SB 2003-NATURAL GAS PIPELINE CORPORATION  SENATOR BUNDE referred to page 6, line 29 of Section 41.42.045 (b), "the governor shall promptly make an appointment", and asked whether the term "promptly" should be further defined. 4:07:30 PM CHAIR SEEKINS said that is a point well taken. He reminded the committee that the question of whether appointments to the board would require legislative confirmation has not been resolved. SENATOR BUNDE advised that Tam Cooke provided a legal opinion that legislative confirmation is unlikely to be enforceable or allowed. CHAIR SEEKINS asked for a copy of that opinion. SENATOR BUNDE said that it is being distributed. CHAIR SEEKINS commented that Senator Green said, when the primary function of a board is fiduciary, it is not subject to confirmation by the legislature. The legislature can stipulate that board members cannot be dismissed except for cause. 4:09:25 PM CHAIR SEEKINS said that the other unresolved question having to do with public members of the board is the residency requirement. SENATOR BUNDE interjected that he has submitted an amendment that requires most of them to be Alaskans. He also noted that committee members should now have a copy of the memo from Tam Cooke before them, and read the last sentence from that memo: "The Board of Directors of the Alaska Natural Gas Pipeline Corporation do not fall within the types of boards in which confirmation is required." 4:10:20 PM CHAIR SEEKINS thanked Senator Bunde. He then brought up the subject of when board meetings should be held and whether the meetings should be public. 4:10:50 PM SENATOR ELTON said that he is more comfortable with the Permanent Fund Corporation model than that outlined in the bill. All of its meetings are public and, if the board needs to address matters that are confidential, it goes into executive session. SENATOR GREEN asked if there is or should be a provision for emergencies in which a decision must be made post-haste. CHAIR SEEKINS said he thinks that would be handled based on notice, and asked if anyone had an opinion on it. 4:11:47 PM SENATOR WILKEN asked how the Alaska railroad board handles meetings, and whether that would be a good model to follow. MR. DONOHUE asked Chair Seekins to repeat the question. CHAIR SEEKINS explained that the discussion is about the public meeting process and how it should be handled. MR. DONOHUE replied that the plan was to ensure that at least one of four meetings would be public, although that would not preclude making all of them public. The primary concern of DOR is that the meetings remain exempt from the Open Meetings Act, because it puts constraints on how quickly the board could meet, creates litigation points for lack of notice and subject matter of executive sessions. If AK Pipe is to operate on an equal footing as a commercial entity with the other members of the LLC, freedom from the Open Meetings Act is necessary. 4:14:33 PM SENATOR WILKEN restated his concern about allowing votes on fiscal issues via teleconference. SENATOR ELTON said that Mr. Porter stopped by his office to discuss the issue of public meetings. He understood the model that Chair Seekins suggested and had no objection to it, and may be working on some language now. CHAIR SEEKINS asked Senator Wilken whether all members of the board must be present, or if a certain number of members could attend via teleconference. SENATOR WILKEN said he prefers that all members must be present. SENATOR BUNDE said that, on page 6, line 8, where it states that board members would be paid for "each day or portion of a day spent at a meeting of the board," he would like the portion required to earn the honorarium to be more clearly defined. He said he would prepare an amendment for the committee's consideration. 4:16:14 PM CHAIR SEEKINS said that, when he was on the permanent fund board of trustees, he sometimes spent half a day each way traveling to a meeting and ended up not meeting at all. He asked Senator Bunde if he would want to put members of this board in the position of doing that without compensation. SENATOR BUNDE said he would like to discuss it. 4:16:59 PM CHAIR SEEKINS directed Mr. Donohue's attention to page 9, paragraph (8) starting on line 3, and asked whether the board of directors could divest the state of Alaska of it's ownership interest in the project simply by a vote. MR. DONOHUE replied that there are provisions that would restrict the transfer of assets as long as the corporation has outstanding obligations. Since this is a public organization, its duty is to acquire and maintain an ownership interest over the life of the project. The provision on page 9 is focused on allowing the board to use the ownership interest as an asset to secure debt and so on. 4:19:14 PM MR. DONOHUE said that he does not think the administration would have any objection to amending the language to make it clear that the board cannot transfer the entire asset. CHAIR SEEKINS asked for questions on indemnification and confidentiality agreements, which are discussed on page 10. 4:20:01 PM He went on to page 11, line 9, dealing with police powers of the state, and asked Mr. Donohue to explain what those powers are. 4:20:12 PM MR. DONOHUE answered that the police powers of the state refer to its sovereign authority to maintain the health and security of the state, to regulate criminal matters, and commercial activity within the state. CHAIR SEEKINS went on to page 21, line 14, and asked if the insertion of the word "reasonably" before "required" would address some of the concerns the committee has discussed. 4:21:43 PM MR. DONOHUE said that is a question for Mr. Porter. He said that this provision has been a hot issue with producers. They are uncomfortable with the administration's approach and would prefer a complete exemption from the public records act. They are insisting on a confidentiality agreement as part of the LLC agreement. 4:22:34 PM CHAIR SEEKINS said that he knows there is a confidentiality agreement in the SGDA that delineates those things that must be confidential, and he wonders why that was not done in this bill. MR. DONOHUE said that the administration did look to the SGDA provisions as a model. 