Legislature(2007 - 2008)
04/01/2007 01:11 PM Senate RES
| Audio | Topic |
|---|---|
| Start | |
| SB104 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
ALASKA STATE LEGISLATURE
SENATE RESOURCES STANDING COMMITTEE
April 1, 2007
1:11 p.m.
MEMBERS PRESENT
Senator Charlie Huggins, Chair
Senator Bert Stedman, Vice Chair
Senator Lyda Green
Senator Gary Stevens
Senator Bill Wielechowski
Senator Thomas Wagoner
MEMBERS ABSENT
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."
MOVED CSSB 104(RES) OUT OF COMMITTEE
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
03/16/07 (S) Heard & Held
03/16/07 (S) MINUTE(RES)
03/19/07 (S) RES AT 3:30 PM BUTROVICH 205
03/19/07 (S) Heard & Held
03/19/07 (S) MINUTE(RES)
03/21/07 (S) RES AT 3:30 PM SENATE FINANCE 532
03/21/07 (S) Heard & Held
03/21/07 (S) MINUTE(RES)
03/21/07 (S) RES AT 5:30 PM SENATE FINANCE 532
03/21/07 (S) Heard & Held
03/21/07 (S) MINUTE(RES)
03/22/07 (S) RES AT 4:15 PM FAHRENKAMP 203
03/22/07 (S) Heard & Held
03/22/07 (S) MINUTE(RES)
03/23/07 (S) RES AT 1:30 PM BUTROVICH 205
03/23/07 (S) Heard & Held
03/23/07 (S) MINUTE(RES)
03/24/07 (S) RES AT 1:00 PM SENATE FINANCE 532
03/24/07 (S) Heard & Held
03/24/07 (S) MINUTE(RES)
03/24/07 (S) RES AT 3:00 PM SENATE FINANCE 532
03/24/07 (S) Heard & Held
03/24/07 (S) MINUTE(RES)
03/26/07 (S) RES AT 3:30 PM BUTROVICH 205
03/26/07 (S) Heard & Held
03/26/07 (S) MINUTE(RES)
03/27/07 (S) RES AT 3:00 PM BUTROVICH 205
03/27/07 (S) Heard & Held
03/27/07 (S) MINUTE(RES)
03/28/07 (S) RES AT 3:30 PM BUTROVICH 205
03/28/07 (S) Heard & Held
03/28/07 (S) MINUTE(RES)
03/29/07 (S) RES AT 5:00 PM BUTROVICH 205
03/29/07 (S) Heard & Held
03/29/07 (S) MINUTE(RES)
03/30/07 (S) RES AT 1:30 PM BUTROVICH 205
03/30/07 (S) Heard & Held
03/30/07 (S) MINUTE(RES)
03/31/07 (S) RES AT 12:00 AM BUTROVICH 205
03/31/07 (S) Heard & Held
03/31/07 (S) MINUTE(RES)
04/01/07 (S) RES AT 11:00 AM BUTROVICH 205
WITNESS REGISTER
DON BULLOCK, Attorney
Legislative Legal and Research Services
Legislative Affairs Agency
Alaska State Capitol
Juneau, AK 99801-1182
POSITION STATEMENT: Explained CSSB 104(RES), Version M.
MARCIA DAVIS, Deputy Commissioner
Department of Revenue
Juneau, AK
POSITION STATEMENT: Explained CSSB 104(RES), Version M, and
suggested amendments on behalf of the administration.
DONALD SHEPLER
Greenberg Traurig, LLP
Consultant to the Administration
Alaska State Capitol
Juneau, AK 99801-1182
POSITION STATEMENT: Testified on CSSB 104(RES), Version M, and
the proposed amendments.
PATRICK GALVIN, Commissioner
Department of Revenue
Juneau, AK
POSITION STATEMENT: Discussed proposed amendments to
CSSB 104(RES), Version M.
KEVIN BANKS, Acting Director
Division of Oil and Gas
Department of Natural Resources
Juneau, AK
POSITION STATEMENT: Answered questions relating to
CSSB 104(RES), Version M.
MARTY RUTHERFORD, Deputy Commissioner
Department of Natural Resources
Anchorage, AK
POSITION STATEMENT: Answered questions pertaining to
CSSB 104(RES), Version M.
ACTION NARRATIVE
CHAIR CHARLIE HUGGINS called the Senate Resources Standing
Committee meeting to order at 1:11:20 PM. Present at the call
to order were Senators Stedman, Green, Stevens, Wielechowski,
Wagoner, and Chair Huggins. Senator McGuire was excused.
SB 104-NATURAL GAS PIPELINE PROJECT
CHAIR HUGGINS announced SB 104 to be under consideration.
1:12:01 PM
SENATOR STEDMAN moved to adopt the new proposed committee
substitute (CS), labeled 25-GS1060\M, Bullock, 3/31/07. There
being no objection, the motion carried and Version M was before
the committee.
