SB 3002-STRANDED GAS AMENDMENTS  9:35:38 AM CHAIR SEEKINS announced SB 3002 to be up for consideration. He said that he would like to correct Amendment 5, which was adopted 08/01/2006, and asked if the members had other amendments to offer. 9:36:22 AM SENATOR BEN STEVENS said that he had a new amendment and a revised Amendment 2. The committee took an at-ease from 9:36:46 AM to 9:40:48 AM to copy and distribute the amendments. CHAIR SEEKINS reminded the committee that Amendment 5 was amended to add two subparagraphs, one referenced traversing land beneath navigable waters, and the other entering Canada at any point north of 64 degrees. He moved to rescind the committee's action of 8/1/06 in adopting Amendment 5 as amended. There being no objection, it was so ordered. CHAIR SEEKINS offered Amendment 5A, which read: ^AMENDMENT 5A Sec. 43.82.100. Qualified project.    Based on information available to the commissioner, the commissioner may determine that a proposal for new investment is a qualified project under this chapter if the project (1) principally involves (A) the transportation of natural gas by pipeline to one or more markets, together with any associated processing or treatment; (B) the export of liquefied natural gas from the state to one or more other states or countries; or (C) any other technology that commercializes the shipment of natural gas within the state or from the state to one or more other states or countries; (2) would produce at least 500,000,000,000 cubic feet of stranded gas within 20 years from the commencement of commercial operations; [AND] (3) is capable, subject to applicable commercial regulation and technical and economic considerations, of making gas available to meet the reasonably foreseeable demand in this state for gas within the economic proximity of the project; and (4) no project may be considered a qualified project  under this chapter if the pipeline to transport  natural gas from land within the Prudhoe Bay oil and  gas lease area follows a route that: (1) traverses land beneath navigable waters (as  defined in section 2 of the Submerged Lands Act  (43 U.S.C. 1301)) beneath, or adjacent shoreline  of, the Beaufort Sea; or  (2) enters Canada at any point north of 64  degrees north latitude; and  There being no objection to adopting Amendment 5A, it was so ordered. The committee took an at-ease from 9:42:51 AM to 9:49:35 AM. CHAIR SEEKINS announced that Senators Donny Olson, Lyda Green and Albert Kookesh had joined the meeting. 9:50:58 AM SENATOR BEN STEVENS offered Amendment 8 and objected for discussion purposes: ^AMENDMENT 8 Delete "30" Insert "60" In the following section: Sec. 43.82.430. Final findings, determination, and proposed amendments; execution of the contract. (a) within [30] 60 days after the close of the public comment period under AS 43.82.410(4), the commissioner of Revenue shall He explained that it is an extension of the amount of time in the Alaska Stranded Gas Development Act (ASGDA) from 30 to 60 days for the commissioner to assemble the final fiscal interest finding and determination. SENATOR BEN STEVENS removed his objection and moved to adopt Amendment number 8. 9:52:37 AM SENATOR WAGONER said he has no objection to the amendment, but is not ready to vote on the Stranded Gas Act as amended. He wondered if it might behoove the committee to handle this matter differently. SENATOR DYSON asked whether Senator Wagoner was suggesting that Amendment 8 become a separate bill. SENATOR WAGONER pointed out that would ensure that the commissioner is allowed the additional 30 days. 9:53:51 AM CHAIR SEEKINS said that might be a point for further discussion; but he wanted to vote on Amendment 8 to SB 3002 at this time. 9:54:39 AM CHAIR SEEKINS asked if there were any objections to the motion to adopt Amendment 8 to SB 3002. There being no objection, the motion carried. 9:54:50 AM SENATOR BEN STEVENS moved to adopt Amendment 7, and objected for discussion purposes: ^AMENDMENT 7  Page 7, lines 3-12 Delete all material and insert the following new material in its place: Sec. 12. AS 43.82.270 is amended to read:  Sec. 43.82.270. Project plans and work  commitments. A contract under AS 43.82.020 must include provisions for implementation of the qualified project plan approved under AS 43.82.140, as may be  modified as a result of the development of a contract  under this chapter, and provisions for updating the plan at reasonable intervals until the commencement of commercial operations of the approved qualified project. The commissioner of revenue, in consultation with the commissioner of natural resources, may, as a term in a contract under AS 43.82.020, include work commitments or other obligations in the contract to be accomplished before the commencement of commercial operations of the approved qualified project. A  minimum project expenditure commitment shall be  included in a contract under AS 43.82.020 that meets  the requirements set out in (b)-(d) of this section.  Sec. 13. AS 43.82.270 is amended by adding new subsections to read: (b) The sponsors of the Alaska Highway Natural Gas Pipeline Project shall incur a minimum of $1,500,000,000 in project expenditures beginning with the date the contract is fully executed by the parties and continuing until December 31, 2010. The project expenditures required by this subsection must be necessary to finance the planning and permitting phase of the project leading up to the decision on full project funding. The sponsors shall allocate and incur expenditures regularly throughout the period covered by the minimum expenditure commitment. If the commissioner of natural resources determines that a sponsor breached minimum expenditure commitment imposed by the contract, the unexpended balance of the expenditure obligation attributed to that sponsor shall be paid to the state treasury. (c) The sponsors shall establish an escrow account, letter of credit, or other form of financial security satisfactory to the commissioner of revenue to cover the minimum project expenditure commitments imposed in (b) of this section. (d) The sponsors shall provide the commissioner of natural resources with an expenditure report at the end of each month containing enough information to permit an audit of compliance with the expenditure commitments imposed in (b) of this section. Renumber remaining sections. He explained that the intent of this amendment is embodied in Section 13, subsection (b), which requires that, upon execution of a contract between the sponsor group and the state, a $1.5 billion account shall be funded to cover all preliminary front- end engineering design work and permitting costs. That account shall stay in existence for approximately 40 months from time of execution, until 12/31/2010. At that time, if the project has not moved to full project funding and the commissioner determines that there is a breach in the process to that point, the balance of the account shall revert to the state treasury. 9:57:44 AM SENATOR DYSON said he wanted to hear from the producers and/or the state's consultants on the issue before voting on it. He also wanted to set forth some performance deadlines such as dates for filing the Environmental Impact Statement (EIS) and for an open season. 9:58:52 AM SENATOR ELTON asked Senator Stevens if the sponsors would apply to the commissioner for reimbursement of expenses from the escrow account that Amendment 7 creates. SENATOR BEN STEVENS said that is correct. All front-end engineering and design work would be credited to that account. The commissioner and the parties to the contract would have to approve those expenditures to ensure that they fall under the contract before funds would be disbursed. He added that the State has already set aside $300 million for that purpose in the Alaska Housing Finance Corporation (AHFC) account. CHAIR SEEKINS likened it to an earnest money account that is drawn down for project expenditures. SENATOR BEN STEVENS agreed. ^Amendment 1 to Amendment 7 10:00:31 AM SENATOR WILKEN offered Amendment 1 to Amendment 7. He proposed that language be inserted in Section 13, line 9, after the word "resources", so that line would read "commissioner of natural resources, with the concurrence of the commissioner of revenue". He objected for discussion purposes, and explained that these would be weighty decisions that should be shared across agencies. SENATOR BEN STEVENS said he had no objection to that. CHAIR SEEKINS asked for further objections to Amendment 1 to Amendment 7. 