4:23:20 PM CHAIR SEEKINS said that what concerns him is the inclusion of a blanket statement covering "anything that is required to be kept confidential under an agreement with an owner entity". He asked if that means the state has to agree to keep it confidential first, or that there is a vote to determine whether it is confidential. MR. DONOHUE said that, under the LLC agreement, there is a standard definition of what is confidential and how information would be shared among the parties. He reiterated that the producers are concerned about taking a public corporation into their partnership, which has not been done before. He said that he has no legal problem with adding the word "reasonably", but that this is a policy issue that should be addressed by Mr. Porter. 4:25:03 PM CHAIR SEEKINS asked when the legislature would see the LLC agreement. MR. DONOHUE said that he does not have an answer to that question, but that every effort is being made to complete negotiations as quickly as possible. 4:25:22 PM SENATOR GREEN commented that, just because there is a government entity in partnership with a private entity, does not mean that the same public information standards should be imposed on the private entity as are required of the state. MR. DONOHUE assured her that the administration is not trying to bring the members of the LLC or the LLC itself within the Freedom of Information Act. SENATOR GREEN said that she was referring to the call for information that normally, under a government entity, would not be kept confidential. MR. DONOHUE replied that part of the problem might be that the current public records act is somewhat vague in regard to the types of proprietary information that would be protected if challenged. Part of rationale for the expanded list in the bill, is to clarify the nature of the business information that could be protected by Alaska Pipe Corporation in the context of this commercial venture. 4:27:32 PM CHAIR SEEKINS referred Mr. Donohue to page 27, section 12 of the bill, and asked him to explain what 45.45.900 actually accomplishes. MR. DONOHUE answered that this provision is in current law and provides that, in the context of a construction contract in Alaska, a person cannot agree to indemnify another contractor for their sole negligence or misconduct. So, section 12 amends that rule by providing for the exception that is added with section 13. He explained that the standard mechanism for a joint venture between oil and gas entities is to hire an affiliated operator to manage the construction and operate the project at no profit; so that operator would not be willing to accept any risk. The risk would be absorbed by the LLC, which would indemnify the operator against its own negligence or misconduct by its employees, and the cost would be spread among the LLC members according to their membership interest. The members can insure against it on an individual basis or self-insure, which is what the oil companies do. The operator, as an affiliate of one of the members of the LLC, has every incentive to avoid negligence and misconduct; but in a project as big as this, such things do occur. CHAIR SEEKINS asked if this indemnification flows only to the operating entity and is not a cross-indemnification of the owners of the project. 4:32:53 PM MR. DONOHUE answered that this provision deals with two types of indemnification: the operator, and the members of the LLC. These are contractual agreements that will be narrowly drafted to deal with certain kinds of misconduct by low-level employees that the policy makers of each of the partners cannot control. He said there are also provisions that allow the operator to hire experts to assist in construction or permitting and other special areas. The entities providing the consulting service to the operator would be indemnified in the same way. Some companies may also loan employees to the operator during certain phases of the project, and these employees too would be indemnified. CHAIR SEEKINS asked if the actions of someone hired temporarily by or loaned to the operator do not flow back to their original employer, but are indemnified as if he were a regular employee of the operator. 4:34:59 PM MR. DONOHUE answered yes; the indemnification covers any employee that is loaned to the operator, the entity that loaned the employee, and any entity providing consulting services to the operator. He stressed the fact that these are entities affiliated with members of the LLC, and not just any consultant to the operator. CHAIR SEEKINS asked whether, if the negligence of an employee of the state of Alaska caused damages, the cost of the damages would be shared on an equal basis between all of the members of the LLC. MR. DONOHUE answered yes, as long as the employee was working for the operator. 4:35:53 PM SENATOR GREEN asked if Mr. Donohue said that the operator would not have to pay at all. MR. DONOHUE responded that the producers and the state would share the 100 percent ownership interest. The operator would be a separate entity affiliated with one of the owner entities, but would not have ownership in the LLC. SENATOR GREEN asked if the four owners would share 100 percent of the liability. MR. DONOHUE answered yes; it would be shared in proportion to their ownership interest. 4:37:11 PM SENATOR BUNDE referred to page 5, paragraph (3)(A), which lists specific things that would disqualify a person for membership on the board and noted that, although it excludes employees of the state, it does not exclude executives or employees of the major oil companies. He asked why that is not addressed. CHAIR SEEKINS also asked why state employees, but not oil company employees, are excluded from serving on the board. MR. DONOHUE responded that he could not understand why a governor would appoint an oil company employee to the board. He said the desire is to get experienced people on the board, which might mean former oil company employees, who would then be subject to the conflict of interest clause. 4:38:37 PM SENATOR BUNDE said that the conflict of interest section says board members and applicants to the board have to declare a conflict, but does not say it precludes them from serving. SENATOR GREEN asked where the conflict of interest section is located, and then found it on page 7. 