HOUSE BILL NO. 138 "An Act making supplemental appropriations and other appropriations; amending the lapse dates of certain appropriations; and providing for an effective date." KAREN REHFELD, DIRECTOR, OFFICE OF MANAGEMENT AND BUDGET, introduced Larry Ostrovsky, Chief Assistant Attorney General, Oil, Gas, and Mining Section, Civil Division, Department of Law; Nico Bus, Acting Director, Division of Administrative Services, Department of Natural Resources; and Jerry Burnett, Director, Division of Administrative Services, Department of Revenue. Section 1 Law Capital - Oil, Gas & Mining Work related to the state gas pipeline and bringing North Slope natural gas to market, and other oil and gas projects. The Department of Law's Oil, Gas & Mining section continues to play a major role in the State's top priority project related to the construction of a gas pipeline and bringing natural gas to market. A number of contracts with outside counsel and experts are underway and will continue to be needed as negotiations continue. In addition the Department of Law anticipates the Exxon Royalty Reopener will go to trial in either FY 07 or FY 08 and continues to prepare for a four to five week hearing before the Federal Energy Regulation Committee (FERC) considering (in part) the state's and Anadarko's challenges to the TransAlaska Pipeline Service (TAPS) 2005 FERC tariff. $21,500.0 LARRY OSTROVSKY, CHIEF ASSISTANT ATTORNEY GENERAL, OIL, GAS, AND MINING SECTION, CIVIL DIVISION, DEPARTMENT OF LAW, noted the large size of the supplemental bill. He related that the bill is broken down into FY 07 and FY 08. He spoke of the history of expenditures for litigation and gas pipeline matters. The return to the state on a $9 million investment into litigation is about $90 million. The majority of the supplemental request deals with litigation. The reason for such a large supplemental is due to gas pipeline expenditures this past year and the numerous special sessions. 1:45:15 PM Representative Stoltze announced that the Department of Law subcommittee has invited Mr. Ostrovsky to speak on this issue later this week and questions could be addressed at that time. Representative Hawker wondered to which counsel the $21 million would go. Mr. Ostrovsky replied that some of the money would go to the firm of Morrison and Foerster, LLP, which has provided litigation services to the state for TAPS tariff work for over three decades. The firm of Kirkpatrick, Lockhart, and Gates, LLP, is dealing with income tax issues. For royalty matters, Spencer Hosie and other counsel out of Anchorage have been engaged. Greenberg Traurig, LLP, out of Washington, D.C., is dealing with gas pipeline issues. Representative Hawker requested an explanation as to how the $21.5 million would be split between the gas pipeline and other projects. Mr. Ostrovsky offered to provide that information in writing. He explained the factors that went into determining the cost of cases. About $2.5 million went to tax tariff cases this year and about $1.3 million will be spent in FY 08. For income tax cases, $2.8 million was spent this year and $4.45 million will be spent next year. About $300,000 was spent this year on royalty cases; about $1 million will be spent next year. Mr. Ostrovsky opined that there are royalty matters at stake worth over $50 million. Point Thomson litigation costs were about $1 million this year and will be about $500,000 next year, due to its status in administrative appeal, which is less costly. Mr. Ostrovsky addressed gas pipeline expenditures, which were estimated at $3 million for this year and $6 million for next year. That estimate has since been reduced due to no expenditures during December and January. Current estimates are at about $500,000 per month. 1:52:55 PM Representative Hawker asked about the effective dates of the request. He wondered if there were outstanding bills or just prospective costs. Mr. Ostrovsky reported that the request was mostly due to outstanding bills: $2.5 million on TAPS tariff work, which could be worth as much as $100 million a year over five years. Representative Hawker inquired if it was an administrative decision to continue the TAPS tariff work. Mr. Ostrovsky said it was. Representative Hawker asked if that work was satisfactory. Mr. Ostrovsky replied that it was. Representative Hawker wondered if the work was not adequate on gas pipeline negotiations and questioned why new attorneys were solicited. Mr. Ostrovsky explained why fresh lawyers were engaged. 