HOUSE SPECIAL COMMITTEE ON OIL AND GAS April 29, 1999 5:10 p.m. MEMBERS PRESENT Representative Jim Whitaker, Chairman Representative Fred Dyson Representative Gail Phillips Representative Scott Ogan Representative John Harris Representative Allen Kemplen Representative Tom Brice Representative Harold Smalley MEMBERS ABSENT Representative Brian Porter COMMITTEE CALENDAR *HOUSE BILL NO. 170 "An Act establishing the Alaska Gas Corporation, a public corporation, and providing for its structure, management, responsibilities, and operation." - HEARD AND HELD (* First public hearing) PREVIOUS ACTION BILL: HB 170 SHORT TITLE: ALASKA GAS CORPORATION SPONSOR(S): SPECIAL COMMITTEE ON OIL & GAS Jrn-Date Jrn-Page Action 3/31/99 625 (H) READ THE FIRST TIME - REFERRAL(S) 3/31/99 625 (H) O&G, RES, FIN 4/22/99 (H) O&G AT 5:00 PM CAPITOL 17 4/22/99 (H) 4/29/99 (H) O&G AT 5:00 PM CAPITOL 17 WITNESS REGISTER HANK HOVE, Mayor Fairbanks North Star Borough PO Box 71267 Fairbanks, Alaska 99707 Telephone: (907) 459-1000 POSITION STATEMENT: Supported HB 170. BEN NAGEAK, Mayor North Slope Borough PO Box 69 Barrow, Alaska 99723 Telephone: (907) 852-0200 POSITION STATEMENT: Encouraged the legislature to view HB 170 in a positive light. DAVE COBB, Mayor City of Valdez PO Box 307 Valdez, Alaska 99686 Telephone: (907) 835-4313 POSITION STATEMENT: Supported HB 170. DAVE DENGEL, City Manager City of Valdez PO Box 307 Valdez, Alaska 99686 Telephone: (907) 835-4313 POSITION STATEMENT: Discussed the amendment. BILL WALKER, Attorney City of Valdez Walker Walker Wendlandt & Osowski 550 West 7th, Suite 1850 Anchorage, Alaska 99501 Telephone: (907) 278-7000 POSITION STATEMENT: Offered information regarding the amendment. MANO FREY, Executive President Alaska AFL-CIO 2501 Commercial Drive Anchorage, Alaska 99501 Telephone: (907) 272-4571 POSITION STATEMENT: Encouraged the moving forward of HB 170. ACTION NARRATIVE TAPE 99-15, SIDE A Number 0001 CHAIRMAN JIM WHITAKER called the House Special Committee on Oil and Gas meeting to order at 5:10 p.m. Members present at the call to order were Representatives Whitaker, Dyson, Phillips, Ogan, Harris, Kemplen, Brice and Smalley. Representative Porter was excused. HB 170-ALASKA GAS CORPORATION CHAIRMAN WHITAKER announced that the only order of business before the committee would be HOUSE BILL NO. 170, "An Act establishing the Alaska Gas Corporation, a public corporation, and providing for its structure, management, responsibilities, and operation." Number 0075 CHAIRMAN WHITAKER explained that HB 170 would establish the Alaska Gas Corporation which would be a publicly owned entity. "The purpose of the Alaska Gas Corporation is to procure, transport, and market natural gas from Alaska's North Slope to the world." He acknowledged that many questions have arisen during the consideration of this and those questions will be addressed. Chairman Whitaker emphasized that this will not be a "closed door, secretive deal," but rather "an open and honest review of an economic opportunity for all the people of Alaska." He informed the committee that the makers of the constitution demanded through Article VIII, Section 2, "That the legislature provide for the utilization, development, and conservation of all natural resources belonging to the state for the maximum benefit of its people." That is the basic premise of HB 170. Chairman Whitaker informed the committee that there will be a series of hearings on HB 170 and the topics that surround it. He announced that no public testimony would be taken today, but noted there will be opportunity for that later. REPRESENTATIVE HARRIS moved that the committee adopt the proposed committee substitute (CS), Version LS0694\H, Chenoweth, 4/23/99, as the working document before the committee. There being no objection, it was so ordered. Number 0410 HANK HOVE, Mayor, Fairbanks North Star Borough, stated that he supported HB 170. He read the following statement into the record: I believe, along with Mayor Cobb of the City of Valdez and Mayor Nageak of the North Slope Borough, that this bill is potentially one of the most important pieces of legislation to come before the body this year. It is creative, it is innovative, and it represents "out of the box" thinking, and as Fairbanksan, I am extremely pleased and proud of the fact that its originator was our very own Representative Jim Whitaker. This bill, for the first time, envisions a practical means by which Alaska can develop it's vast natural gas deposits on the North Slope. It overcomes the obstacles, real or imagined, that our oil producers have cited for years as reasons why Alaska's gas must remain stranded. It places the interest of Alaska first and, instead of being placed well down the line in priority of development as it competes with other petroleum producers' fields throughout the world, it could quite probably move Alaska natural gas to a position at or near the top of the