10:01:40 AM SENATOR GREEN inquired about any impacts that the committee may not have considered. CHAIR SEEKINS said he would ask. 10:02:38 AM SENATOR STEDMAN asked if it is correct to infer from Section 13, subsection (c) that the account does not have to be funded; it is sufficient that the full faith and credit of the corporation be behind expenditures up to $1.5 billion. SENATOR BEN STEVENS answered that he is correct; a cash deposit is not required. Each party would have to put up a letter of credit equal to its participation, and those letters of credit would be drawn upon as expenses are incurred. If a sponsor were found in breach of its duty to execute, the unexpended balance of the obligation attributed to that sponsor would be called to the state treasury. CHAIR SEEKINS noted that it is not a drawdown account. SENATOR BEN STEVENS agreed. SENATOR STEDMAN asked for confirmation that there would be no initial cash call of $1.5 billion on the participants. SENATOR BEN STEVENS answered that one could view it as "upon execution" the parties agree to spend $1.5 billion by the end of 2010. CHAIR SEEKINS asked what happens if the money is not spent by December 31, 2010. SENATOR BEN STEVENS replied that the remaining balance would be paid to the state. SENATOR STEDMAN prefaced his question by saying that a considerable amount of money has already been spent. He asked how the "look back" would be dealt with. 10:05:11 AM SENATOR BEN STEVENS referred to the first sentence of subsection (b), which reads, "The sponsors of the Alaska Highway Natural Gas Pipeline Project shall incur a minimum of $1.5 billion in project expenditures beginning with the date the contract is fully executed by the parties and continuing until December 31, 2010." 10:05:24 AM SENATOR DYSON recommended that the committee delay a vote on this amendment for a couple of hours, until the producers and the administration's consultants have had some time to look at it. SENATOR BEN STEVENS said he knows the producers' response will be "no"; every substantive amendment the committee has put forward to the stranded gas act has been met with a resounding "no". He said that there should be a commitment to perform. If the sponsors want to drag their feet, there is $1.5 billion on the line. CHAIR SEEKINS clarified that, if the state has a $300 million commitment, the three sponsors have $1.2 billion on the line between them. SENATOR BEN STEVENS said that's right. SENATOR DYSON said that he was impressed by some of the producers' testimony yesterday and still wants to hear from them before voting. CHAIR SEEKINS assured him that the committee would hear from them. 10:08:10 AM SENATOR ELTON said he would also like to hear from Mr. Joseph Donohue whether, if there were an issue about payments under this amendment, it would go to the contractual dispute resolution process. SENATOR STEDMAN pointed out that the state has already put up its portion of $300 million. 10:09:44 AM CHAIR SEEKINS welcomed former Governor Hickel. 10:10:12 AM CHAIR SEEKINS moved to table Amendment 7. SENATOR BEN STEVENS objected. CHAIR SEEKINS announced Amendment 7 would be set aside. 10:10:33 AM SENATOR BEN STEVENS moved to withdraw Amendment 2 and re-offer it in a new form as Amendment 6. There being no objection, it was so ordered. 10:10:53 AM SENATOR BEN STEVENS moved to adopt Amendment 6 and objected for discussion purposes. ^AMENDMENT 6 Page 1, line 3, following "terms;": Insert "providing for an advisory vote,treatment of  certain laws, and approval and ratification regarding  a stranded gas fiscal contract;" Page 8, following line 8: Insert new bill sections to read: "*Sec. 14. AS 43.82.430(b) is amended to read:  (b)After considering the material described in (a) of this section and securing the agreement of the other parties to the proposed contract regarding any proposed amendments prepared under (a) of this section, if the commissioner determines that the contract is in the long-term fiscal interests of the state, the commissioner may execute [SHALL SUBMIT] the contract [TO THE GOVERNOR]. Sec. 15. AS 43.82.430(c) is amended to read:  (c) The commissioner's final findings and determination under (a) of this section and decision  regarding whether to execute the contract under (b)  of this section are final agency decisions under this chapter. Sec. 16. AS 43.82.440 is amended to read: Sec. 43.82.330. Judicial review. An [A PERSON MAY NOT BRING AN] action challenging the constitutionality of a law authorizing a contract developed under this  chapter [ENACTED UNDER AS 43.82.435] or the enforceability of a contract executed under a process  authorized by [A] law may not be brought [AUTHORIZING A CONTRACT ENACTED UNDER AS 43.82.435] unless the action is commenced within 120 days after the date that the contract was executed by the state and the other parties to the contract." Renumber the following bill sections accordingly. Page 11, line 30: Delete all material and insert the following: "*Sec.23. (a) AS 43.82.435 is repealed. (b) AS 43.82.445 is repealed. " Page 11, following line 30: Insert new bill sections to read: "*Sec. 24. The uncodified law of the State of Alaska is amended by adding a new section to read: APPROVAL AND RATIFICATION. Notwithstanding AS 43.82.435, repealed by sec.23(a) of this Act, the provisions of the Alaska Stranded Gas Fiscal Contract between the State of Alaska and BP Exploration (Alaska) Incorporated, ConocoPhillips Alaska, Incorporated, and ExxonMobil Alaska Production, Incorporated, as amended to conform to the provisions of the Act, are approved, and the process and procedures followed in formulating that contract are ratified. *Sec. 25. The uncodified law of the State of Alaska is amended by adding a new section to read: SUSPENSION OF OTHER LAW. The provisions of the Alaska Stranded Gas Fiscal Contract between the State of Alaska and BP Exploration (Alaska) Incorporated, ConocoPhillips Alaska, Incorporated, and ExxonMobil Alaska Production, Incorporated, as amended to conform with the provisions of the Act, are effective notwithstanding the provisions of any other law, including AS 43.82.200-43.82.270. Any inconsistency between the Alaska Stranded Gas Development Act (AS 43.82) and the fiscal contract executed under AS 43.82 are cured and authorized by this section. *Sec. 26. The uncodified law of the State of Alaska is amended by adding a new section to read: ADVISORY VOTE. At the 2006 general election to be held on November 7, 2006, in substantial compliance with the election laws of the state, the lieutenant governor shall place before the qualified voters of the state a question advisory to the governor and the commissioner of revenue. Notwithstanding other laws relating to preparation of the ballot proposition, the question shall appear on the ballot in the following form: QUESTION Shall the commissioner of revenue sign and make binding upon the State of Alaska the Alaska Stranded Gas Fiscal Contract between the State of Alaska and BP Exploration(Alaska) Incorporated, ConocoPhillips Alaska, Incorporated, and ExxonMobil Alaska Production, Incorporated? Yes [ ] No [ ]" Renumber the following bill sections accordingly. Page 12, line 7: Delete "Sections 2-14 and 17-20" Insert "Sections 2-13, 17, 20-22, and 23(b)" Page 12, following line 9: Insert new bill sections to read: "*Sec. 29. CONDITIONAL EFFECT. Sections 14-16, 23(a), and 24 of this Act take effect only if a majority of the votes cast in the 2006 general election on the ballot proposition in sec. 26 of the Act favor execution by the commissioner of revenue and binding effect on the State of Alaska of the Stranded Gas Fiscal Contract between the State of Alaska and BP Exploration (Alaska) Incorporated, ConocoPhillips Alaska, Incorporated, and ExxonMobil Alaska Production, Incorporated. *Sec. 30. If secs. 14-16, 23(a), and 24 of this Act take effect under sec. 29 of this Act, they take effect on the date that the director of elections certifies the results of the 2006 general election."   