4:39:20 PM SENATOR ELTON asked if there is anything that precludes a future legislature from tweaking any of these provisions. MR. DONOHUE replied that there is nothing in the fiscal contract, but there are provisions in the LLC called member default provisions, that would be triggered by amendments to this statute in the future. These are designed particularly to address producers' concerns about confidentiality and the makeup of the board. They include a dispute resolution process, and a specific provision on page 11, section 22, that specifies the powers of the corporation in the event of changes that adversely affect its ability to perform its obligations under the contract. 4:41:46 PM SENATOR ELTON suggested that it might be helpful for the Administration to identify elements in the bill that the legislature will be prevented from changing in the future. MR. DONOHUE advised that these issues are under discussion. The triggering mechanisms and the penalties have not been resolved; so he does not think the administration can give more specific examples at this time. SENATOR ELTON likened this to putting the cart before the horse, and said that he is uncomfortable not knowing if the legislature will have the power to change this in the future. 4:43:58 PM CHAIR SEEKINS commented that it is hard to predict; but the LLC will have to comply with the decisions the legislature makes now. SENATOR ELTON agreed, and likened it to the way the legislature is dealing with amendments to the SGDA that implicate the kind of contract that can come before the legislature for a vote. In this situation however, the legislature does not have the ability to vote on the LLC. CHAIR SEEKINS said that the legislature would provide the framework within which the LLC can operate. 4:45:19 PM MR. DONOHUE said that the legislature would not be precluded from changing the law in these areas; but there could be limited penalties on the Alaska member within the LLC that would affect voting rights and access to confidential information. CHAIR SEEKINS said he could not imagine that information normally available to shareholders of a corporation would be withheld from the citizens of the State. He said he thinks the committee is trying to get at what information it is not necessary to share with shareholders of a corporation, because the people of the state are really acting as shareholders in the LLC. He asked Mr. Donohue if the state is bound by the agreement. MR. DONOHUE said that changes could be made but might be subject to penalties, which are limited as described in this power. [page 11, paragraph (22)] 4:48:24 PM SENATOR ELTON said he would describe a couple of examples, and then go back to the situation the committee finds itself in with the contract. By passing this bill, the legislature will be making decisions on indemnification in sections 12 and 13. It will be determining how many board members there should be and where they come from. Those are two examples of decisions that a future legislature may want to "tweak". The legislature is adopting the SGDA amendments after having seen the contract, to accommodate the contract. The other way to do this is to wait and adopt legislation authorizing Pipeco after seeing what the LLC looks like. 4:49:54 PM MR. DONOHUE remarked that he understands that the administration intends to bring the LLC to the legislature for review in conjunction with the Alaska Pipe legislation. 4:50:07 PM SENATOR WILKEN said he is not comfortable with his knowledge of the subject matter; but he knows the 29 pages of legislation the committee is dealing with are very important. He said he hopes that Chair Seekins has asked the legal and professional advisers available to the state to look at this legislation and advise the committee. SENATOR BEN STEVENS asked Mr. Donohue if it is the LLC management agreement the committee is talking about. MR. DONOHUE said yes, that is what is being negotiated. SENATOR BEN STEVENS asked if there has been any discussion about the LLC operating agreement. MR. DONOHUE said that there have been discussions, but he is not sure where they stand. SENATOR BEN STEVENS said that an LLC operates on two guidelines, a management agreement and an operating agreement. The first to pass is the management agreement that defines the members' rights within the organization. Then the parties to the management agreement develop the operating agreement that defines how the organization will function and how the money will flow through the operation. He has no expectation that there will be an operating agreement by the time the contract comes up for ratification; it may take three years before that is developed. As all Pipeco will do is to set up the public entity that will become a member of the management agreement. SENATOR GREEN asked if there is a different standard required when a government entity is involved. SENATOR BEN STEVENS responded that he asked that question yesterday, specifically regarding Sarbanes-Oxley. 4:54:59 PM MR. DONOHUE said that Louisiana Cutler is looking into it. He responded to Senator Ben Stevens that the management and operating agreements are very closely related, even if they are not created simultaneously. SENATOR BEN STEVENS agreed that they are closely related, but stressed that the LLC operating agreement evolves through participation of the members and is constantly changing. 4:56:59 PM SENATOR BEN STEVENS voiced concern about the establishment of the corporation that will become a member of the LLC, and commented that he will feel better when he has actually seen the LLC agreement. He does not have much concern about the operating agreement, because the LLC will manage that. 4:58:14 PM CHAIR SEEKINS acknowledged Senator Bettye Davis. 4:58:36 PM CHAIR SEEKINS said that the committee will meet at 9:00 am Saturday and will have comments from BP, ConocoPhillips, and ExxonMobil, followed by public comment on SB 2003 and SB 2004. 4:59:14 PM He said that on Sunday at 2:00 pm the committee would entertain amendments from members. He requested that legislative legal services draft the amendments and that they be provided to his staff person, Brian Hove. CHAIR SEEKINS said that the committee might begin consideration of amendments on Saturday if there is time.