1:38:10 PM  SB 2004-STRANDED GAS DEVELOPMENT ACT AMENDMENTS  CHAIR SEEKINS announced SB 2004 to be up for consideration. BONNIE HARRIS, Assistant Attorney General, Department of Law, introduced Joe Donahue, who has worked on the amendments to the Stranded Gas Act; Jim Baldwin, to explain the last portion of the proposed amendments which deal with the Municipal Impact Fund; and Kevin Jardell, to answer policy questions. KEVIN JARDELL, Legislative Director, Office of the Governor, presented a brief history of the Stranded Gas Act and the administration's position regarding its authority to negotiate the contract. 1:43:53 PM He said the administration has acknowledged from the beginning that some of the contract provisions were outside the authority granted to it by the Stranded Gas Act. 1:44:42 PM The question of what authority would be needed to move the project forward was unclear until the contract was complete. Now that there is an agreement between the administration and the sponsor group, the administration is asking for the grant of authority to allow it to put the contract before the legislature for review. MR. JARDELL said that when the administration passed out the fiscal interest finding, it detailed the contract provisions for which the administration needed authority. The legislation now before the committee is intended to give the administration enough authority to renegotiate contract terms after the public hearings. 1:47:25 PM SENATOR BUNDE asked if Mr. Jardell was talking about SB 2004, version A [labeled 24-GS2046\A]. MR. JARDELL replied yes. 1:47:58 PM JOSEPH DONAHUE, Preston Gates & Ellis LLP, Counsel to the Governor, explained sections 1-11 of the bill as follows. He said that these provisions are primarily driven by two major policy decisions made by the administration during the course of negotiations of the proposed fiscal contract. The first decision was for the state to become a full commercial partner in the project. That decision had three components: the state would take an equity position in the pipeline, it would take royalty gas in-kind for the duration of the contract and convert its production tax payments to gas in-kind payments, and it would take a shipping position on the pipeline. 1:49:33 PM The second was the decision to incorporate oil fiscal certainty into the proposed fiscal contract. 1:49:56 PM MR. DONOHUE said that Section 1 is the purpose section of the original Stranded Gas Development Act (SGDA). The new components of the fiscal contract incorporate the revised Petroleum Production Tax (PPT), Payment in Lieu of Taxes (PILT), and a provision that incorporates oil corporate income into the corporate income PILT provisions. Therefore, the first provision expands the scope of the fiscal terms and relates it to all of the sponsors' and other parties' business activity in the state, regardless of whether it is tied to the actual implementation of this project. 1:51:42 PM In Section 1, page 2, paragraph (2), the term "related party" has been added and is defined in Section 16 of the bill as "an entity that is affiliated with a qualified sponsor that owns a portion of the project and is an intended beneficiary of fiscal certainty under the proposed fiscal contract." The related party concept ties to the midstream entities that will own the mainline, the gas treatment plants, and the gas transmission lines. 1:53:12 PM Section 2. AS 43.82.020, revisits some primary negotiation topics identified by the original act and expands them to include express authority for payment of gas production tax in- kind [paragraph (3)]. Paragraph (4) authorizes the state to negotiate acquisition of and ownership in the project, as well as terms relating to collateral agreements authorized under AS 43.82.437. MR. DONOHUE explained that changes in paragraph (1) of 43.82.020 are intended to clarify that oil fiscal certainty can be granted regardless of whether the particular entity is involved in this project, or the earnings being protected arise from it. 1:55:23 PM Changes in paragraph (2) reflect a broadening of the provisions that the Commissioner of Revenue and the Commissioner of Natural Resources can negotiate. Once negotiated and in the fiscal contract, they would supersede any conflicting provisions of oil and gas leases and unit agreements. 1:57:03 PM SENATOR BUNDE asked if the agreements in Section 2 are subject to legislative ratification. MR. DONOHUE replied that they refer to existing oil and gas leases drafted pursuant to statutory authority and subject to the contractual relationship with the producers. 1:57:46 PM CHAIR SEEKINS asked whether the terms would have to be modified in the contract. MR. DONOHUE replied yes. CHAIR SEEKINS asked whether the final version of the contract is still subject to legislative ratification. MR. DONOHUE replied yes. 1:58:40 PM SENATOR BUNDE noted that ratification happens at the very end of the process. MR. DONOHUE agreed. 