Page 12, line 10: Delete "This" Insert "Except as provided in sec. 30 of the Act, this" 10:13:41 AM SENATOR BEN STEVENS explained that Amendment 2 had some complexities that were based upon the original bill, regarding when certain sections would become effective. When the CS came out, there were inconsistencies between the amendment and the CS that caused errors. The memo circulated by Senators Olson and French is based upon one of those major errors, which is when section 24 would be enacted. He said that Amendment 6 corrects those inconsistencies. Page 1 of Amendment 6 includes the purpose of the amendment in the title. Section 14 changes the process for submitting the contract to say that, "the commissioner may execute the contract." Section 15 has to do with making that execution the final agency finding. Section 16 re-states that the contract is developed under this chapter. SENATOR BEN STEVENS continued to page 2 of the amendment. Line 7 inserts a new provision 23 (a) that repeals the requirement for legislative authorization and is tied to the effective date under Section 29. That is, if a vote of the people is ratified to favor execution of the fiscal contract, the requirement for legislative authorization is repealed. He said that Section 24 has raised concern, and stressed that approval and ratification of the provisions of the contract is not intended to authorize execution. Section 24 is not effective until the conditional effect of the requirement for the general vote. Section 25 is the enabling legislation that says any inconsistencies between the SGDA and the fiscal contract are cured by this section, under the assumption that the contract is accepted by a majority of the general public and becomes executable by the commissioner. Section 26 establishes a vote of the general public to execute. 10:16:08 AM SENATOR BEN STEVENS pointed out that Section 29 is the most important because it provides the conditional effect that, "Sections 14-16, 23 (a) and 24 of this Act take effect only if a majority of the votes cast in the 2006 general election on the ballot proposition in Section 26 of this Act favor execution by the commissioner of revenue". He re-emphasized that, if the vote is taken to the people and the people ratify it, legislative authorization is not necessary. 10:17:13 AM SENATOR BEN STEVENS announced that he wished to set Amendment 6 aside and bring it up later. There being no objection, it was so ordered. CHAIR SEEKINS suspended the hearing on SB 3002 until after the Alaska Gasline Port Authority presentation. SB 3002-STRANDED GAS AMENDMENTS  7:15:49 PM CHAIR SEEKINS returned attention to SB 3002. He informed members that drafting was proofreading a new proposed committee substitute (CS). 7:16:13 PM CHAIR SEEKINS said he would open with Amendment 7 (already moved and set aside), having to do with the $1.5 billion good-faith account. 7:17:22 PM ^David Van Tuyl, BP DAVID VAN TUYL, Commercial Manager, Alaska Gas Group, BP, said that BP does not support this amendment. It believes it may have unintended consequences that will be bad for the project, including higher costs. He estimates the total cost to project sanction would approach $1 billion, but fears that this amendment wipes out any incentive to work efficiently. Even if the producers perform well and deliver, they could still have to write a check to the state. It increases costs at the front end of the project when it especially hurts project economics. BP fears it will result in schedule-driven behaviors that historically result in cost overruns and failed projects. 7:20:04 PM He also thinks the amendment raises a number of awkward questions and concerns regarding the project. Specifically, the state might be conflicted out of voting in project management decisions. It raises the question, "What is a sponsor?" The term is not defined in the act, nor does it say whether the state is considered one. In addition, it creates difficulties for project economics. The language does not provide a specific amount, saying only that the commissioner can set it at a minimum of $1.5 billion. There is no detail of what is included in project expenditures or how they will be audited. BP is committed to diligently advance this project, and the contract currently drafted does that. It is evaluating public comments in an effort to constructively address valid concerns; but the producers negotiated a balanced contract and, if the costs and risks increase, the contract will have to be re- balanced in order to go forward. 7:22:20 PM SENATOR DYSON asked for clarification of the term "full project funding" from Sec. 13(b) that reads: "Project expenditures required by this subsection must be necessary to finance the planning or permitting phase of the project leading up to the decision on full project funding." MR. VAN TUYL replied that is a good question, and said he is not sure the term is defined in the act. He thinks it means project sanction, which is when the companies commit the funds necessary to fund the project; but he isn't sure. SENATOR DYSON said he thinks that is what the sponsor intended, and asked what the producers have to accomplish in order to get to that point in the process. MR. VAN TUYL answered that they have to complete all of the preliminary engineering and the environmental fieldwork necessary to prepare a FERC application; hold a successful open season; and submit the project application to FERC and the National Energy Board (NEB) in Canada. Those regulatory processes have to run their course and the producers would have to receive a "Record of Decision" from the FERC and a "Leave to Construct" from the NEB, either conditional or unconditional. Once those are received, the companies will decide whether they are acceptable, then they would commit funds. SENATOR DYSON asked if all of those things could be accomplished in four years. MR. VAN TUYL answered yes, but reminded Senator Dyson that there are processes in that time frame over which the producers have no control. 7:25:45 PM SENATOR DYSON asked if the timeframe is realistic. He said that he does not believe the sponsor of the bill intended the producers to spend more money; the intention was that money spent during this phase would be provided for by this account. He also pointed out that the account doesn't have to be funded; they only have to provide a letter of credit. So, although this is a hassle, it does not take any money out of the producers' pockets. He asked if $1.5 billion is an unreasonable number for all that has to be done to get to project sanction. MR. VAN TUYL replied that BP estimated that costs to get to sanction might approach $1 billion, but it hopes to beat that. He said his concern is the language that says if the commissioner determines that a sponsor has breached the minimum expenditure commitment, the unexpended balance would be paid to the state treasury. That seems to mean that the producers have to spend at least that much by December 31, 2010, whether the work could be completed for less or not. 7:27:40 PM SENATOR ELTON asked Mr. Van Tuyl if, relative to a definition of "sponsor", it would be clearer to say the "mainline LLC" rather than "the sponsors of the Alaska highway natural gas project". MR. VAN TUYL answered that he supposed it would address the question of who has the obligation for the expenditure. The specific expenditure amount in the amendment is still a concern. SENATOR ELTON asked if disputes would be handled by the commissioner of DNR with the concurrence of the commissioner of DOR, or would go through an arbitration panel. MR. VAN TUYL said that is not clear. 7:30:07 PM CHAIR SEEKINS asked Mr. Van Tuyl to restate his concern regarding the use of the word "sponsor" in this amendment. MR. VAN TUYL replied that he isn't aware that "sponsor" is specifically defined in the act, although "sponsor group" and "member of a qualified sponsor group" are used generally to refer to the producers. CHAIR SEEKINS said that the meaning of "sponsor" or "sponsor group" is assumed, and asked if Mr. Van Tuyl was sure it is not defined in the act. MR. VAN TUYL said he does not see it in the definitions section in the act. 7:31:36 PM CHAIR SEEKINS said it is not in definitions, but there is a whole section on what it takes to be a qualified sponsor or qualified sponsor group. MR. VAN TUYL agreed, and pointed out that it would seem to exclude the state. If that were the case, then the state's share would be excluded. CHAIR SEEKINS said he would ask the drafter; but he thinks the intent was that, since the state is a 20 percent owner, it would have to put up 20 percent of the amount. 7:32:07 PM SENATOR BEN STEVENS said he would like to clarify his intent. The first sentence of Section 13(b) reads: "The sponsors of the Alaska Highway Gas Pipeline Project shall incur" [A Minimum Of $1,500,000,000] "in project expenditures beginning with the date the contract is fully executed". So, once contract is fully executed, all parties to the contract become the sponsors. 7:33:32 PM CHAIR SEEKINS said that he couldn't find any definition. He asked Senator Stevens what he proposes if the costs are less than $1.5 billion. SENATOR BEN STEVENS responded that, if the total expenditures to full project funding were less, then the sponsors would not be liable for the balance of the $1.5 billion. The only time funds would revert to the state treasury is if there was a breach. 