priority list. The bill proposes to eliminate the necessity of waiting for gas to liquids technology to advance to the point where this method of gas utilization might become economic which conceivably may never happen. It provides the opportunity and the means by which Alaska can devise and control its own destiny concerning this important natural resource which has been, essentially, "locked up" by the oil producers for far too long. MAYOR HOVE read from the April 16, 1999 issue of the World Gas Intelligence which follows: In Alaska, takeover of Arco by BP will increase BP Amco's stake in the Prudhoe Bay field, with this 26-trillion cubic feet of reserves from 21 percent to 53 percent, while reducing the likelihood of an eventual LNG contract there. MAYOR HOVE continued with his prepared statement which follows: This bill would make available, for the first time, sufficient quantities of natural gas to communities along the length of the pipeline that have suffered economically from a lack of access to an affordable source of energy. The bill envisions a maximization of return to the residents of the State of Alaska from the production and sale of this resource while retaining the important private enterprise economies that would result from competition in the construction and operational phases of the project. In addition to the benefits of access, we envision the distribution to every village and community in the state significant sums derived from the revenue stream from the sale of gas. This could have the effect of ending the necessity of communities throughout the state having to appeal to the legislature each year for municipal assistance and revenue sharing money. With this provision set in statute, there would no longer be the need for the endless and frequently unproductive discussions surrounding this issue. And finally, and perhaps most importantly, the bill may very well represent Alaska's financial salvation well into the Twenty-first Century. The financial difficul ties associated with declining crude production in the state are well known to all of us. The revenue resulting from this production and sale of the huge gas deposits is vitally important to every resident of this state if we are to find our way out of the financial briar patch in which we are currently located. It will ensure that our children and grandchildren have a bright future in Alaska and can look forward to the prospect of living, working and playing in this great state. I believe this bill deserves the serious consideration of every member of this committee as well as every member of the legislature. I urge you to give the bill all of the consideration that it deserves. Number 0712 REPRESENTATIVE PHILLIPS pointed out that there would only be one source of revenue large enough to do this which is the permanent fund. In attempting to develop a long-term financial plan, the public has opposed going into the permanent fund. Therefore, that will be a consideration for this legislation. MAYOR HOVE explained that HB 170 contemplates the issuance by the State of Alaska of revenue bonds sufficient to fund the construction of the pipeline and associated assets. He pointed out that method is beneficial because the bonds would be exempt from taxation. That exemption would probably result in several percentage points below the cost of capital that might have to be paid under a private enterprise scheme such as contemplated under last year's HB 393. Under HB 393, capitalization under different models was determined to be between 7.5 percent and 10.5 percent. Tax exempt revenue bonds could be around five percent which changes the entire complexion of such a project. Last year, under a private financing scheme, at market rates that were not tax exempt, the project probably could not have been considered even marginal with regards to viability. However, changing the cost of capital as under HB 170, changes everything. By early analysis, this project could result in gas priced on the world market at the middle and possible lower end. REPRESENTATIVE PHILLIPS commented that she would like to have assurances and verification, as the process continues, that tax exempt bonds would be a factor. She indicated that she was not sure of that at this time. REPRESENTATIVE OGAN said that those bonds would have to be collateralized with something such as the assets of the permanent fund. MAYOR HOVE stated that he believed the bonds would be collateralized by the revenue stream. CHAIRMAN WHITAKER agreed that the revenue bonds would be collateralized by the project. He pointed out that GO bonds are not contemplated to fund this program. Number 0980 BEN NAGEAK, Mayor, North Slope Borough, testified via teleconference from Barrow. He began by thanking Mayor Hove, Mayor Cobb, and Representative Whitaker for working on this issue. He commented that in his travels over Prudhoe Bay, he has seen the gas being