1:55:55 PM Representative Hawker inquired whether, now that the Department of Law has hired the legislature's attorneys, if the legislature has the availability of unbiased legal counsel. Mr. Ostrovsky replied that was a concern of the Legislative Budget and Audit Committee. There is a waiver with Greenberg Traurig which states that they can help the administration formulate legislation, but once it is introduced, they are free to comment in any way they see fit. The legislature is also free to review any documents produced. If there is an irreconcilable conflict, the state would have to withdraw and find other counsel. Representative Hawker thought it would be problematic for an attorney to be working on both sides of an issue. He questioned the reasoning behind letting Morris and Forester go. Mr. Ostrovsky thought it was a unique situation and made sense to get a second perspective. The governor wants to move in a different direction and sees a common interest between the administration and the legislature. It is also a matter of efficiency. 1:58:39 PM Representative Gara inquired about the TAPS litigation. Mr. Ostrovsky explained that in 2003 RCA made the determination of intrastate rates through TAPS at $1.96 per barrel. Most of the oil that goes through TAPS, about 90 percent, is interstate and is about $4.60 per barrel. The state and the carriers had a TAPS settlement agreement for many years, which could expire as soon as 2009. That agreement states that there will be no undue discrimination in rates. The state believes that it is discriminatory to intrastate rates and has asked FERC to change to the RCA rates. The carriers believe the opposite to be true. 2:00:42 PM Section 2(a) Natural Resources Capital Gas Pipeline Analysis Outside experts and consultants will be retained for work related to the gas pipeline, including outside legal counsel and experts on federal pipeline law and FERC procedures. A consultant to advise the state on crafting an RFP consistent with the Alaska Gasline Inducement Act (AGIA) for gasline proposals and with analyzing those proposals under AGIA will also be retained. $6,550.0 NICO BUS, ACTING DIRECTOR, DIVISION OF ADMINISTRATIVE SERVICES, DEPARTMENT OF NATURAL RESOURCES, explained the request for gas pipeline analysis, which is intended to cover the retention of outside experts and consultants on a number of aspects relating to the gas pipeline analysis, specifically outside experts on FERC, tariff cost overrun, and royalty evaluation methodology. Mr. Bus related the two aspects of the request, one for an RFP consultant to help the state solicit bids on gasline applicants, and monitor it through the process from a legal and commercial framework. The other aspect is for FERC experts and outside counsel for $1.25 million. The total of $6.550 million can be split between two fiscal years, FY 07 - $4.135 million, and FY 08 - $2.450 million, for continuity and to treat it as a capital appropriation. 2:02:29 PM Representative Hawker asked why there is a "new funding request" without first having a briefing on AGIA. Mr. Bus explained the reasoning behind the appropriation. Representative Hawker requested a fiscal note. Representative Chenault asked if $4.1 million is expected to be expended the remainder of FY 07 and $2.4 million in FY 08. Mr. Bus said yes. Section 2(b) Natural Resources Capital Oil and Gas Lease Litigation This project will help offset the costs of litigation arising out of the DNR's exercise of the state's rights under its leases and the unit agreement (Point Thomson appeal). This request will help fund the costs of outside experts and legal counsel. $1,500.0 Mr. Bus explained that the amount of $1.500 million is requested as an appropriation to DNR to support any oil and gas lease litigation. It may be dealt with by DOL and DNR cooperatively. Representative Chenault asked if any duplication would be refunded. Mr. Bus stated that DNR would work closely with DOL. Representative Hawker asked for a breakdown between FY 07 and FY 08 spending. Mr. Bus explained that $600,000 would be spent in FY 07 and about $700,000 in FY 08. 