7:36:16 PM MR. VAN TUYL said he wanted to emphasize his concern about the deadline. If all of the activities are not completed by January 1, 2011 as required by the contract, and the total cost is only $800 million, the commissioner could say that the producers are in breach and require them to pay the full amount, which is a minimum of $1.5 billion. That could cause participants to cut corners or operate in a way that is different from the norm, in order to make the deadline. 7:37:17 PM ^Mark Nelson, ExxonMobil MARK NELSON, ExxonMobil, said that ExxonMobil is also opposed to Amendment 7 due to the hard completion date and minimum spending requirements. Just as the producers have a responsibility to shareholders, the state has a responsibility to Alaskans to pursue the project in a disciplined manner using best practices. Project management experts and individual project analysis have concluded that, "When the calendar rather than the data drives the project, the project usually fails." Rushing to meet imposed deadlines serves to increase costs, compromise safety, and increase the risk of project failure. As with other amendments presented by this committee, this amendment may prevent the project from being commercially viable. An economic project does not need guaranteed start-up dates and mandated spending rates, because the parties already have a substantial incentive to advance it. In conclusion, being schedule-driven won't deliver the best project to the state of Alaska and participating companies. 7:40:40 PM ^Wendy King, ConocoPhillips WENDY KING, ConocoPhillips, said she appreciates that, from the public comment perspective and the comments that she has heard in committee over the past couple of months, work commitments are a significant issue to the legislature. For the producers, it is a heart-of-the-deal issue. The producers have emphasized that it is not advisable to tie work activities and dollars to dates. Schedule-driven projects are set up for failure. She stressed that ConocoPhillips wants to move this project forward and is committed to spend the money necessary to get to project sanction, but cautioned that, until project sanction, all of those funds are likely to be equity funds, not financed funds. Also the federal loan guarantees won't provide backup financing until the project gets to the completion tests, so the sponsors are "on the hook" for those dollars. Ms. King said that Conoco Phillips is trying to work with all parties to find a solution to work commitments. This could include committing some money to project development in the contract itself. She said that Conoco Phillips is not opposed to spending commitments, but it sees challenges with this particular amendment. The $1.5 billion monetary requirement is more than ConocoPhillips expects to have to spend, and the focus should be on keeping costs down. Another issue is the timeline. The contract hasn't even been approved and the producers do not know when the project will begin, but there is already pressure to get to sanction by 2010. Schedule-driven behavior is a concern. 7:44:14 PM She continued to say there should be some mechanism whereby, if there is a spending commitment, but all parties agree it should be spent at a later date, it could be deferred. She is also concerned that putting up $1.5 billion in the beginning could create some time-value of money issues. To conclude, ConocoPhillips has not had time to fully assess this amendment internally. It is willing to entertain some of the concepts in the amendment, but it needs to advance that in the context of discussions on work commitments. 7:45:28 PM SENATOR STEDMAN said that, in the second line from bottom of Amendment 7, it talks about providing the commissioner with a monthly expenditure report; so that should alleviate some of the concern about a big expenditure coming in only one day into the project. The intent is not to get remuneration to the state, it is to keep the project moving forward and deal with other concerns. MR. NELSON said that ExxonMobil's concern is that it does not have control over a lot of things that can happen prior to project sanction, such as a judicial challenge. It would be putting money at risk, or could be forced to continue spending money during a challenge of the contract. 7:47:26 PM SENATOR BUNDE commented that Mr. Van Tuyl mentioned fairness, and one of the consistent tenets he has heard from the producers is certainty. He thinks fairness would dictate some certainty for the state as well. The producers are putting money at risk; the state is putting its economy and the well being of its citizens at risk. He said he was heartened to hear that the producers have thought about how to bring more certainty to the state, and is wondering when the committee might hear more about that. MS. KING replied that the public comment period closed July 24, and ConocoPhillips is just beginning discussions with the administration and its partners to find a balance that works for all parties. She said she is unable to provide a firm timeline for a decision at this point. 7:49:46 PM SENATOR BUNDE asked if it is possible that a decision might be available before next Thursday. MS. KING said that is very optimistic. 7:50:08 PM SENATOR WILKEN said that is the best testimony Ms. King has given, and it is clear that she understands the state's position; so, he addressed his comments to the representatives of the other two producers. He said he will vote for this amendment, but does so with some concern, because he does not like deadlines either. This contract won't leave the legislature as a "trust me" contract. He does not want to get to the end of the four years estimated to project sanction and hear that the producers aren't ready yet. He said he does not know what the benchmarks are, but there have to be some specific goals the state can use to measure whether the producers are expending the effort necessary to move this project ahead. 7:53:36 PM MR. VAN TUYL said he appreciates Senator Wilken's concern, and BP is committed to advance the project and monetize the resource for the benefit of BP and the state. The challenge is how to structure the contract to ensure that outcome. The work commitments in the contract are the product of a lot of consideration, and he thinks the formula provides as much certainty as it is reasonably possible to provide. Deadlines and spending rates may not result in the desired outcome. 7:56:12 PM SENATOR WILKEN said he believes what Mr. Van Tuyl said, but he does not want Mr. Van Tuyl's replacement talking to his replacement about these same issues. He wants some type of a yardstick. MR. NELSON echoed Mr. Van Tuyl's remarks, saying that ExxonMobil is committed to this project and will continue to work hard; but it does not want to put inefficient measures in place that will cost extra money. 7:57:19 PM SENATOR BEN STEVENS said he wanted to make a clarifying point. In Section 13 when it says, "the contract is fully executed by the parties", the term parties is defined as "the state and all participants" and participant means "BP, ConocoPhillips, and ExxonMobil". The sponsor is the one that takes it to the federal government. 7:58:21 PM CHAIR SEEKINS pointed out that this is $1.5 billion, and $300 million has already been set aside by the state. SENATOR BEN STEVENS clarified that the state is putting risk money up front as well, and once the contract is executed, the state will agree to pay 20 percent of the expenses incurred. He said he does not agree that all of the $300 million will come back to the state if a breach has occurred. SENATOR ELTON asked Senator Stevens if it was his intent to kick any disputes under Section 13(b) or (d) into the arbitration dispute resolution process, or for them to be settled by the commissioners. SENATOR BEN STEVENS said he cannot answer the question, but his intent was for the minimum project expenditure to be agreed upon in the contract. As part of the contract, it would be subject to dispute resolution; but the statute does not become part of dispute resolution. 8:03:36 PM CHAIR SEEKINS asked if the unexpended balance attributed to that sponsor would be subject to forfeiture. SENATOR BEN STEVENS answered yes; it doesn't say whole project would come to a stop. 8:04:59 PM SENATOR ELTON said he is struggling with language that would make it clear that disputes under Section 13(b), (c) or (d) would be settled by the commissioners of revenue and natural resources outside the dispute resolution process established in the contract, and is thinking of a possible conceptual amendment to clarify that. 8:05:41 PM SENATOR BEN STEVENS said he does not think that language is necessary, because the contract cannot dictate what statute says. He said he does not want to put anything in statute that can be dictated by contractual terms. 