asked what would happen if an applicant meets four
of five criteria but varies from what the state wants on the
fifth, and if the state has the flexibility to favor a company
that has a better way of 'skinning the cat'.
COMMISSIONER GALVIN replied that in putting together the "must-
have" requirements, it was recognized that the objectives were
achievable and appropriate. The evaluation criteria strike a
balance between the primary drivers of the decision and
discretion by the commissioners to use the application
information. There is enough flexibility to allow the commercial
market to be creative in their applications.
CHAIR HUGGINS said that two applications could be fairly similar
but the one with the deepest pockets would win every time.
He pointed out a provision in the contract where a company with
the financial wherewithal must start the project in one year.
Otherwise, the requirement is five years. Being able to hit the
ground running, financially, means a more feasible project.
4:27:18 PM
COMMISSIONER GALVIN replied in explaining the difference between
the one- and five-year start dates requirements and said that
it's a matter of transport commitments and other forms of
credit. The ability to have a non-risky open season is
important; a well-prepared company could eliminate the
uncertainty the state feels and increase its likelihood of
success. This doesn't necessarily mean that this company will be
the one with the deepest pockets.
4:29:33 PM
He explained that AGIA provides additional royalty and tax
incentives to get companies to commit gas to the pipeline. The
state doesn't want to have to ask for more money than the
initial company's projected royalty payment. In terms of the
royalty rates, it will put the leases at a commercial
disadvantage because of the state's ability to switch at 90
days' notice. That provision will take the uncertainty away so
that companies don't worry about the state unilaterally acting
on its rights under the contract.
CHAIR HUGGINS asked if that provision is important.
COMMISSIONER GALVIN replied that the royalty rate switching is a
big deal, and explained why it's good for companies. It also
prevents having to work out uneven rates later in the process.
4:33:38 PM
He said that he would be having Deputy Commissioner Marcia Davis
help him explain property tax exemption, and explained that it's
a driving force for the producers, and a matter of the state's
ability to provide certainty in fiscal terms once the project
becomes profitable. There are constitutional issues with
providing this level of tax certainty; it may not be
constitutional, but the administration is working to make it so
once the time comes.
4:37:47 PM
CHAIR HUGGINS asked what the pipeline timeline will be from a
legal standpoint.
COMMISSIONER GALVIN replied that starting with open season, the
period is ten years. The tax rate in place then will be the rate
paid in the tenth year that gas is flowing. He added that the
provision doesn't mean tax avoidance; it's simply a guarantee
that the open rate tax rate will remain stable.
4:38:16 PM
MARCIA DAVIS, Deputy Commissioner, Department of Revenue (DOR),
explained her background in private enterprise managing bottom-
line issues and as senior counsel to BP. She used her private
business and legal background to create the best possible
exemptions within AGIA.
She explained that the tax exemption is equal to the production
tax obligation minus the gas production tax obligation that
would have been applicable if open season taxes were applied.
The Department of Revenue will be required to maintain a side
analysis of different taxation rules if the tax rates change.
Whatever the tax the legislature decides on in future years, the
producers will receive an appropriate exemption. The strength of
the provision comes from the fact that it's structured as a
contract; the shipper must commit to buy capacity on the
pipeline at the first initial open season, and must agree not to
fight the rolled-in rates that the pipeline company will be
required to submit to the FERC.
4:42:23 PM
SENATOR WAGONER asked if a company would lose its advantage on
the production tax if it violates that agreement and goes to the
FERC and protests.
MS. DAVIS replied yes. She explained that the value is set for
ten years, which is an average period for Alaskan industrial
standards.
4:43:53 PM
SENATOR WIELECHOWSKI remarked that courts can't make
constitutional rulings, and asked if a company would have to
wait until the legislature tried to pass the tax to file a suit.
MS. DAVIS replied that the statute of limitations for challenges
to the act is three months; additional legal opinion may be
needed.
SENATOR WIELECHOWSKI said that the matter was one to be taken up
in the judiciary committee, and it may never even become an
issue.