burned. Much money is leaving those wells which should be generating revenue for the state. This legislation helps the state realize some benefits from the natural gas, although many hoops must be passed through before the Alaska Gas Corporation is established. He commented that the bottom line is the economic feasibility of the project as well as the benefits brought to the state. MAYOR NAGEAK acknowledged the recent legislative discussions regarding the declining revenues with which everyone will have to deal. This is an opportunity for the legislature to consider a plan that would benefit all municipalities in Alaska. Mayor Nageak encouraged the legislature to review HB 170 in a positive light and to move forward with the feasibility study. The feasibility study would contain specific information related to this project. Mayor Nageak commented that this is a workable solution to Alaska's situation. REPRESENTATIVE PHILLIPS said she was encouraged by Mayor Nageak's comments. She cited the issue of land and possible contributions as one that will certainly arise between Mayor Nageak and Mayor Cobb. That issue may be a significant factor in whether this project is feasible. Number 1353 MAYOR NAGEAK reiterated the importance of everyone working together. The issue of gas is not new. He discussed a meeting of mayors in Fairbanks in which there were discussions regarding the cost of the pipeline by a private sector entity. Mayors have met on this and other issues numerous times and now this is up to the legislature. CHAIRMAN WHITAKER asked Mayor Nageak to expand on his meeting in New York with bonding fundants. He asked if Mayor Nageak discussed the possibility of revenue bonding for a project of this nature. MAYOR NAGEAK informed the committee that real interest was expressed at that meeting and there were questions regarding the gas pipeline. He believed that those at the meeting were looking for leadership with regards to addressing declining revenues. This project is one such answer to the declining revenues. Mayor Nageak pointed to the importance of rating agencies which review the viability of the finances of any entity as well as how that entity deals with such problems as revenue shortfalls. Mayor Nageak said that a good rating from a rating agency often results in revenue and GO bonds being very attractive to bonding agencies. Number 1567 DAVE COBB, Mayor, City of Valdez, testified via teleconference from Valdez. Mayor Cobb believed that HB 170 provides Alaska with one of its few remaining opportunities to control its own future. The North Slope gas is currently not being developed and the projections are that it will not be developed for the future which impacts the local communities. Mayor Cobb stated that the potential growth of communities along the pipeline corridor and those throughout Alaska would be phenomenal with the development of gas. He informed the committee that currently, there is a company interested in coming into Valdez to establish an iron ore reduction plant. That company would need 20 billion cubic feet of natural gas annually. Such a situation would provide 30 to 50 jobs in Valdez which would not be available if Alaska waits for the oil industry to develop the gas pipeline. MAYOR COBB echoed prior comments regarding the fiscal state Alaska is in and the need to look "outside the box" for manners in which to solve Alaska's problems and develop the state's natural resources. Mayor Cobb noted that the communities have developed an amendment to HB 170 which would address the needs and concerns of each community in Alaska. Every Alaskan community should be a beneficiary of the revenues from this project. He reiterated the previous comments regarding the need to review all aspects of this project in order to determine its feasibility, although he believed it to be feasible for the state. He noted concerns regarding the proposed merger, specifically what would the merger mean to the development of gas on the North Slope. Mayor Cobb emphasized his support of HB 170 and encouraged review of the bill. REPRESENTATIVE PHILLIPS informed Mayor Cobb that much interest was sparked with regards to his comments of the possible iron ore reduction plant because there are some Kenai Peninsula legislators on this committee who have been working to have that located on the Kenai Peninsula. MAYOR COBB stated that many communities are "hamstrung" regarding new development in the state from industries besides the oil industry. Unless there are available supplies of gas throughout the state, development such as iron ore reduction or manufacturing cannot be accomplished. CHAIRMAN WHITAKER noted that there is an amendment, LS0694\H.2, Chenoweth, 4/29/99, which has been mentioned. He said that the rules seem to indicate it appropriate to discuss the amendment in conjunction with the CS without having to adopt the amendment. Chairman Whitaker invited Mayor Hove