1:12:43 PM
DON BULLOCK, Attorney, Legislative Legal and Research Services,
Legislative Affairs Agency, explained that he'd prepared
Version M in response to suggestions from the committee
yesterday. The first change, page 5, lines 3-4, relates to
receipt and delivery points and the size and design capacity.
It adds "unless the application proposes specific in-state
delivery points". Before, it said such information isn't
required for in-state delivery points.
1:13:50 PM
MARCIA DAVIS, Deputy Commissioner, Department of Revenue (DOR),
in response to Senator Wielechowski, said the above suggestion
came from the administration after hearing discussion at
yesterday's meeting. When it says the information isn't
required for in-state delivery points, the intent was to not
require the five offtake points to be designated with such
certainty with respect to sizing, quantity, and so on, until
there had been an opportunity to negotiate those terms with the
in-state recipients or suppliers. However, it might have
sounded too exclusive, since applicants that are proposing
specific projects may have worked out the details for specific
in-state delivery points.
MS. DAVIS added that the administration wants the language to be
helpful but not proscriptive. Thus if a project has specific
in-state requirements, those could be provided and the
commissioners could consider that information in the application
evaluation. In response to Chair Huggins, she said they didn't
want the commissioners to not be allowed to consider information
related to an in-state delivery point because of how the
criteria are worded.
1:15:19 PM
MR. BULLOCK told members the next change, page 5, lines 19-20,
applies to the project itself. Paragraph (i), beginning on
line 13, says those provisions apply if the proposed project
involves a pipeline into or through Canada. The change to
paragraph (ii), starting at line 19, relates to a proposed
project involving marine transportation of liquefied natural gas
(LNG). Deleted was a reference to the pipeline from the North
Slope to tidewater. Thus this section just describes the marine
portion of the project.
MR. BULLOCK explained that the next change, page 10, line 26,
only relates to the placement of a section that was moved ahead
of the next section. The next changes, to Section 43.90.180(b),
lines 13-15, were insertion of "an undiscounted value" and
changing the discount rate from zero to two percent for
evaluation purposes.
SENATOR WIELECHOWSKI asked about the six percent on that same
line, recalling Mr. Scott's testimony yesterday that
five percent is more appropriate, being more the industry
standard.
MS. DAVIS replied that the administration knows it will do a
five percent case because of recommendations from its experts.
As legislative staff had pointed out, however, this lists
minimums; thus the administration isn't precluded from using
five percent. She gave her understanding that legislators
desire six percent because it might relate to other technical
materials that could assist them in evaluating the project.
1:17:58 PM
MS. DAVIS, in response to Senator Stedman, began discussion of
conceptual Amendment 1. She referred to the fact that (b), on
page 11, lines 14-15, says in part: "the commissioners shall
use an undiscounted value and, at a minimum, discount rates of
two, six, and eight percent". She relayed the administration's
suggested wording: "shall use, at a minimum, an undiscounted
value and discount rates of two, six, and eight percent". She
deferred to Mr. Bullock's editing expertise
1:18:45 PM
CHAIR HUGGINS moved to adopt the aforementioned as conceptual
Amendment 1. He asked whether there was any objection.
SENATOR WIELECHOWSKI objected, asking to hear from Mr. Bullock.
MR. BULLOCK said the way it is drafted now, there has to be an
undiscounted value. In addition, there must be a minimum of the
other discount rates. It's still a minimum list.
MS. DAVIS indicated the suggestion was stylistic only, not a
substantive change in the number of models the administration
would be required to run.
SENATOR WIELECHOWSKI responded that he tended to agreed with
Mr. Bullock and that the language should be left alone.
1:20:13 PM
CHAIR HUGGINS withdrew conceptual Amendment 1. He suggested
further work might be needed in a later committee.
MR. BULLOCK highlighted a change on page 11, line 8, that the
commissioners are to consider the public comments received
during the review and comment period. Also on page 11, line 18,
paragraph (2), "wellhead value" was changed to "net back value",
based on advice from the administration. Furthermore, on
line 19, "and treatment costs" was added along with the
transportation; this references anything done to the gas
treatment facility.
MR. BULLOCK noted on page 12, lines 16-17, statutory citations
were edited to reflect the change in order of the review
criteria with respect to public comment. On page 13, line 10,
"calendar days" was changed from 100 to 60. On lines 22-23, it
says "shall accept the certificate when all rights of
administrative appeal relating to the certificate have expired."
This limits it to the appeal before the agency.
CHAIR HUGGINS suggested this gets to Senator Wielechowski's
concern yesterday.
SENATOR WIELECHOWSKI asked what the maximum amount of time is
that an administrative appeal could take.
MS. DAVIS recalled that yesterday Mr. Shepler said once the
appeal is filed, which must be within 30 days, the Federal
Energy Regulatory Commission (FERC) undertakes its
consideration. There is no firm timeline for FERC to resolve
that appeal.
