HOUSE BILL NO. 393 "An Act relating to contracts with the state establishing payments in lieu of other taxes by a qualified sponsor or qualified sponsor group for projects to develop stranded gas resources in the state; providing for the inclusion in such contracts of terms making certain adjustments regarding royalty value and the timing and notice of the state's right to take royalty in kind or in value from such projects; relating to the effect of such contracts on municipal taxation; and providing for an effective date." REPRESENTATIVE MARK HODGINS, (TESTIFIED VIA TELECONFERENCE), KENAI, explained that last year the Legislature passed HB 250 which enabled commissioners to establish the needs base for HB 393. The emphasis of the legislation is to advance the development of Alaska's vast supply of North Slope natural gas. The legislation follows the recommendations put forth by the North Slope Gas Commercialization Team, which was established last year to build a framework to improve the economic feasibility and competitiveness of a North Slope gas project. The bill authorizes the State to negotiate contracts with project sponsors to improve the economic feasibility of developing stranded gas on the North Slope. Contract payments would replace some or all of the State's and municipal taxes applicable to the gas project including: ? State and municipal ad valorem property taxes; ? Production or severance taxes; and ? State corporate taxes. The State's royalty share of produced gas would not be subject to that contract. Contract payments would be designed to improve project economics by "back-end loading" tax liabilities to allow project investors to begin to recoup some of their investment before facing a heavy tax burden. The contract payments would also be designed to provide the State with an increased share of the project's revenue if energy prices increase or if the sponsors are able to substantially decrease anticipated project construction costs. Representative Hodgins stated that it is important to remember that this is a "for profit" project. The State of Alaska owns resources on the North Slope and would like to see those resources moved to a revenue source. There are several benefits to the approach authorized in the bill. Fiscal arrangements could be tailored to the specific economics of a gas project. Contractual payments are more likely to provide predictability for potential investors in a project. Representative Hodgins pointed out that the total cost of the project is not known. He projected that if the cost were around $12 billion dollars, it would probably move forward; although, noted those variables exist. While the bill is unique in many respects, there are precedents for the incentive. For example, the Liquefied Natural Gas (LNG) project on the Kenai Peninsula, which provides significant jobs, production and property tax revenue, benefits directly from the Alaska Industrial Incentive Act which provides tax advantages critical for development. He noted that oil could be sold on the spot market, whereas, LNG would be contracted over many years. The project will not go forward without contracts guaranteeing sales of the product. Representative Hodgins commented that from results put forth from the mayor's recommendations, an advisory group will be established. The taxable amount of funds coming into the State would be $12.6 billion dollars. The amount generated for federal government would be approximately $26 billion dollars. There is room to help increase profitability by not front-end loading the costs. He proposed that the State should give up no more than 2% in order that the project can move forward. He pointed out that an important addition to the bill is the confirmation to be given by the Legislature on each contract. He emphasized the need that the commissioner negotiates contracts with the Legislature. Representative Hodgins summarized, the Stranded Gas Development Act is a critical step in the efforts to realize the benefits of our gas resources located in the North Slope. WILSON CONDON, COMMISSIONER, DEPARTMENT OF REVENUE, stated that this proposed legislation was originally submitted by the Governor, however, the Special Committee on Oil and Gas made significant changes to it. The Administration supports the bill as changed by that Committee and the House Resources Committee. HB 393 provides a framework for developing a customized proposed fiscal system applicable for the development of stranded gas. The bill is particularly focused on the LNG process, whereby, gas would be pipelined from the North Slope, liquefied on the southern coast of Alaska, shipped to Asia and sold as LNG. The bill acts as framework legislation, designed to instruct the Executive Branch to develop a proposal/contract which would provide for payments in lieu of some or all taxes imposed on the project by State or local governments. The bill only authorizes and directs the Executive Branch to bring proposals before the Legislature in the form of such contracts. Once it is put before the Legislature, they would in turn need to pass enabling legislation. Commissioner Condon noted that several issues relate to the contracts. He replied that it is unknown if the contracts would bind future legislatures. He proposed that the Legislature should determine if they would want to be bound in that way, which would be a policy call decided when the contract is brought before the entire Body. The legislation specifies that if someone applies to create a stranded gas project and it meets the criteria of the bill, the Executive Branch is then instructed to develop a proposal in the form of a fiscal contract, which would substitute payments for all State and local taxes. The contract would then come back before the Legislature so that enabling legislation could be passed. Co-Chair Therriault pointed out that passage of HB 393 would not bind future legislatures to ratify the contracts. Commissioner Condon distributed a flow chart for HB 393. [Copy on File]. Co-Chair Therriault inquired the requests submitted by the mayors involved. Commissioner Condon replied that the bill works as follows. ? The bill provides for the filing of an application; and ? Then the contract is negotiated. Commissioner Condon added, the legislation would provide for the establishment of a Municipal Advisory Group and each affected municipality would provide a member for that advisory group. Commissioner Condon touched on the gas to liquid concern. He stated that the bill should provide for a full range of opportunities to commercialize stranded gas in Alaska, although, the fiscal systems would be different. Co-Chair Hanley pointed out that the application deadline would be 2001; if no one submitted an application by that time, it would be over. Co-Chair Therriault noted HB 250, which established the North Slope Gas Commercialization team, contained a fiscal note for $230 thousand dollars which was zeroed out. The effort was paid for out of the Governor's contingency fund. He asked the amount expended on creating HB 393. Commissioner Condon did not know. He stated that most of the money provided by the Governor's contingency fund was used, although, other resources had also been included. HB 393 was HELD in Committee for further consideration.