1:59:52 PM SENATOR DYSON referenced Section 3 on page 3, and asked if it means that the commissioner can change oil taxes that are already established in statute. MR. DONOHUE replied yes. SENATOR DYSON asked how long that provision has been in the amendment. MR. DONOHUE said it has been there for a couple of months and directed him to the appendix I version. 2:01:52 PM Paragraph (2) of Section 3, line 7, makes this subsection conform to the rest of the changes proposed to AS 43.82.220. Paragraph (6), line 19, repeals the terms and conditions for administrative termination of a contract under AS 43.82.445. That has been replaced with a purely contractual procedure (Article 28 and Article 5). MR. DONOHUE continued to paragraph (7), line 21, which broadens the commissioner's authority, providing greater flexibility and less technical density than in the long-form SGDA conforming amendments bill in appendix I. 2:05:30 PM SENATOR ELTON said his understanding is that the language in paragraph (7) is not needed for anything in the contract now, but is inserted in the Stranded Gas Development Act in case additional changes are made between now and the time it is presented to the legislature. MR. DONOHUE replied that it is intended to substitute for a "laundry list" of paragraphs that do reflect articles and provisions in the current fiscal contract. It also provides flexibility in case other changes are necessary. 2:06:22 PM Section 4, page 3, proposes a new subsection (b) to 43.82.200. It relates to Article 26 of the fiscal contract, exhibit C and provides mandatory dispute resolution procedures. 2:07:54 PM CHAIR SEEKINS asked Mr. Donohue to describe the state's sovereign immunity. MR. DONOHUE answered that sovereign immunity is a common-law concept going back to the sovereigns of England. It originally meant that you could not sue the king, but changed eventually so that you could sue him in a special court of equity. It has evolved into a doctrine that says the legislature can define those actions that can be brought against the state by citizens. 2:10:07 PM CHAIR SEEKINS asked if, by waiving our sovereign immunity, we are allowing someone to sue the state on issues related to the contract. MR. DONOHUE replied no, that it relates only to the producers' rights to sue the state if it fails to pay an arbitration award. If an award is unpaid 365 days after an attempt to collect in the State of Alaska, the producers can file the award as a judgment in another state and pursue the state's assets to satisfy the judgment. CHAIR SEEKINS asked Mr. Donohue to confirm that waiving the state's sovereign immunity is a different thing from giving up the state's sovereignty. MR. DONOHUE replied that it is different. MR. JARDELL interjected that, every time the state allows itself to be sued, it technically waives its sovereignty. MR. DONOHUE continued with Section 5, page 4, amending 43.82.210(a). These changes are part of a pattern to make it clear that oil fiscal certainty can be considered and proposed in a contract and submitted to the legislature for final review and authorization. 2:11:02 PM He said Section 6, page 4, amends 43.82.220(a) to clarify that, in the event of a conflict, the provisions of the fiscal contract preempt the conflicting provisions in oil and gas lease or unit agreements. He pointed to the article [Article 23] in the current contract that relates to Point Thomson, as an example of a potential conflict. 2:12:45 PM SENATOR DYSON asked if this provision applies only to SGDA applications that met the deadline a year or two ago. MR. DONOHUE said yes, with few exceptions, the proposed amendments would be retroactive to the beginning of the application process January 1, 2004. If this contract is not approved however, then these will be the new standards going forward and the legislature will have to amend this act to create a new filing deadline. 2:14:15 PM Senator Wagoner commented that will be true only if the new contract is negotiated under the Stranded Gas Development Act. MR. DONOHUE agreed. 2:15:57 PM MR. DONOHUE explained that page 5 contains further amendments to 43.82.220(a), which reflect a move away from long-term purchase and sales agreements. Instead, the state is making a shipping commitment for 20 percent of the gas, the combined total of RIK and PTP. 2:17:13 PM Paragraph (2), line 18, makes it clear that the provisions of the fiscal contract dealing with some of the upstream cost allowances the state has agreed to pay, and which are not allowed under statute or in the oil and gas lease agreements, will be authorized. 2:18:52 PM MR. DONOHUE said that Section 7 broadens 43.82.220(c) to deal with more than just Royalty issues. Section 8 adds a new subsection (e) that says decisions related to taking royalty gas in-kind are not subject to the provisions of AS 38. 