1:22:50 PM
DONALD SHEPLER, Greenberg Traurig, LLP, Consultant to the
Administration, concurred. The term used at FERC is "request
for rehearing," which must be filed within 30 days after the
order that is being appealed. Then FERC takes that under
advisement. There is no timeline for its final decision.
Correcting his testimony yesterday that there is a 90-day period
after FERC acts on the rehearing before going to the court of
appeals, he said it is 60 days. However, that wouldn't be
relevant if the committee adopts this change, limiting the
appeal right to the administrative process.
SENATOR WIELECHOWSKI said he wants to ensure there is no
misunderstanding of what "administrative appeal" means. It
refers to the FERC appeal within the administrative process.
MR. SHEPLER replied for a FERC proceeding, he believes
"administrative appeal" is clear and generally understood. But
this also contemplates a review process if the project is
jurisdictional to the Regulatory Commission of Alaska (RCA).
While he couldn't speak to whether it is clear with respect to
RCA, he opined that it's generally understood to be the appeal
within the agency's own rules and regulations and wouldn't
extend to a court challenge.
SENATOR WIELECHOWSKI said this can be looked at in the Senate
Judiciary Standing Committee, but he wants it to be clear. His
intent is adding language to say these rights will expire once
someone's right before FERC has expired. Someone can still go
to the supreme court or the first circuit court, but that won't
hold up the gas line, the award of the certificate.
MR. SHEPLER opined that the aforementioned is embedded in the
language.
MR. BULLOCK added that perhaps some language could be suggested
such as "all rights of administrative appeal before the agency
in this case". A similar provision refers to the administrative
appeal before RCA, on page 14, lines 18-19. This makes the
certificate timing the same, whether it's from FERC or RCA.
MR. BULLOCK highlighted a stylistic editorial change on page 16,
lines 18-20, related to violations of the license. The term
"project data" was deleted and replaced with "other data"; it
occurs several other places that he didn't point out, since it's
not substantive. And on page 17, lines 23 and 25, "qualified"
was deleted before "person" at the administration's request.
1:28:08 PM
MS. DAVIS explained that as the team began working on the
requested definition for "or other qualified person" and
ensuring they were identifying the right category of persons
that this intends to benefit - those entitled to lock up initial
capacity in the first open season, and then to have the tax and
royalty associated with the gas shipped in that capacity receive
the benefit - the team needed to think about how the assignment
provisions may or may not affect it. They realized it was a
more complicated fix, but they weren't able to provide a
definition of "qualified person" today.
MS. DAVIS elaborated, noting some places said "another person"
or "qualified person". They'd thought a partial fix would be to
use just one term, "other person". So this is the only place
where it said "qualified person". Although they wanted to
eliminate it, they also wanted to put on the record that other
pieces may require tightening up, to ensure the definition works
correctly in the body of the bill.
1:29:19 PM
MR. BULLOCK said he'd asked and was told "qualified person" is a
person qualified under AS 43.90.300 to take the inducement.
MS. DAVIS noted there's a difference between "qualified person"
and "person qualified". That is another reason to take out
"qualified" in this context. As Mr. Bullock said, the only time
one sees "person qualified" it means qualified under the section
.300 inducement. She acknowledged the need for further cleanup.
CHAIR HUGGINS surmised a few elements will have to be addressed
in another committee in order to maintain the momentum of the
Alaska Gasline Inducement Act (AGIA).
MS. DAVIS concurred.
MR. BULLOCK noted on page 18, line 13, "amend" was changed to
"amends". The final change is on page 22, line 22, where he'd
spelled out 500 million cubic feet numerically.
CHAIR HUGGINS asked whether there were questions. He then
invited Ms. Davis to address the handout she'd provided.
MS. DAVIS said many of the changes to Version M that she would
propose are typographical or conforming changes.
1:31:20 PM
MS. DAVIS began discussion of Amendment 2. She said lines 23
and 28 have essentially the same language, but one uses the word
"matching" and the other doesn't. The administration has no
problem with taking Mr. Bullock's suggestion that "matching" be
deleted on line 28 to provide parallel construction.
MR. BULLOCK affirmed that "matching" is redundant language
because it says the percentage that the state will contribute.
1:32:33 PM
CHAIR HUGGINS moved to adopt Amendment 2, to delete "matching"
on page 2, line 28. There being no objection, it was so
ordered.
MS. DAVIS began discussion of Amendment 3, relating to language
that originally was the administration's. On page 3, the
paragraphs beginning at lines 24 and 27 set forth the finding to
be made by the three-person arbitration panel. Unfortunately,
the original language had a two-pronged finding: that the
project is uneconomic and then whether it should be abandoned.
The administration doesn't believe the question of whether it
should be abandoned is an appropriate inquiry for an arbitration
panel, however. They want the question framed clearly: Is the
project economic or uneconomic? So they recommend deleting "and
should be abandoned" on lines 24 and 27.