4:45:54 PM
CHAIR HUGGINS noted that that the issue would be taken up in the
judiciary committee.
COMMISSIONER GALVIN said that he would next look at how much gas
is currently available to fill a pipeline. The amount of gas
needed isn't known; it depends on the project. The amount of gas
from the fields can be predicted, though, and thus the ideal
pipeline size needed.
He talked about major gas reserve fields on the North Slope, and
how much gas could conceivably be produced from Prudhoe Bay.
4:49:04 PM
He cited language from a staff report on Prudhoe Bay gas off-
take rates and how the Alaska Oil and Gas Conservation
Commission (AOGCC) has not been asked to look at the issue
closely.
CHAIR HUGGINS interjected that he wants to see that inquiry.
COMMISSIONER GALVIN said the administration is currently talking
to the AOGCC. A major concern is that if gas isn't being taken
off and sold elsewhere, there will be a negative impact on long-
term oil recovery. Point Thompson is another area currently in
flux; once it is re-leased there will be explicit provisions and
penalties for non-performance there. There may need to be a few
years of liquid production before the saleable gas can begin to
be produced. He then talked about prospects for new exploration
in the future.
4:55:43 PM
SENATOR WIELECHOWSKI said he has heard comments from Exxon about
their intentions to not participate in the gas-line deal.
COMMISSIONER GALVIN said the administration has not heard
explicit messages; it is not sure what Exxon's position is.
MS. DAVIS said that in her experience such companies are driven
by the need to serve their shareholders; it's the state's job to
establish a framework to allow private enterprise to develop the
project do it meets the needs of the state as well as the
corporations. The state has been careful not to pre-ordain
commercial outcomes in a way that hampers the process; it will
analyze the applications rationally and will ensure that the
process is superlative.
4:58:39 PM
CHAIR HUGGINS asked if the Shell Group is a potential
participant in open season.
COMMISSIONER GALVIN replied yes, but that company's primary
target is oil. If they do discover gas while drilling for oil,
though, they will likely participate in open season.
4:59:31 PM
CHAIR HUGGINS asked him to answer some questions brought up in
the last meeting.
COMMISSIONER GALVIN said that he would have Don Shepler, advisor
to the administration, help him discuss the difference between
the one- and five-year time frames after FERC certification. He
clarified that after a company gets the certificate they have
one year to begin the project if they have adequate financial
backing; ideally they would be prepared to act. If they don't,
the state gets all of the project assets. If a company doesn't
have credit support, the bill allows up to five years to
assemble the appropriate financing.
5:03:36 PM
CHAIR HUGGINS asked where on the project timeline a company
would receive certification.
COMMISSIONER GALVIN replied that that depends on the proposal
submitted. Application could be done at any point in the five-
year time frame.
5:05:12 PM
DON SHEPLER, Greenberg Taurig Consultants, Advisory to the
Administration, said that there is a statutory timeline as to
how long the FERC has to act once it receives a completed
application. In reference to the five-year period mentioned by
Commissioner Galvin, he explained that the licensee would have
obtained the certificate but wouldn't have firm contracts. The
period would give time to put together the commercial elements
of a deal that have not yet come together. Even in the Lower 48,
pipeline projects do not coalesce immediately; he gave examples
of pipelines in the Lower 48 that had issues with their
timelines. Some time after certification is essential depending
on how commercial arrangements are made.
5:09:55 PM
COMMISSIONER GALVIN added that that scenario assumes that no
commitments are made at open season. The state, the licensee,
and the FERC will be invested in the project; if a mutual
decision is made that it is not economic, the bill will allow
everyone to walk away. If the other party doesn't see the
scenario that way and wants to pursue damages, a third party can
be asked to make the determination.
5:14:16 PM
MR. SHEPLER said that there is a timeline in statute as to how
long the FERC has to act in the five-year timeline in terms of
whether the application is complete.
COMMISSIONER GALVIN added that the timeline delineates the
greatest amount of time the applicant may have for the process.
CHAIR HUGGINS asked for clarification on the language of the
bill, and what the timeline would be like in a worst-case
scenario.