and Mayor Cobb to join the committee at the table to provide the committee with the reasoning behind the amendment. MAYOR HOVE noted that when HB 170 was described to himself, Mayor Cobb and Mayor Nageak there was also discussion regarding a revenue stream that would have the capacity to retire all the debt associated with the project as well as to provide a significant sum to be distributed to Alaskan residents. He informed the committee that the three mayors were invited by Chairman Whitaker to develop a plan with certain assumptions as provided by Chairman Whitaker. The plan was achieved and can be defended. Mayor Hove viewed this project as a substitute for the eventual elimination of municipal assistance and revenue sharing. MAYOR HOVE explained that the model would take 25 percent of the projected profit stream from the Alaska Gas Corporation and devote that to distribution across the state. Therefore, 75 percent of the revenue stream was left for the State of Alaska to utilize as it wished. Mayor Hove noted that every community would receive a $50,000 minimum payment annually irrespective of the community's size. The balance of the available funds would be distributed on a pro rata share depending upon population. The plan also provides for a payment in lieu of taxes payment above the pro rata amount to the North Slope Borough, the Fairbanks North Star Borough, and the City of Valdez due to the effects of the pipeline in those communities. The pipeline would attract additional residents and therefore create an additional need for public infrastructure which would be funded through that payment. Mayor Hove commented that this plan is fundamentally supportable. He said that all three mayors agree that the plan has at its core an equitable and fair distribution of the profit stream from the Alaska Gas Corporation. Number 2108 DAVE DENGEL, City Manager, City of Valdez, commented that the plan attempts to spread the wealth to all Alaskan communities. He reiterated Mayor Hove's explanation that the plan would distribute 25 percent of the revenue to the municipalities and leave 75 percent available to the state to be appropriated as the legislature sees fit. Of the 25 percent, the payment in lieu of taxes for the three affected communities would be taken off first. He explained that the assets of the Alaska Gas Corporation are tax exempt and therefore, real property would be located within the boundaries of the three specified municipalities, although those municipalities would not be able to tax that property. After that amount was taken off the top, the remaining sum would be divided by the state's population. Mr. Dengel reiterated that all cities, regardless of population, would receive a minimum of $50,000. MR. DENGEL pointed out that boroughs take on a greater responsibility area wide. Therefore a methodology was developed in order to provide funds to the city within a borough and provide the borough with a large portion due to its area wide responsibilities. He explained that the plan takes the general fund budget of each community and compares that to the general fund budget of the borough which results in a ratio. That ratio was multiplied by the per capita dividend for the entire borough which is the city's share. Then all of the city's dividends within that borough would be added, that sum would be subtracted from the whole of the borough and the result would be distributed to the borough. REPRESENTATIVE KEMPLEN referred to page 4, Article 4 of the amendment which reads, in part, "The corporation shall provide gas to every community in the state that requests provision of it." He inquired as to how that would work, for instance, in Bethel. MAYOR HOVE explained that the language was present in order that a community that wished to construct a pipeline to a take-off point on the main gas line would be free to do so. If the community chose to do so, the community would also receive as much gas as required. Clearly, in the case of Bethel that would be impractical. Number 2308 REPRESENTATIVE BRICE commented that he could foresee a plant on the Yukon River loading barges and taking the gas up and down the Yukon as an alternative to heating oil. Representative Brice said that was a good provision which he appreciated. CHAIRMAN WHITAKER said that the concern was that the Alaska Gas Corporation would be responsible for bearing the cost of building such spur lines. With regard to Representative Brice's scenario, Chairman Whitaker commented on how this project could create so many more opportunities for the state. REPRESENTATIVE OGAN concurred with Representative Brice's scenario. However, this language should be clarified such that the language translates that the corporation shall sell and provide the gas to the community at the equivalent of the spigot of the well-head at the pipeline. MR. DENGEL stated that the purpose of the language was that the community