1:33:46 PM
SENATOR WIELECHOWSKI pointed out that if there is a temporary
dip in gas prices at the time of evaluation, an arbitrator could
say it isn't economically feasible. However, gas prices could
rise later.
MS. DAVIS indicated if criteria for abandonment were set up, it
might not be structured to address that concern, an important
one. Thus perhaps the framing of the "uneconomic" question
should be clarified and set within a timeframe, such as at a
point in time, over the life of the project, or for a range of
time in the future. However, she'd have concerns just letting a
three-party arbitration panel loose with regard to the range of
considerations they believe relevant to the question of whether
there should be abandonment; she didn't know what the panel
would do. Usually, the desire is to be very tight as to what is
sent to an arbitration group.
1:36:05 PM
PATRICK GALVIN, Commissioner, Department of Revenue, added that
the administration intends to do further work on the definition
of "uneconomic" and have it tightened up before the next
committee. Once it's defined, he believes it will answer
Senator Wielechowski's concern about ensuring it isn't just at
that particular moment in time. The panel should only decide
whether the project is uneconomic under the definition provided,
and isn't to have a subsequent value judgment that's undefined
about whether it should be abandoned.
CHAIR HUGGINS asked whether that satisfied Senator
Wielechowski's concern.
SENATOR WIELECHOWSKI said this is turning over a tremendous
amount of power and authority to the arbitrators. He urged
caution.
MS. DAVIS agreed, but opined that tightening the aforementioned
definition to include the frame of reference for timing would
satisfy Senator Wielechowski's concern. Furthermore, including
"and should be abandoned" would turn over even more power to a
three-party panel to make further value judgments beyond the
math and timing of the project evaluation on economic terms.
COMMISSIONER GALVIN, in response to Chair Huggins, clarified
that today they're asking to eliminate "and should be abandoned"
on page 3, line 24, as well as "and should not be abandoned" on
line 27, to make it clear that the issue for the arbitration
panel is just a determination of whether it is uneconomic.
Subsequently, the administration will further define
"uneconomic" so it clarifies what that determination is.
1:38:29 PM
CHAIR HUGGINS moved to adopt Amendment 3, on page 3, to delete
"should be abandoned" on line 24 and to delete "should not be
abandoned" on line 27. He asked if there was any objection.
SENATOR WIELECHOWSKI objected. He said he'd almost rather leave
it as is, until there is further definition.
MR. BULLOCK suggested one issue is whether abandonment will
automatically follow "uneconomic". That is a policy decision.
Another is, uneconomic for whom? Does it relate to the state's
economic interest until the certificate is issued, or just that
it's no longer a good project for the licensee?
MS. DAVIS replied that the administration is taking that point
into consideration. The definition needs to focus on the frame
of reference. It isn't an easy definition, since they're
working through different party references.
COMMISSIONER GALVIN opined that the two phrases which are the
subject of Amendment 3 don't need to remain as placeholders. It
might give the false impression that the administration is going
to define both whether a project is uneconomic and whether it
should be abandoned. The administration considers the section
as a whole to establish that relationship. The primary issue
will be defining "uneconomic".
1:40:58 PM
SENATOR WIELECHOWSKI said as he reads the statute, this
authority is being given to the arbitrators, who have two
decisions to make: 1) whether the project is uneconomic and
2) whether it should be abandoned. The statute does take into
account that there could be a price dip or other factors in the
world that affect the price of natural gas. If "and should be
abandoned" is removed, then the sole criterion for the
arbitrators is whether it is uneconomic. He disagreed with the
assessment, saying this gives the arbitrators a tremendous
amount of additional power, which he also disagreed with.
MS. DAVIS opined that they were saying the same thing, not
wanting to give the arbitrators a tremendous amount of power and
agreeing that, as this is written, it requires the arbitrators
to make two findings. The administration wants one finding,
based on a finding of "uneconomic". Unfortunately, the
legislature doesn't have the definition that will be provided
yet and thus doesn't have assurance that the timing issue will
be addressed. She said there are many paths to the right place.
1:42:18 PM
COMMISSIONER GALVIN added that when the structure was set up, it
was to allow one party to say the project is uneconomic and
won't work. If that is determined to be correct, the desire is
to give the party a chance to get out of having to move the
project forward. The administration didn't intend for there to
be other considerations. Rather, the intention was for a
determination that a project is uneconomic to be the determining
factor on whether to allow the abandonment provisions to then
kick in. It wasn't viewed as a two-part test.
The committee took an at-ease from 1:44:15 PM to 1:45:59 PM.
CHAIR HUGGINS withdrew Amendment 3, saying the committee would
defer it based on the objection and the administration.