8:08:32 PM SENATOR DYSON said he agrees with Senator B. Stevens, but he worries about the curative language the committee saw earlier, which he is told is standard in a contract. If the contract is ratified and it later proves to be in conflict with any existing law, the curative language says the contract trumps the legal statute; so he feels that the point Senator Elton raises is a valid one. He also feels that the producer's concern about the deadline is valid. If the contract is not ratified quickly, it would be better to specify a number of days or years instead of naming a firm end date. He thinks accommodation should also be made for events beyond the producers' control. 8:09:45 PM SENATOR HOFFMAN asked Chair Seekins to refresh his memory regarding the amendment before the committee. CHAIR SEEKINS said that the amendment to Amendment 7, to include "with the concurrence of the commissioner of the Department of Revenue" is before the committee. SENATOR HOFFMAN asked Senator Stevens how he arrived at $1.5 billion in light of the fact that all three sponsors have said they think they can get to project sanction for less than $1 billion. 8:10:42 PM SENATOR BEN STEVENS said the legislature voted on a $300 million set-aside, and the state is a 20 percent partner, so he calculated the total based on that. 8:11:59 PM SENATOR STEDMAN commented that the state had some concerns about its ability to come up with the funds to build this, and the $300 million set aside is a good start toward the full 20 percent it will have to come up with. The committee took an at-ease from 8:12:54 PM to 8:17:20 PM. CHAIR SEEKINS called the meeting back to order. Not all of the members were present, so he went off the record until they arrived. SENATOR KOOKESH arrived. The committee took an at-ease from 8:18:06 PM to 8:19:08 PM. CHAIR SEEKINS called for discussion among the members. SENATOR ELTON said he will vote yes, but still has concerns about the dispute resolution process and plans to discuss it with Legislative Legal Services before the bill gets to the floor. 8:19:45 PM CHAIR SEEKINS interrupted to clarify that the matter before the committee is whether there is any objection to adopting Amendment 1 to Amendment 7 (proposed earlier by Senator Wilken) to insert "with the concurrence of the commissioner of revenue" in Section 13. There being no objection, it was so ordered. 8:20:12 PM CHAIR SEEKINS said that the committee is now discussing Amendment 7, as amended. SENATOR ELTON said he appreciates the effort to create some work commitments and monetary incentives, and does not think it is too burdensome for the producers. He does not put aside their concerns however, and thinks that they should have time to come up with a way to tweak this approach if they feel it is necessary. 8:21:59 PM SENATOR BUNDE asked Senator Stevens whether, if there is a delay and the reason for it is disputed, the dispute would go to arbitration. SENATOR BEN STEVENS replied that is not his intent. It is intended to provide leverage to the commissioners. The intent was to create financial commitments, while giving the producers latitude to be efficient within that framework. How a dispute would be handled relates to whether a determination is made that there has been a breach in the spending commitment imposed by the contract. 8:24:38 PM SENATOR BEN STEVENS removed his objection. SENATOR DYSON objected. 8:25:12 PM The roll was called: Yea: Senator Olson, Senator Wilken, Senator Hoffman, Senator Kookesh, Senator Ben Stevens, Senator Stedman, Senator Bunde, Senator Green, Senator Wagoner, Senator Elton, Senator Seekins Nay: Senator Dyson Amendment 7 was adopted as amended by a vote of 11 yeas, 1 nay. 8:26:34 PM CHAIR SEEKINS introduced a new draft CS, Version F. 8:26:46 PM SENATOR GREEN moved to adopt Version F as the working document. There being no objection, it was so ordered. 8:27:23 PM ^Jim Clark and Joseph Donohue JIM CLARK, Chief Negotiator, Office of the Governor, introduced himself. CHAIR SEEKINS asked Joe Donohue if he would explain the intent behind Section 1 of the CS. 8:27:44 PM JOSEPH DONOHUE, Preston, Gates & Ellis, said the intent of Section 1 of the bill (Version F) is to provide authority for the state to agree to the Federal Arbitration Act. So, this is an exception to the revised Alaska Uniform Arbitration Act. The contract provides that the Federal Arbitration Act will control the arbitration procedures, and this exception is designed to clarify that. 8:28:36 PM SENATOR DYSON asked if he is correct that the Federal Arbitration Act will apply except where this contract has exceptions. MR. DONOHUE answered that the concern was that state law might conflict with the contents of the proposed contract. This allows the state to negotiate in the context of a Stranded Gas Development Act contract, to stipulate to arbitration procedures outside of title 9 of the state law. SENATOR DYSON asked if the contract doesn't conform to state law, this paragraph puts it under federal arbitration law. MR. DONOHUE said this allows the state to stipulate as a contractual term in a fiscal contract under 43.82 that the Federal Arbitration Act will control arbitration proceedings. 8:30:02 PM CHAIR SEEKINS asked if there were objections or proposed amendments to Section 1. Hearing none, he asked Mr. Donohue to address paragraph 1 of Section 2. MR. DONOHUE explained that paragraph 1 of Section 2 was intended to clarify that the contract developed under 43.82 could include fiscal certainty terms relating to oil and to the business activities of the qualified sponsors generally, not just those related to new investment, or the gas pipeline project. CHAIR SEEKINS asked for questions or amendments. 8:31:10 PM SENATOR ELTON asked Mr. Donohue to speak to a suggestion he made earlier, when explaining Version G to the committee, that this section be moved to another part of the bill. MR. DONOHUE replied that his comment was related to lines 6-7, the language "including gas pipeline expansion pricing that encourages further gas exploration." At one point, the administration considered proposing language to 43.82.200 that would deal with this issue and take it out of the purpose clause. SENATOR ELTON asked if the administration decided against that. MR. DONOHUE answered yes. CHAIR SEEKINS commented that the committee added "or a related party" to that paragraph and the next, as well as a definition of related party in a later section. He explained that Section 3 was the committee's amendment to the earlier CS (Version G). 8:32:41 PM CHAIR SEEKINS reminded the committee that Section 4 is an amendment that was offered by Senator Stedman and has been included in the new CS. He asked Mr. Donohue to explain the deletion on page 3 of Section 5. MR. DONOHUE explained that Section 5 inserts the concept of "related party" to make it clear that fiscal certainty terms can relate to owners of the GTP, the mainline LLC, and other entities. Also, the deletion on page 3 is designed clarify that fiscal terms do not necessarily have to relate directly to this new investment. CHAIR SEEKINS asked for questions on Section 6. 8:34:09 PM SENATOR ELTON commented that, under Version G, there was an amendment to 43.82.020, which was negotiation of contract terms and deals with the related party issue, and that section seems to be missing in this version. CHAIR SEEKINS said he would come back to the sections that were removed for convenience, to discuss whether any should be reinserted. 8:35:00 PM MR. DONOHUE explained that Section 6 deletes the reference to royalties. AS 43.82.220 currently deals only with royalty-in- kind and royalty-in-value issues, and the intent was to broaden the application of 43.82.220 to deal more generally with oil and gas lease and unit agreements. He went on to Section 7, which states that compliance with 43.82.220(a) is sufficient to satisfy all statutory requirements under AS 38. That is primarily intended to make clear that those are the sole criteria that apply to decisions to enter into shipping commitments under the stranded gas act, and that the royalty advisory board has no role in those decisions. 