2:05:42 PM Section 3(a) Revenue Capital Commercialization of North Slope Gas $419.5 - two internal economists to work on gasline issues $1,360.0 for two contractual economists and/or commercial analysts' firms to assist in modeling and analyzing tax incentives and impacts, marketing options and criteria to evaluate applicants and proposed projects $1,169.6 for specialized legal counsel $50.9 for other costs, including financial and legal research $3,000.0 JERRY BURNETT, DIRECTOR, DIVISION OF ADMINISTRATIVE SERVICES, DEPARTMENT OF REVENUE, explained that the request is for commercialization of North Slope gas. He broke the request down into $419,000 for two state economists for 17 months, $1.3 million for external economists, and about $1.2 million for attorneys and law firms, and about $50,000 for travel and meeting expense. That is about $874,000 in FY 07 and about $2 million in FY 08. Representative Chenault asked if the two state economists are currently on staff. Mr. Burnett related how current staff would be reorganized. He thought that Roger Marks and Dr. Michael Williams would be working on this issue. 2:08:20 PM Representative Hawker inquired if there would be incentives regarding this sort of development. He also questioned the meaning of creating new tax structures. Mr. Burnett replied that he could not answer those questions yet. Representative Gara asked how long outside legal help would be needed. Mr. Ostrovsky replied that it depends on the case. He gave an example of a TAPS tariff case. Representative Gara suggested a cheaper way to add staff to the Department of Law. Mr. Ostrovsky observed two problems: low paying salaries and difficulty in finding qualified expertise due to poor salaries. 2:12:58 PM Section 3(b) Revenue Tax Division Petroleum Production Tax (PPT) implementation costs: $521.7 for three positions and contracts for developing regulations, expenses for public hearings and legal advice on regulations. $521.7 Mr. Burnett noted that the fiscal note identifies almost $1.4 million for a full year's implementation of the Petroleum Production Tax (PPT). Section 3(c) Revenue Tax Division Language to allow the department to make refunds for capital expenditures and lease bids as provided in the PPT, AS 43.55.023(f). $0.0 Mr. Burnett explained that this language appropriates the funding for the transferable tax credit refunds in FY 07. 2:14:39 PM Section 4(a) Natural Resources Gas Pipeline Extend lapse date from June 30, 2007, to June 30, 2008, for the Bullen Pt. Road right-of-way permitting multi- year allocation in sec. 7(d)(1), ch. 6, SLA 2005, pg. 11, as amended by sec. 34(c), ch. 82, SLA 2006, pg. 151. The amount expected to be available is $100.0. The lapse extension also applies to sec. 7(d)(2) Division of Oil and Gas Increased Workload, which expects $150.0 to be available. The lapse extension also applies to sec. 7(d)(3) Commissioner's office increased workload. This allocation is expected to be fully expended by June 30, 2007. $0.0 Mr. Bus explained the three elements in the section affected by extending the lapse date from June 30, 2007, to June 30, 2008. He shared the logic for extending the Bullen Point Road project, the Division of Oil and Gas Increased Workload appropriation, and a Workload appropriation in the Commissioner's Office. Representative Chenault asked about the Bullen Point Road right-of-way permitting. Mr. Bus related the details about that project. He presented a map of the project. 2:17:37 PM 4(b) Administration - Alaska Oil and Gas Conservation Commission Extend the lapse date from June 30, 2007, to June 30, 2008, for the gas pipeline development multi-year appropriation made in sec. 20(a), ch. 3, FSSLA 2005, pg. 106, line 21. The amount expected to be available is $250.0. $0.0 ERIC SWANSON, DIRECTOR, DIVISION OF ADMINISTRATIVE SERVICES, DEPARTMENT OF ADMINISTRATION, addressed the section which extends the lapse date for the gas pipeline development. Representative Chenault asked about gas off take rates in Point Thomson. He also wondered about the ramifications due to the Exxon litigation. 