MS. DAVIS called attention to page 5, line 20, paragraph
(D)(ii), noting it wasn't listed on the handout because it arose
when the administration saw Version M this morning. Mr. Bullock
had thought the language transmitted to him last night was a
little odd because it said "if the proposed project involves
marine transportation of liquefied natural gas that is bringing
North Slope gas to the tide line". He'd questioned the concept
of a boat bringing gas from the North Slope to the tide line,
and thus he'd eliminated that phrase.
MS. DAVIS said while Mr. Bullock's change might be fine, the
administration is mindful of possible types of projects.
Conceivably, an LNG plant on the North Slope could involve
marine transportation. She asked those present whether they had
any suggestions for this language.
MR. BULLOCK noted the project only involves North Slope gas.
1:47:53 PM
MS. DAVIS suggested discussing the language during the next
recess to confirm whether anything needs to be reinserted. She
turned to page 18, lines 22-23, and identical language on
page 19, lines 25-27. As discussed yesterday, this inserts a
qualifier on the requirement of a receiver of the resource
inducements to not protest the rolled-in rates relating to the
15 percent that the pipeline companies are required to propose
and support. This was an effort to have an intermediate
position that says: As long as there is a FERC rebuttable
presumption, that receiver of the resource inducement isn't
bound to honor the nonprotest of rolled-in rates for the
15 percent that the pipeline company has.
MS. DAVIS noted the administration expressed concern about this
language yesterday and has had more time to think about it. She
asked Mr. Shepler to articulate the concerns. She clarified
that the suggested amendment would eliminate that insert in the
royalty section and the tax section, to restore the requirement
that someone receiving resource inducements has to honor the
rolled-in rates plus 15 percent, just as the pipeline builder
would in the pipeline-construction inducement phase.
1:50:08 PM
MR. SHEPLER told members the administration's position since
introduction of AGIA has been that rolled-in pricing for an
expansion of the line, up to a 15 percent rate bump-up for
existing shippers, is essential. As originally drafted, without
the phrase under consideration, AGIA has an obligation for the
pipeline company to file at FERC for rolled-in pricing. As a
condition to getting the inducement, there is a parallel
obligation by the resource owners that get the upstream
inducement to agree not to protest that aspect of the pipeline
company's filing. So there is increased certainty as to how an
expansion will be treated for rate purposes. This symmetry in
obligations by the pipeline company and the shippers that are
receiving resource inducements exists in the original AGIA.
MR. SHEPLER explained that the added language says so long as
FERC has a rebuttable presumption in favor of rolled-in pricing,
the upstream party receiving the resource inducement isn't
committed to not oppose the pricing. He acknowledged the double
negatives. He said FERC has a policy, applicable only in
Alaska, of a rebuttable presumption in favor of rolled-in
pricing. This language says that if the expansion were filed
today, the existing shippers - the upstream "inducees" - could
protest the rolled-in treatment that the pipeline is obligated
to propose to FERC. This sets the stage for litigation.
MR. SHEPLER noted at FERC the pipeline company proposes a
certificate application for the expansion and proposes how the
rates will be derived. Under AGIA, even with this language, the
pipeline company presumably would propose rolled-in treatment.
But without the quasi-contractual commitment, the shippers - the
resource inducees - would be free to protest the price increase.
Thus whether the expansion would be priced incrementally or on a
rolled-in basis is unknown and indeterminable until a
certificate is issued at the end of the FERC process. In
addition, if this issue has arisen, the resolution can go to the
court of appeals, further delaying the final answer.
1:55:32 PM
MR. SHEPLER recalled testimony yesterday that an explorer must
have some confidence as to how an expansion will be priced
before investing. He indicated the language under question in
these two sections allows litigation and eliminates the degree
of certainty, disrupting the symmetry attempted in the original
bill and adding delay to the process. Thus the administration
recommends deleting from Version M the phrase on page 18, lines
22-23, and on page 19, lines 25-27.
SENATOR WIELECHOWSKI recalled testimony from TransCanada on the
impact of rolled-in rates, assuming a 4.8 billion cubic foot
(bcf) line up to, say, 6.0 bcf, essentially modeling the J-
curve. He asked whether the administration has a similar type
of modeling.
1:58:06 PM
KEVIN BANKS, Acting Director, Division of Oil and Gas,
Department of Natural Resources (DNR), replied there is some
modeling of the impact to all shippers of such an expansion with
respect to rolled-in tariffs; it was described in the second
presentation to the committee a couple of weeks ago.
SENATOR WIELECHOWSKI asked how critical rolled-in rates are to
the whole concept of AGIA.
MR. BANKS replied they are very critical because they have a
tremendous impact on how explorers will evaluate an exploration
program. Under the bill, explorers can anticipate an
opportunity every two years to respond to a solicitation by the
pipeline company to expand the pipe. If they may come into an
open season for that expansion but don't know the outcome for
the tariff, however, it affects their attitude about proceeding
with exploration activities.