8:36:45 PM CHAIR SEEKINS explained that Section 8 on pages 3-4, is the amendment adopted regarding Project Labor Agreements (PLA's), which has been incorporated into the new CS. He asked Mr. Donohue to go on to Section 9. MR. DONOHUE said Section 9 deletes language that would limit the term of the contract to the period necessary to develop the stranded gas, in order to avoid legal issues relating to how long that period might be. It also contains the committee amendments passed earlier in the week, changing the term from commencement of operations from 35 years to 25 years, and maximum contract period from 45 years to 35 years. 8:38:08 PM SENATOR BEN STEVENS offered Amendment 9 (the first amendment to Version F) and objected for discussion purposes. He said this amendment came before the committee during the last special session and has not changed. ^AMENDMENT 9 AS 43.82 is amended by adding a new section to read: Sec. 43.82.255. Term of contract provisions  related to oil. (a) The provisions of this section apply to a contract developed under AS 43.82.020 that provides for periodic payment in lieu of taxes on oil under AS 43.55. (b) For the part of the contract term beginning immediately after the date of full project funding or the date of issuance of a certificate of public convenience whichever date is later, and ending 14 years after that date, the commissioner may develop a term for the contract that provides for payments in lieu of the taxes on oil set out in AS 43.55. For the part of the contract term established with as much certainty as the Constitution of the State of Alaska allows. (c) For the part of the contract term beginning immediately after the period described in (b) of this section, and ending on a date not later than 25 years after the effective date of the contract, the amount of the payment in lieu of tax on oil under AS 43.55 must be equal to the amount of the tax levied by the law. However, the commissioner may develop a contract term that, in the event of a material change in the taxes enacted after the effective date of the contract, establishes a procedure for restoring the parties to substantially the same economic position they had as of the end of the period described in (b) of this section immediately before the change. (d) Implementation of a contract provision authorized in this section may'be made subject to the dispute resolution procedures of the contract. CHAIR SEEKINS said he assumed that Senator Stevens wanted to make some modifications, and that is why it was not incorporated into the CS. He asked if there were questions regarding Amendment 9. SENATOR WILKEN referred to line 18, the word "commissioner", and reminded the committee that the administration was going to prepare language to clarify that this refers to the commissioner at the time of the fiscal certainty. He asked if the administration has had the opportunity to work on that. MR. DONOHUE apologized and said he does not have it ready. 8:40:09 PM CHAIR SEEKINS asked Senator Stevens if he would like to hold the amendment to look at the new language. SENATOR BEN STEVENS replied that it is up to the discretion of the chair. CHAIR SEEKINS asked if Senator Stevens' intent is that it be automatic and negotiated now, or that it be negotiated in the future, if the legislature raises taxes making an economic balancing agreement necessary. SENATOR BEN STEVENS answered that it would be negotiated as the result of a material change at a future date. CHAIR SEEKINS asked if it would satisfy his intent to say: "However, in the event of a material change in the taxes enacted after the effective date of the contract and after the period of time specified in paragraph (b), the commissioner of revenue may develop a contract term that establishes a procedure for restoring the parties to substantially the same economic position they had..." 8:41:59 PM SENATOR BEN STEVENS asked Chair Seekins to repeat his proposed language. CHAIR SEEKINS did so. SENATOR BEN STEVENS replied that, if that helps to clarify it, he has no problem with it; but he feels it is already prescribed on line 14. 8:42:52 PM MR. DONOHUE interjected that, given the context of 43.82 generally no clarification is needed. CHAIR SEEKINS said that, as he understands the statute, the commissioner referred to is the commissioner of revenue, and the economic balancing procedure would not take effect automatically unless the economic rents changed after the prescribed period of time. He asked Senator Wilken if he was satisfied with that determination. SENATOR WILKEN answered that he is not. He said he does not understand why the committee feels it should deal with this at all. The sitting commissioner can maintain the fiscal equilibrium during that 14-year period. 8:45:04 PM CHAIR SEEKINS replied that this section takes place after the 14 years. SENATOR WILKEN responded that it is at the tail of 25 years. MR. DONOHUE explained that, under this provision, the current commissioners might offer a contract term that would lock in the tax that is in effect by law at project sanction. The producers may or may not agree to that, since they don't know what is being locked in; so there is uncertainty related to the second phase as to whether the producers would even be willing to consider this. As to the third phase, it seems as if the commissioner could negotiate provisions now that help refine the concept of material change and how it would work when there is fiscal stability. 8:46:24 PM MR. CLARK suggested that the administration meet with producers to craft language that fulfills the committee's direction, and bring it back for review before the legislature ratifies the contract. 8:47:31 PM CHAIR SEEKINS said he understands it would be the sitting commissioner that would make the decision to do it. SENATOR GREEN pointed out that this is language that the committee already adopted two or three times. SENATOR BEN STEVENS said he did not think there were any proposed changes. SENATOR WILKEN said that, when the committee talked about this amendment previously, there were three sections: four years to sanction, five years to build, 9 years for capital cost recovery. Then there was a piece of time at the end and, if there were changes that would require the state to change oil, it would seek balance through gas, or vice versa. This amendment proposes to address something that, best guess, starts 14 or more years from now. He did not understand why one would suppose this legislature can do a better job of it today than the commissioner and the administration could in 14 years, given all the circumstances that could arise. 8:50:54 PM MR. CLARK said that the language for fiscal balancing agreements exists in many types of contracts. It is usually included on the front end so all parties know what the rules will be in the future. It may be that, at end of the 14-year period, it needs to be changed; but that could happen to other sections of the contract as well. 8:52:38 PM SENATOR DYSON asked what is before the committee now. CHAIR SEEKINS replied that it is Amendment 9 (the first amendment to Version F). SENATOR DYSON said that it looks as if disputes under this section are subject to the contractual arbitration process, and asked Senator Stevens to comment on the last two lines of the amendment. SENATOR BEN STEVENS answered that terms of a contract are subject to dispute resolution. Disputes concerning the timing would be settled in arbitration. 8:55:18 PM CHAIR SEEKINS confirmed that it is when it is implemented. SENATOR DYSON said that confirmed what he thought was true. He said he appreciates what Senator Stevens has done, but is not convinced of the efficacy of that dispute resolution process. 8:56:14 PM SENATOR STEDMAN asked Chair Seekins if he could provide a brief timeline to the people listening from home. CHAIR SEEKINS summarized that there is a period of approximately four years until project sanction, prior to which there is no fiscal certainty. For a period of approximately five years after sanction and nine years of construction, during capital cost recovery, the state has established what taxes on oil will be. That is a total of 14 years after project sanction. The remaining 25 years, minus the pre-build years and the capital cost recovery years, is a period of economic balancing during which, if taxes are raised resulting in a substantive change in the distribution of rents, the commissioner can enter into the process to restore economic balance. (This was illustrated using the chart Senator Wilken created for SB 2004.) 