5:15:19 PM
COMMISSIONER GALVIN answered that it could go up to 12 years.
MR. SHEPLER clarified that that would be a worst-case scenario.
COMMISSIONER GALVIN added that the state will be active
throughout the whole process; even from a worst-case scenario,
there can be success.
CHAIR HUGGINS said that according to a chart before committee
the time period would be 24 months for certificate issuance.
MR. SHEPLER agreed.
5:16:57 PM
CHAIR HUGGINS asked about the likelihood of the state entering a
five-year provision scenario.
COMMISSIONER GALVIN replied that the administration hadn't yet
formally heard from the producers on their viewpoint. The
purpose of AGIA is to allow commercial participants to identify
how to minimize the risk of a longer scenario.
CHAIR HUGGINS asked if the most likely event to lead to a five-
year plan would be an unsuccessful open season.
5:18:19 PM
MR. SHEPLER said that an open season that doesn't fill the
pipeline would be such a scenario. If the open season fully
subscribes the pipeline and the licensee doesn't move forward
within a year of receiving the certificate, it would be fair to
take back the certificate and work product for reassignment. It
would not be fair to do so if the licensee doesn't have firm
contracts and financial commitments.
CHAIR HUGGINS asked what else besides an unsuccessful open
season would be a factor in allowing a five-year period.
5:20:49 PM
COMMISSIONER GALVIN replied that the open season is a big deal
and the best opportunity to get the project on firm footing, but
it may be necessary to have successive open seasons in order to
ultimately fulfill the need for credit support. There needs to
be the opportunity to build forward from the initial open
season. Within AGIA, the biggest risk is that there will be
unsuccessful open seasons before and after FERC certification.
Hopefully the inducements will help with a framework for a
successful initial open season; if not, the open season after
certification will need to be successful.
5:22:03 PM
CHAIR HUGGINS said that he's heard different comments about how
FERC certification without a successful open season would work;
he asked what the legal opinion on the matter was.
MR. SHEPLER replied that federal statute allows for a FERC
presumption for a pipeline need and downstream takeaway
capacity, and FERC regulations don't require contracts. Even if
a project is certified, the pipeline sponsor will likely not go
forward without project financing and contracts. The FERC would
require that the pipeline be considered at-risk if a company
built a line for which it didn't have full transport contracts.
The FERC wouldn't think certification without such assets would
be optimal, but legally it is obligated to process the
application.
5:25:29 PM
CHAIR HUGGINS speculated on the level of risk such a situation
would create, and asked for Mr. Shepler's thoughts.
MR. SHEPLER replied that the administration wants a pipeline for
its investment; part of the price of getting the state's
investment is the commitment to file for certification by a
designated date. Legislation also provides that if a certificate
is received the company is obligated to accept it. If at the end
of a five-year or shorter period the process is decidedly
failing, that's one thing; otherwise it should be given time to
develop. Once a certificate is filed for, the specificities of
the project narrow.
CHAIR HUGGINS asked how high the risk factor would be in a
theoretical situation.
MR. SHEPLER replied that a company should discuss risk factors
with its board before application. The legislation requires that
a company specify how the state's money will be used after an
open season. The issue should be resolved internally and be
reflected in the application.
5:29:36 PM
COMMISSIONER GALVIN added that the incentives total $500 million
because that's half of the estimated cost of getting a FERC
certificate. The issue of cost-sharing after open-season is
important; there is a different risk profile after an
unsuccessful season. The state wants to provide enough money to
get from open season to FERC certification, because at that
point there is the greatest likelihood of success for the
project.
COMMISSIONER GALVIN explained who would be presenting at the
next meeting, and asked if the committee would like to give
notice of questions that would be asked.
CHAIR HUGGINS commented that he and the commissioner agree that
AGIA is malleable, and as many parties as possible should be
heard from. The hearing process is about how to make the bill
and open season as successful as possible; AGIA needs to be
tightened up in some places.
There being no further business to come before the committee, he
adjourned the meeting at 5:36:26 PM.
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