MR. BANKS noted the second issue is potential delay, should
there be an appeal at FERC of the tariff resulting from the
expansion. Even a year's delay, under the modeling shown a week
or so ago, can kill an exploration prospect. Explorers'
economics are fairly tight, and any delay or carving away with
respect to the rates can steal tremendous value from the
explorer and severely damage the potential for new gas coming
off the North Slope.
SENATOR STEDMAN said the state wants rolled-in rates. But the
future models haven't been reviewed yet, and the Legislative
Budget and Audit Committee hasn't yet brought forward
consultants to assist with some of these questions. He recalled
testimony showing that the tariffs under expansion could rise,
fall, or stay the same. He suggested there is time to work
through these issues and others. He said this bill is being
moved along fairly fast.
2:02:05 PM
CHAIR HUGGINS recalled that MidAmerica described multiple
scenarios with rolled-in rates, most of which depressed the
price to the shipper. As for the 15 percent, he said he'd yet
to hear someone testify that the 15 percent plateau could be
bumped up against. He asked about the likelihood that rolled-in
rates will raise the price for the shipper, noting he'd heard
the producers say they'd be subsidizing new gas in the pipe.
MR. BANKS responded that if the expectation is that rolled-in
rates will be the actual rates paid, an explorer asking for the
expansion can figure out what it will be. With this provision,
however, at the outset the explorer won't know the outcome of a
FERC open season or the expansion rate, whether rolled in or
incremental. That's the uncertainty. And then there is
potential for having the expansion delayed because of an appeal.
2:03:51 PM
SENATOR WIELECHOWSKI gave his understanding that under current
FERC rules and regulations, there cannot be rolled-in rates for
a new tariff if they'll be subsidized. He asked how that rule
applies under the bill's current language, and if there would
still be no subsidies on tariffs if the language were taken out.
MR. SHEPLER replied that FERC Orders 2005 and 2005-A said FERC
intends to continue to balance two objectives: 1) no subsidy of
one shipper by another and 2) for the Alaskan project, the
statutory mandate of Congress in 2004 that FERC adopt
regulations that encourage the exploration, production, and
development of the Alaskan resources. In balancing those, FERC
has come to its current policy: a rebuttable presumption in
favor of rolled-in pricing. Order 2005-A discussed what
constitutes a subsidy. Just because one rate is higher than
another and it raises an existing shipper's rate, that isn't
necessarily a subsidy. Rather, FERC would have to investigate
it in the context of a particular application.
MR. SHEPLER opined that since that FERC policy is in place, the
language being discussed here invites an existing shipper that
receives the resource inducement to protest the rolled-in
treatment. Rolled-in rates will go down under some scenarios,
but if they rise it can be expected that the existing shippers
will protest, resulting in litigation, delay, and uncertainty.
2:07:56 PM
MARTY RUTHERFORD, Deputy Commissioner, Department of Natural
Resources, added that the state made a conscious decision,
recognizing rolled-in rates could result in increased prices
borne in part by the state; this is associated with the net
backs for tax and royalty purposes. But because the expansion
provisions for the North Slope are so critical to the state's
interests, to ensure that new exploration activities occur and
that there are reasonable tariff structures available to the gas
outside the original 37 trillion cubic feet (TCF) or 35 TCF, it
was decided that this is absolutely in the state's interest.
The administration believes allowing a shipper to challenge
rolled-in rates is antithetical to the state's interest, and
thus they oppose the amendment and support the original
construct of AGIA.
2:09:18 PM
CHAIR HUGGINS recalled that Anadarko, the only explorer the
committee had heard from, alluded to the importance of the rate,
saying the important thing was a successful gas pipeline open
season. He asked for Ms. Rutherford's comments.
MS. RUTHERFORD replied she hadn't heard that testimony, but
Commissioner Galvin could speak to it. However, having had many
discussions with Anadarko, British Gas (BG), and Shell about the
importance of rolled-in tolls to their exploration interests,
she firmly believes they think this is a critical element of
AGIA.
2:10:23 PM
COMMISSIONER GALVIN noted they'd heard from "two and a half"
explorers: Anadarko and the BG group spoke favorably about the
expansion provisions, including rolled-in rates, with the latter
particularly expressing much more confidence that its gas could
get into a line. And Chevron said half the company would
support rolled-in rates, but the other half might not. He told
members that everyone has been clear that, from an explorer
standpoint, rolled-in rates are great; however, someone with no
intention of exploring and bringing in new gas or who doesn't
own the pipeline will see it differently.
COMMISSIONER GALVIN added that the administration believes the
inducement offered here has value, with a twofold goal: getting
companies to commit gas while ensuring that explorers feel
confident they can participate in this line in the future and
therefore should start drilling wells. The amendment strips
away half - though not half the overall value, since getting the
gas committed is the primary interest - of what the
administration is trying to get in exchange for the upstream
inducements. They want it preserved in the bill.