2:19:20 PM JOHN NORMAN CHAIR, ALASKA OIL AND GAS CONSERVATION COMMISSION (AOGCC), responded to second question first. He reported that the Exxon study of the Point Thomson reservoir is back on track. It was interrupted or suspended because Exxon was hit with default notices on the unit and on the leases. He anticipates the outcome of the dispute will derive useful information to resolve the gas off take rate at Point Thomson reservoir. He emphasized that he has not received any applications regarding off take rates. AOGCC initiated proceedings to update the field rules for the Prudhoe Bay reservoir and to initiate the Point Thomson study. He reiterated that the operators have not been cooperative in working out the off take rate regarding the reservoirs. 2:23:07 PM Mr. Norman explained that the Point Thomson reservoir has no gas off take and is unique because of extremely high pressures. It is called a retrograde reservoir, a complicated reservoir that requires a great deal of study. The potential to waste liquid hydrocarbon exists. 2:25:53 PM Mr. Norman related that the total amount to be dispersed from FY 06 to FY 10 remains at $4.7 million. He spoke of receiving $1.2 million to update Prudhoe Bay off take rate. He anticipates ending FY 06 with about $250,000, not spent or encumbered, of the $4.7 million. The request is that $250,000 be carried forward in order to insure that the project is done correctly. 2:28:31 PM 4(b) Natural Resources - Gas Pipeline Extend lapse date from June 30, 2007, to June 30, 2008, for the gas pipeline risk analysis and royalty issues multi-year allocation in sec. 20(c)(1), ch. 3, FSSLA 2005, pg. 107, line 2. The amount expected to be available is $1,500.0. The lapse extension also applies to sec. 20(c)(2) gas pipeline corridor geologic hazards and resource evaluation. This allocation is expected to be fully expended by June 30, 2007. $0.0 Mr. Bus explained the two parts: extending the lapse date for gas pipeline risk analysis and evaluating the Gas Pipeline Corridor Geologic Hazards & Resource Evaluation appropriation. Representative Hawker asked why the old process should continue to receive funding. Mr. Bus deferred to Mr. Banks to answer. KEVIN BANKS, DIRECTOR, DIVISION OF OIL & GAS, DEPARTMENT OF NATURAL RESOURCES, explained what the risk assessment money has done so far. That concept continues in the AGIA bill, which comes out on Friday. 4(b) Revenue Commissioner's Office Extend lapse date from June 30, 2007, to June 30, 2008, for the gas pipeline development multi-year appropriation made in sec. 20(e), ch. 3 FSSLA 2005, pg. 107, line 13. The amount expected to be available is $100.0. $0.0 4(b) Revenue Alaska Natural Gas Development Authority Extend lapse date from June 30, 2007, to June 30, 2008, for the gas pipeline development multi-year appropriation made in sec 20(f), ch. 3, FSSLA 2005, pg 107, line 16. The amount expected to be available is $500.0. $0.0 Mr. Burnett explained that this section contains two lapse date extensions used for work on commercialization of natural gas. The amount of money expected to be available will be carried forward to FY 08. 2:34:10 PM 4(c) Natural Resources - Gas Pipeline Extend lapse date from June 30, 2007, to June 30, 2008, for the Bullen Pt. Road right-of-way permitting multi-year allocation in sec. 20(d)(1), ch. 3, FSSLA 2005, pg. 107, line 10, as amended by sec. 34(d), ch. 82, SLA 2006, pg. 151. The amount expected to be available is $800.0. The lapse extension also applies to sec. 20(d)(2) Division of Oil and Gas Increased Workload. This allocation is expected to be full expended by June 30, 2007. The lapse extension also applies to sec. 20(d)(3) Commissioner's office increased workload, which expects $10.0 to be available. $0.0 Mr. Bus related that this section extends a lapse date which affects Bullen Point Road Right-of-Way Permitting appropriation. 2:34:50 PM Representative Kelly asked if LB&A agreed with the Greenberg Traurig waiver of conflict. Mr. Ostrovsky said the waiver was from the administration. Representative Kelly asked if both sides agreed. Mr. Ostrovsky said yes. Representative Gara repeated his suggestion to cut expenses by not contracting out services and, instead, using in-house attorneys. HB 138 was heard and HELD in Committee for further consideration. 2:37:26 PM