2:20:10 PM Section 9 amends language in AS 43.82.250 related to the term of the contract, but the underlying term limit is still 35 years and may not exceed 45 years from the effective date. SENATOR HOFFMAN arrived at 2:21:22 PM. MR. DONOHUE continued to Section 10, page 6, which is intended to make the actual operation of the work commitments article consistent with the underlying statute. Section 11 adds a new section 43.82.437, which authorizes a type of collateral agreement called a coordinating arrangement, that would tie the overall fiscal agreement with qualified sponsors who are the production subsidiaries, to the parent organizations and the affiliates that will actually implement the project. 2:24:00 PM This section also deals with the establishment of Alaska Pipeline Corporation (a.k.a. Alaska Pipe, PipeCo, AK Pipe), a public corporation that would finance and own various parts of the project. In order to make the corporation effective immediately, it authorizes a modified quorum rule allowing the two commissioner members to act on behalf of the board for the first 120 days. 2:26:19 PM SENATOR SEEKINS asked who the commissioner members are. MR. DONOHUE responded that they are the Commissioner of Revenue and the Commissioner of Transportation and Public Facilities. Five public members are provided for in the legislation and, as they are appointed, will have an equal vote. 2:26:50 PM SENATOR ELTON quoted a portion of Section 43.82.437, subsection (a), page 6, beginning on line 20, which reads: The Commissioner of Revenue, with the concurrence of the Commissioner of Natural Resources, may negotiate collateral agreements. He asked if that means the Commissioner of Natural Resources must concur to negotiate, or must concur in the agreement reached by the Commissioner of Revenue. MR. DONOHUE replied that this relates to agreements between the state and any other entity, unlike subsection (b), which refers to agreements between a public corporation and other entities. So, the answer is that the Commissioner of Natural Resources would have to concur with any agreement reached as a result of negotiations. 2:28:05 PM JIM BALDWIN, Counsel to the Attorney General's Office, explained that Section 12, page 7, gives the parties to the contract assurance that municipal taxes and assessments can continue to be paid directly to the municipalities. 2:29:24 PM Section 13 provides for the accounting and custody of impact payments amounting to $125 million. Section 14 establishes a "Grant Fund", which is an account in the General Fund, to receive those monies. Subsection (e), page 9, lines 6-10, outlines the purposes for which grants can be made. Section 15 extends the life of the Municipal Advisory Group to cover the period throughout which grant funds will be made available. Section 16 was discussed earlier. 2:32:36 PM MR. BALDWIN said that Section 17 makes it clear that arbitrations within the state are provided for under the Alaska Uniform Arbitration Act, but carves out an exception for arbitrations that are authorized under the SGDA. Section 18 repeals AS 43.82.445. Section 19 is a technical change correcting the section heading of 43.82.220. MR. BALDWIN went on to Section 20, page 10, which provides that Sections 1-12, 15, 16, and 18 of this act are retroactive to January 1, 2004, and that Section 17 is retroactive to January 1, 2005. Section 21 makes this act effective immediately. 2:33:58 PM SENATOR ELTON went back to Section 14, page 8, lines 20-21, which says that the department "shall adopt regulations under which economically affected municipalities and nonprofit organizations may apply for and be eligible to receive grants". He said that "nonprofit organizations" is not defined in the definition section, and wondered if it is defined elsewhere in law. 2:34:40 PM MR. BALDWIN replied that the intention is to make eligible those nonprofit organizations that act in a quasi-municipal capacity in the unorganized borough. There are such organizations and the state contracts with them regularly, so the intention is not to write a particular region out of the state out of getting an impact grant provided they can document a sufficient impact. SENATOR ELTON noted that Mr. Baldwin is talking about a subset of nonprofit organizations that provides quasi-governmental duties, and asked if there is a reason the language of the bill does not speak to that subset rather than the broader category of nonprofits. MR. BALDWIN replied that he thinks it would be beneficial to amend the language to make that clearer and offered to help with that. 2:36:28 PM SENATOR BEN STEVENS pointed out that on page 9, lines 5-6 specifically identify "nonprofit organizations serving the unorganized borough". 