2:13:04 PM
CHAIR HUGGINS said he tends to agree, but asked what incentives
for exploration exist with PPT - known as the petroleum
production tax or petroleum profits tax - or elsewhere.
COMMISSIONER GALVIN replied that PPT has the equivalent of
42.5 percent of exploration costs that the state will reimburse
through credits or deductions off the tax bill. On top of that,
there are opportunities to have 20 or 40 percent of exploration
costs - depending on whether it is located within a producing
unit or the distance from it - under the exploration incentive
credit (EIC) program. Programs within DNR's leasing program
offer incentives for particular leases where it is deemed
appropriate. And there are some for Cook Inlet exploration as
well. The state has programs geared towards providing a state
contribution to an exploration's cost.
COMMISSIONER GALVIN recalled that ConocoPhillips requested that
the producers which make the initial shipping commitments not
have to bear the burden, since the state has many tools to
provide exploration incentives. In that scenario, he said, the
state would shoulder it in the form of another incentive credit.
The administration believes that in exchange for the certainty
provided on the royalty and tax, however, the state should
receive a commitment to accept rolled-in rates. It's an
exchange being offered. The administration believes it provides
significant value to explorers. They'd like to see it stay.
2:15:55 PM
CHAIR HUGGINS indicated the incentives just described were
deemed generous when PPT was being discussed, but now there is
concern about impeding exploration. He said the incentive is
rolled-in rates, and he hadn't come to that conclusion yet.
COMMISSIONER GALVIN replied he wouldn't characterize rolled-in
rates as an incentive to exploration. Rather, it is an
assurance that the commercial terms available to an explorer
will be predictable, be reasonable, allow them to commercialize
gas, and allow them to expect a decision within a period of
time. That's a different offer than covering some costs. The
administration sees rolled-in rates as a way for the state to
use the inducements in this package to get commitments, from
both the pipeline company and the initial shippers, that they'll
have terms for explorers that are fair.
2:18:01 PM
MR. BANKS pointed out that while the timing of the capital
credits offered to an explorer is important, happening early in
the development of a prospect, the value of rolled-in rates
continues through the life of the project, past the point where
capital credits might have been used.
MS. RUTHERFORD opined that it furthers the state's interests and
the partnership arrangement. Through PPT last year, the State
of Alaska has become a partner through its tax role with respect
to exploration and development. She sees rolled-in rates
similarly. It is in the state's long-term interest to maximize
exploration and full-basin development in all the basins and
offshore. Rolled-in rates encourage this.
MS. RUTHERFORD said for short-term expansions, everyone will be
advantaged; for the expensive expansions, everyone will take a
bit of a hit, although the 15 percent element would limit that.
Those who don't currently hold proven reserves have said how
critical it is. And the results of rolled-in rates are seen in
the Canadian Alberta Basin areas. She said she wants to
replicate that model of development in Alaska, into the years
beyond the 35 TCF.
2:20:22 PM
CHAIR HUGGINS urged caution about disadvantaging the state or
inviting litigation, but acknowledged the importance of
assurance for explorers. He indicated the need to see modeling
or something beyond opinions, even if the opinions might be good
ones.
SENATOR WIELECHOWSKI asked if the PPT incentives were too
generous.
CHAIR HUGGINS indicated he didn't want to expand the
conversation in that direction.
COMMISSIONER GALVIN referred to previous testimony from the
different players. He said clearly the administration is trying
to balance the various interests while recognizing how the state
will facilitate the desired behavior. While acknowledging
concern voiced about the possible use of rolled-in rates, he
didn't recall any direct testimony that this provision would
preclude someone from accepting the upstream inducement package.
2:22:50 PM
CHAIR HUGGINS offered his feeling that in a best-case scenario,
the three big producers would come forward in the open season,
but others would defer until later. The producers would say
they are subsidizing others' gas moving through the pipeline.
He surmised that this provision grew out of that frustration.
COMMISSIONER GALVIN expressed confusion, noting he hadn't heard
anyone say that if the explorers find gas before the open season
they'll wait because of some intent to get a better deal later.
Rather, as soon as they find gas they intend to make a
commitment, rather than riding on the coattails of someone else.
MS. RUTHERFORD said she hadn't heard the testimony, but she'd
had conversations with some explorer companies in the last week.
She'd heard complaints from some that if their reserves don't
allow participation in the initial open season, they will -
through the construct of AGIA as it currently exists - miss the
opportunity for the upstream inducements. So they want to avail
themselves of those values. She opined that while an initial
compression expansion might lower the tariff structure, the
values of the AGIA-provided upstream inducements will counteract
any predisposition to waiting and, in fact, will encourage them
to be ready for the initial open season if there is any
opportunity for them to do so.
The committee took an at-ease from 2:25:26 PM to 2:47:22 PM.
CHAIR HUGGINS reported that they'd conferred about this language
and agreed it would remain. The administration would come back
with data, legislators would get data, and it would be addressed
in a subsequent committee.