8:58:06 PM CHAIR SEEKINS asked if he had summarized it correctly. SENATOR BEN STEVENS replied yes. SENATOR STEDMAN paraphrased that, under this amendment, the oil tax structure would not be locked in until after sanction. The state would stabilize the taxation on oil through the construction. CHAIR SEEKINS interrupted that it may be unconstitutional to do so. 8:58:52 PM SENATOR WILKEN said he would vote for the amendment because it addresses one of the issues the committee has with the contract, but told Mr. Clark that he expects to have further discussions with him on this subject. SENATOR ELTON said he would vote for the amendment because it is marginally better than what is in the contract that he supposes will be presented to the legislature. He does not think it does anything to alleviate the constitutional questions, and he does not think the state should lock itself into a tax rate for any period of time. 9:00:01 PM SENATOR DYSON removed his objection. CHAIR SEEKINS asked whether there was further objection to adopting Amendment 9. There being no objection, it was so ordered. 9:00:25 PM CHAIR SEEKINS explained that Sections 10 and 11 are the same as Amendment 7 to Version G, which was adopted by the committee. He asked Mr. Donohue to address Section 12. MR. DONOHUE explained that Section 12, beginning on page 6, extends the minimum public comment period from 30 to 60 days. CHAIR SEEKINS asked if this is an amendment that was passed earlier today. 9:01:34 PM SENATOR BEN STEVENS said yes; it was a curative amendment, because the 60 days expired on the 24th of July. SENATOR WILKEN said he thought the amendment was on line 23. CHAIR SEEKINS answered yes. This was a curative amendment to the 60 days of public comment that ended in July. MR. DONOHUE agreed. SENATOR WILKEN repeated that he thought the change was on line 23. CHAIR SEEKINS replied that it would be. SENATOR BEN STEVENS said he believes the governor announced that he was going to have 75 days of public comment, from May 10 to July 24. MR. CLARK confirmed that it was 75 days. ^Amendment 10 9:03:07 PM SENATOR BEN STEVENS moved to adopt Amendment 10, which amends line 19 on page 6 to read "75" in lieu of "60". There being no objection, it was so ordered. (This is the second amendment to Version F.) CHAIR SEEKINS said that Section 13 is the one that was amended earlier today. 9:03:47 PM MR. DONOHUE said that the amendments to Section 14 clarify that the fiscal terms can relate to the qualified sponsor, members of the qualified sponsor group, or related parties. The amendments on lines 11-13 specify that payments are due to the state, but can be made payable to the revenue affected municipalities. He continued to Section 15, saying that the amendments to 43.82.505 provide that all of the impact payments due under the fiscal contract would be paid to economically affected municipalities under the principals outlined in 43.82.520. SENATOR WILKEN apologized to the committee for digressing, but said he has been working on the PILT issue and needed to correct an error. Section 16 of Version G was deleted in Version F but contained some really good work and should be retained. CHAIR SEEKINS said he would put it back in and asked where Senator Wilken would like it to be inserted. SENATOR SEEKINS said it should go right after economically impacted municipalities and would become a new Section 16. Section 15 would revert to its language in G, because it refers to Section 16. 9:06:08 PM SENATOR WILKEN moved to adopt the foregoing as conceptual Amendment 11, the third amendment to Version F. He noted it would take Sections 15 and 16 of Version G and insert them after the current Section 15 in Version F. SENATOR ELTON interjected that, unless he has misunderstood Senator Wilken's intent, they should be inserted after Section 14, beginning on line 14, because Section 15 in Version F would be replaced. CHAIR SEEKINS asked for confirmation. SENATOR WILKEN agreed and restated his motion. The committee took an at-ease from 9:10:01 PM to 9:10:51 PM and from 9:12:22 PM to 9:14:30 PM to discuss technical aspects of the amendment. 9:16:31 PM CHAIR SEEKINS re-stated Senator Wilken's motion to adopt conceptual amendment 11 to Version F: Remove Section 15 of Version F, replace it with Sections 15 and 16 of Version G, and renumber the other sections accordingly. There being no objection, the motion carried. 9:17:22 PM SENATOR WILKEN moved to adopt Amendment 12 (fourth amendment to Version F). He objected for discussion purposes. He said that, under the stranded gas amendment, AS 43.82.210 speaks to payment in lieu of taxes for municipalities, and the amendment intends that the legislature will decide how the PILT monies are distributed. The state gets money from the oil companies in four major ways: a corporate income tax; royalties; severance tax, and an ad valorum tax. The ad valorem tax calls for 2 percent of the total value to be divided between municipalities that have oil and gas properties within their boundaries, with the balance remaining in the general fund. That tax is being replaced by PILT, which will generate approximately $12.67 billion over the next 35 years. 9:20:41 PM SENATOR WILKEN said he researched how the PILT money was distributed and found that one area is benefiting disproportionately to others, and he isn't sure that is in line with the spirit of Section 8.1 of Alaska's constitution. He distributed a chart showing the distribution and pointed out that the North Slope Borough will get 70 percent of the money. Fairbanks North Star Borough will get 4 percent; Valdez will get 3 percent; the state of Alaska will get the 21 percent that remains. If that were distributed on a per capita basis, that would be $1.3 million each for residents of the North Slope Borough; $96,000 for those in Valdez; $5,800 for residents of Fairbanks North Star Borough; and $4,400 for each of the 626,000 citizens of Alaska. He said that Amendment 12 provides that the money will go to the state and the legislature will decide how to distribute it to the people of Alaska. 9:23:28 PM CHAIR SEEKINS asked Senator Wilken if Version F, page 3, between lines 18-19 would be a good place to insert the amendment. MR. CLARK interrupted to suggest that it might be helpful for Mr. Dickinson, author of this section, to explain the administration's rationale. 9:24:34 PM ^Dan Dickinson DAN DICKINSON, CPA, said that Section 20.1 of the contract states that payments are due to the state. It can direct that some of those are paid to political subdivisions, and rules for that are found in Exhibit G. It also states that political subdivisions have no rights under the contract and cannot go directly to the producers for satisfaction on issues. CHAIR SEEKINS asked if there is a problem with the distribution being directed by law. MR. DICKINSON answered that Exhibit G, the methodology that determines how it is divided up, provides that no money goes to a political subdivision unless there is a ratio in front of it. That ratio is the political subdivision's mil rate over 20 mils. Under law, the legislature establishes the rules for the mil rate, so he believes that the amendment is superfluous. Having said that, maybe mil rates aren't the best way to determine how certain municipalities get money. Other rules could be made. 9:28:47 PM SENATOR WILKEN said that, although everything Mr. Dickinson said is correct, he is not sure how germane it is to what he is trying to do. He referred to Exhibit G, which reads in part: "participant may make a portion of its payments due to the state under articles 15, 16, and 17, payable to a political subdivision." Then it says to go to Exhibit F for calculations, and number 15 under F shows hypothetical examples that really do not illustrate how the money will be distributed. How that money is divided up should be dealt with through deliberative legislative process, not through the contract. 9:31:42 PM MR. DICKINSON observed that Section 43.82.210 of the Stranded Gas Act instructs the commissioner that PILT payments to municipalities will be a function of the contract. He also pointed out that there is an assumption as to what mil rates are; but those mil rates can be changed. He urged caution to ensure that the mil rate is always a critical part of the calculation. 9:33:10 PM SENATOR HOFFMAN explained that the vast majority of the money is going to the North Slope because that is where the resource is, and the borough should be incentivized to encourage development. 