2:37:00 PM SENATOR WILKEN directed Mr. Baldwin's attention to page 7, lines 29-31, which amend the term "revenue-affected municipality" to read "economically affected municipalities", and asked if there is a difference between those terms. MR. BALDWIN replied that the terms are defined in the Stranded Gas Development Act. He said that a "revenue-affected municipality" can also be "economically affected", but the reverse may not be true. SENATOR WILKEN then directed him to page 8, line 24 and asked if any thought has been given to defining the phrase "direct or severe impact". MR. BALDWIN answered that he hoped it would be further defined in regulation. SENATOR WILKEN asked if it would be appropriate to add a requirement into the bill that a definition of the phrase be included in the regulations. MR. BALDWIN answered that would be a policy call. 2:39:35 PM SENATOR WILKEN asked Mr. Baldwin how the process described in subsection (e), page 9, lines 2-14, would work. He said it appears that the grant request would be submitted in a report to the legislature during the first 10 days of the session, and then go through the department to the municipal action group, which would advise the commissioner whether the request is appropriate. He asked if that is correct. MR. BALDWIN responded yes, the relevant Municipal Advisory Group makes a recommendation that the proposed expenditure meets the needs of the section. SENATOR WILKEN asked where the report due to the legislature is addressed. MR. BALDWIN directed him to subsection (d) on page 8, line 27. SENATOR WILKEN asked if the grant request first surfaces in the first 10 days of every session. CHAIR SEEKINS said that he thinks the legislature gets a report of where grants have been given. MR. BALDWIN confirmed that the report is submitted to the legislature after the fact. SENATOR WILKEN questioned the language on page 8, lines 29-30 which reads "a list of all municipalities and organizations determined by the department to be eligible for further grants". MR. BALDWIN responded that the report includes a list of meritorious requests that were not funded due to a shortfall. 2:41:29 PM SENATOR WILKEN asked if the committee could get a step-by-step description of how the grant process works, including how decisions are made regarding impacts. 2:42:36 PM SENATOR HOFFMAN asked why page 9, subsection (f), restricts the use of grants to retire municipal debt. MR. BALDWIN said that it is a policy call, but the rationale behind it is that it does not further the public interest to incur new debt to pay preexisting debt. Grants should be used to cover new impacts, but obligations initiated after the beginning of the grant program might be covered at the discretion of the legislature. SENATOR HOFFMAN countered that the language seems to prohibit both previous and future debt. MR. BALDWIN agreed, but said that the language is modeled on an existing grant program in response to the request of the Municipal Advisory Group. He reiterated that it is open to policy determination by the legislature. 2:45:11 PM SENATOR WILKEN said the total amount of grant money available over 6 years is $125 million, and if it were used to cover existing municipal debt, it would be eaten up very quickly. At ease from 2:45:58 PM to 2:55:24 PM 2:56:30 PM SENATOR WILKEN directed Mr. Baldwin to a handout [Chapter 82. Alaska Stranded Gas Development Act], Section 43.82.520, subsection (b), paragraph (1), which reads "the share of payments to revenue-affected municipalities should be given priority over payments to economically-affected municipalities with due regard to the anticipated size of the tax base", and asked if he could explain the differences between the two types of municipality. 2:58:19 PM STEVEN B. PORTER, Deputy Commissioner, Department of Revenue, responded that economically-affected refers to unexpected impacts to the communities during the construction phase, when there is no revenue being generated. These are the impacts addressed by the $125 million impact funds in the contract. Revenue-affected communities are those that have taxing authority. SENATOR WILKEN thanked Mr. Porter for his explanation and asked whether he could provide it in writing. MR. PORTER said that he would have the lawyers elaborate on his explanation. CHAIR SEEKINS said that SB 2003 and SB 2004 will be open for public testimony over the weekend, so he would close discussion on SB 2004 for now and open discussion on the PipeCo bill, SB 2003. He asked whether the members of the committee would like to hear from anyone in particular on these matters when they return after the weekend. 3:01:25 PM SENATOR WAGONER requested that the Chair ask Legal Services to have Jack Chenoweth review the document and report back to the committee on Friday. SENATOR ELTON suggested that the Chair ask Kevin Ritchie, Executive Director of the Alaska Municipal League (AML), to provide the committee with the municipalities' reaction to some of the provisions. MR. PORTER said that Steve Thompson, Chair of the Municipal Advisory Board, might be willing to attend or to send a representative. SENATOR OLSON suggested that the Chair invite Kathy Wasserman. CHAIR SEEKINS Closed discussion on SB 2004.