MS. DAVIS told members that was the end of the administration's
suggested changes. However, regarding the change made on
page 13, line 10, with respect to the legislative approval, the
administration is still concerned that even with the 60-day
provision there will be timing problems. Nonetheless, the
administration is comfortable with letting this provision
continue to be debated and worked in the next committee.
2:49:04 PM
MR. BULLOCK noted the first section of the bill, where it talks
about the $500 million, needs to be fleshed out with regard to
how it will be handled.
CHAIR HUGGINS said it appears it will be addressed in the Senate
Finance Committee.
CHAIR HUGGINS moved to adopt conceptual Amendment 4, to agree
with the changes to be implemented by Mr. Bullock, whether they
were from the administration or Mr. Bullock. There being no
objection, it was so ordered.
2:50:08 PM
SENATOR WAGONER moved to adopt conceptual Amendment 5, on
page 13 of Version M, deleting Section 43.90.200, titled
"Legislative approval; issuance of license", and replacing it
with the language from Version A, the original bill. Noting
Mr. Shepler had spoken about uncertainty and potential delays
relating to FERC, he said it is the same thing here. He
believes there is a lot of uncertainty and potential delay if
the legislature is allowed even 60 days to review a contract
that it doesn't have authority to change.
SENATOR WAGONER added that it seems preposterous to take that
responsibility to the legislative level. If the administration
provides the legislature with a copy of the contract and bullet
points explaining what is in the contract, he doesn't see any
need for more than 30 days, which he views as generous for such
a review.
2:52:02 PM
CHAIR HUGGINS objected to the amendment.
SENATOR GREEN pointed out differences in wording. Version A
refers to the 30th legislative day, whereas Version M says 60
calendar days. She asked how those compare.
SENATOR WAGONER replied it would be about 45 days. He indicated
the amendment was offered to generate discussion.
CHAIR HUGGINS said another difference is approval versus
disapproval.
SENATOR WAGONER concurred.
2:52:44 PM
SENATOR WIELECHOWSKI spoke against conceptual Amendment 5.
While saying it is important to get this done as quickly as
possible, he voiced concerns about the first version. First,
perhaps it should be approval rather than disapproval, an issue
likely to be addressed in the Senate Judiciary Standing
Committee. Also, he'd like the administration to consider
having the legislature approve it as a bill, rather than a
resolution, to make it more "bulletproof."
SENATOR WIELECHOWSKI referred to the issue of 60, 30, or
100 days. He opined that 60 is a fair compromise, since 100
seems too long and 30 too short. It is "within" 60 days, so it
could be done more quickly than that. Furthermore, he envisions
the administration coming forward and presenting a tremendous
amount of detailed information, including economics and
modeling. It's a highly important decision for the state, and
30 days seems to short.
SENATOR STEDMAN told members he agreed with most of what Senator
Wielechowski said. He opined that this is the most important
decision the legislature has faced in the last several decades.
Getting as much buy-in as possible with the people is important.
The legislature needs to review the decision and ratify it so
it's clear to all the players that Alaskans stand behind it and
are moving forward to get a gas pipeline.
CHAIR HUGGINS agreed with Senator Wielechowski, adding that
there is a potential for going to Alaskans and explaining the
merits of the entity that is awarded the license, and then
getting Alaskans' comments.
SENATOR WAGONER said he doesn't disagree, but doesn't believe it
is the legislature's responsibility; it is an administrative
function. He expressed hope that when the Senate Judiciary
Standing Committee reviews this bill, it will look at who has
authority to negotiate and approve contracts under the
constitution. It's not the legislature. It's the governor.
CHAIR HUGGINS said that is a good point.
The committee took an at-ease from 2:55:55 PM to 2:56:11 PM.
A roll call vote was taken. Senator Wagoner voted for
conceptual Amendment 5. Senators Green, Stedman, Stevens,
Wielechowski, and Huggins voted against it. Therefore,
conceptual Amendment 5 failed by a vote of 1-5.
2:56:42 PM
SENATOR WIELECHOWSKI referred to discussion about rolled-in
rates, pages 18, lines 22-23, and page 19, lines 25-27. He
opined that this is an important policy call requiring a lot
more discussion. He expressed concern that adding that
provision could delay the project and discourage expansion of
the line. He'd like to see more modeling from the
administration on actual economic impacts. He'd also like to
hear from experts as to whether this will impact an open season
and future expansion. He noted he wasn't offering an amendment.
2:57:38 PM
SENATOR STEDMAN moved to report CSSB 104(RES), 25-GS1060\M,
Bullock, 3/31/07, as amended, from committee with individual
recommendations and accompanying fiscal notes. There being no
objection, CSSB 104(RES) was reported from the Senate Resources
Standing Committee.
There being no further business to come before the committee,
Chair Huggins adjourned the Senate Resources Standing Committee
meeting at 2:58:18 PM.
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