9:34:26 PM SENATOR OLSON pointed out that the pie chart shows North Slope Borough getting 2/3 of the money, twice as much as the rest of the state. He asked Mr. Dickinson how accurate the percentages are, since nobody knows what the mil rate will be 35 years from now. 9:35:49 PM MR. DICKINSON answered that there are a number of assumptions that reflect the situation today. The more distant the projection, the harder it is to predict how those assumptions will hold up. If the tax base increases, all other things being equal, one would expect the mil rate on the North Slope to lower. For example, if the tax base grows by $3 to $3.5 billion to a tax base that is currently $12 billion, that is an increase of almost 30 percent, so the mil rate should decrease by 30 percent and the state's portion should pick up. SENATOR OLSON asked if Mr. Dickinson is saying that the numbers could be off by 30 percent. MR. DICKINSON responded that, over 30 years, that would be a generous estimate. 9:37:35 PM SENATOR OLSON opined that the administration is not in favor of amendment. MR. DICKINSON answered that is correct. The administration worked hard to ensure that the legislature retained the ability to control these issues. 9:38:17 PM SENATOR STEDMAN asked if the mil rate would have to change statewide to do the property tax adjustment to bring that number down. MR. DICKINSON replied that is correct. Under the current system, any taxation up to 20 mils by a locality goes to that locality; the difference between its tax rate and 20 mils goes to the state. Under current statute, a municipality can go up to 30 mils for operations. If it is receiving payments to pay back bonded indebtedness, there is no mil rate limit. So, one of the things that happens in the contract is that municipalities' current ability to tax is limited. Even though 20 mils has effectively been the ceiling, the actual cap is at 30. This legislation would reduce it to 20 for operations; there is no cap for debt. 9:40:33 PM SENATOR WILKEN agreed with Mr. Dickinson, but noted that a provision in current law allows the North Slope Borough to choose how it establishes its per capita mil rate. Because its expenses exceed the 30 mils, it is allowed to use a formula that takes the average per capita of the state, multiplies it by 225, and divides it by municipal population. That lowers the effective mil rate to keep it below 30 mils. Today it is at 29.7 mils for its operating budget and 40.22 mils for debt, which comes to 69.97. They get to make that choice. Today, the North Slope Borough has approximately 6,894 people. Through the optional calculation for North Slope Borough, the municipal population is counted as 13,047. 9:42:45 PM MR. DICKINSON answered yes. Those options are defined in law, and the issue went as far as the Supreme Court about five years ago, which affirmed it. Because it is in law, it remains in the purview of the legislature. SENATOR BUNDE said one might refer to this amendment as a belt and suspenders. When dealing with $5 to $10 billion, that might be a good investment. The numbers may be speculative, but wherever underground resources are found, they belong to all of the people of the state, not to a particular geographic region. When hyperinflation hits, which will happen when the pipeline goes through, all communities will suffer economic impacts. 9:44:21 PM SENATOR OLSON said that he is not sure what the previous speaker's point was, but he would like to go back to the point that Senator Wilken made and ask whether the option that North Slope Borough has chosen differs from what other boroughs have available to them. SENATOR WILKEN responded that the provision was included because of the boroughs extraordinary wealth. Any borough has the option, but only one has the wealth to use it. 9:45:23 PM CHAIR SEEKINS asked if there is a continuing objection to the motion to adopt Amendment 12. SENATOR OLSON objected. The roll was called: Yea: Senator Bunde, Senator Dyson, Senator Wilken, Senator Green, Senator Wagoner, Senator Seekins Nay: Senator Kookesh, Senator Stevens, Senator Stedman, Senator Olson, Senator Elton, Senator Hoffman Amendment 12 failed to be adopted by a vote of 6 yeas, 6 nays 9:46:12 PM CHAIR SEEKINS moved on. There were no questions or proposed amendments to Sections 18-22. 9:47:37 PM CHAIR SEEKINS asked if there were any other sections that members would like added back into Version F. SENATOR BEN STEVENS reminded Chair Seekins that Amendment 6 (to Version G) is still on the table. In the interest of time, he asked to reserve the right to offer it on the floor if there is no other debate. CHAIR SEEKINS agreed. SENATOR ELTON asked what sections of G have been dropped. 9:48:39 PM SENATOR WILKEN answered that the sections deleted from Version G were Sections 3, 4 and 7; Sections 11 and 16 were deleted but put back into Version F. MR. DONOHUE explained that Section 3 made it clear that fiscal terms can relate to "related parties," including the mainline LLCs and other LLCs. The deleted language in sub-paragraph (1) clarified that fiscal terms are not restricted to activities, income, and property related to the specific approved, qualified project. Sub-paragraph (2) related to broad amendments that would allow the fiscal contract to negotiate terms that varied from the oil and gas lease agreements and unit agreements. Sub- paragraph (3) provided authority for the state to negotiate for the receipt of production taxes in kind rather than in value. 9:52:14 PM MR. DONOHUE explained that Section 4 of Version G relates to amendments to the contract development provisions. Sub-paragraph (1) clarifies that fiscal certainty can attach to oil and that credits can be provided for investments in the project, specifically in the fiscal contract and not related to provisions of excess profits tax (EPT) and related tax. Sub- paragraph (2), lines 11-12, relates to provisions that would expand the scope of 43.82.220 beyond the authority to vary royalty-in-kind notice and timing provisions, and royalty-in- value valuation methodologies to include variations from oil and gas lease agreements and unit agreements. On lines 23-24, the language authorizes the administration to negotiate administrative determination contractual provisions and is associated with a repealer of 43.82.445. Sub-paragraph (7) would broaden the authority of Section 7 to authorize all the terms of the contract that are not specifically mentioned in 43.82.200. 9:54:23 PM MR. DONOHUE went on to explain that some of the preceding deletions relate to Section 7, 43.82.220(a), which would broaden the authority of the state to negotiate provisions that would vary from leases and unit agreements within the context of the fiscal contract. Specifically sub-paragraph (1) clarifies the state's right to enter into shipping commitments for the life of the agreement, and to specify by the deletion of the current sub-paragraph (3) that the state's commitment to take its royalty share in value is not limited to initial purchase and sale agreements. Sub-paragraph (2), lines 21-23 are intended to authorize certain provisions of the fiscal contract that vary from lease terms and, in some cases, the terms of title 38. 9:55:56 PM CHAIR SEEKINS said that the deletions did not necessarily reflect a lack of intent to consider these provisions; but members felt they did not have enough information to act on them at this time. MR. CLARK stressed that these are provisions that will have to be discussed at a later time, as they will be needed to make a contract work. 9:57:06 PM SENATOR GREEN moved to report CSSB 3002 Version F, as amended, from committee. SENATOR WILKEN, SENATOR BUNDE and SENATOR ELTON objected. SENATOR WILKEN explained he would like to see what the administration does to address public comments before giving it further authority. He also wants to see the LLC agreement and do more work on how the PILT will be distributed. 9:59:08 PM SENATOR ELTON explained that, in addition to Senator Wilken's concerns, he is not comfortable with the piecemeal fashion in which these amendments are being handled. SENATOR BUNDE said he shares Senator Wilken's concerns. CHAIR SEEKINS said he intended to vote for the bill because, even though more work is needed, it provides some sideboards that might help in further negotiations. 10:02:48 PM SENATOR HOFFMAN agreed with Chair Seekins that this is just a step toward moving the project forward. 10:03:50 PM CHAIR SEEKINS asked for further comment. There was none. The roll was called: Yea: Senator Hoffman, Senator Ben Stevens, Senator Stedman, Senator Green, Senator Seekins Nay: Senator Elton, Senator Kookesh, Senator Bunde, Senator Olson, Senator Dyson, Senator Wilken, Senator Wagoner CSSB 3002(NGD), Version F, as amended, failed to move from committee by a vote of 5 yeas and 7 nays.