would request a valve at the pipeline and that community would pay the well-head price plus the transportation cost to the point. The community would then be responsible to get the gas from that valve to its destination. MAYOR HOVE announced that he would provide the committee with information based on the methodology explained by Mr. Dengel. Mayor Hove referred to a spreadsheet entitled, "HB 170 Alaska Gas Corporation Community Dividend Program," that was provided to the committee. He noted, "This is per billion dollars of profit. So, you get to choose how much profit you think...and apply the appropriate multipliers." He informed the committee that the following communities would receive the specified community dividend: Fairbanks North Star Borough - $12,735,369(annually); City of Fairbanks - $1,805,615; Kenai Peninsula Borough - $6,367,886; Ketchikan Gateway Borough - $1,056,630. He reiterated that was per billion in profit. He reviewed the corresponding community dividend amounts for other communities as listed on the spreadsheet. TAPE 99-15, SIDE B CHAIRMAN WHITAKER noted that the committee packet includes a memo from Roger Marks, Department of Revenue. Page 2 of that memo includes a matrix entitled, "Net Cash Flow to State - North Slope Gas," which provides some preliminary numbers which Chairman Whitaker noted were very conservative figures. The chart illustrates that a price of $2.50 per thousand cubic feet of gas equates to $10 per barrel of oil which is very conservative. Chairman Whitaker said that a more realistic figure is provided at a price of $3.50 per thousand cubic feet of gas which equates to $17.00 per barrel of oil. He pointed out that at the year 2020, the numbers provided by Mayor Hove could be roughly doubled. If the state is very lucky and oil reaches $22 per barrel, the equivalent gas price is $4.50. Chairman Whitaker emphasized that the numbers are huge. Number 2399 REPRESENTATIVE KEMPLEN expressed his concern regarding Article 4 of the amendment. The language does not refer to the size of the natural gas pipeline and therefore no upper limit of size is specified. He noted that the primary market for natural gas is export. Therefore, he believed that there could be the possibility of conflict between the amount of natural gas available for export and the amount wanted by the local communities. This could be more problematic for those communities with a major project such as the iron ore smelting project already mentioned. Representative Kemplen recommended that the committee review inserting an upper limit and ensure that the export aspect of this is economically viable. MR. DENGEL deferred to Bill Walker, the author of this amendment. Number 2326 BILL WALKER, Attorney, City of Valdez and the firm of Walker Walker Wendlandt & Osowski, testifying via teleconference from Anchorage, acknowledged that there would be challenges, but viewed the amendment as a start. With regard to the size of the line, Mr. Walker said that would have to be further developed in the legislation. Mr. Walker pointed out that the economics of the gas line under HB 393 is certainly different than under HB 170. Under HB 393, the authority had to be available for export under long-term contract in order to make it feasible financially. He commented that under HB 170 it appears that the local communities would have a higher priority. REPRESENTATIVE PHILLIPS commented that the amendment is an interesting concept. With regard to profit-sharing with municipalities, Representative Phillips stressed the need to ensure that at no time will the state be required to pay out this money to municipalities, if a point is reached in any given year where there is no profit on this line. Therefore, that language would need to be worked out. Also the language regarding the issues of the boroughs and the cities needs to be clarified, particularly for those areas that are not encompassed within a borough. CHAIRMAN WHITAKER interjected that the issue of boroughs and cities could be commented on by Mayor Hove. REPRESENTATIVE PHILLIPS said that she did not see the answer in the language and therefore, was uncomfortable with the language. CHAIRMAN WHITAKER announced that he was not planning on taking any action on this legislation; this is the first of many hearings. MAYOR HOVE stated that no distinction was made between organized and unorganized governments, but every village is represented on the spreadsheet and shares on the pro rata basis. REPRESENTATIVE PHILLIPS agreed, but pointed out, "... if you are encompassed a borough, the borough also gets money which is more money into that area. So, that's the language I want to verify and clarify." Number 2162 MAYOR HOVE used Fairbanks as an example. Fairbanks is not consolidated and includes two organized cities and one borough. In Fairbanks' case, the ratio of its funded budgets for a given year is the determinant of how much money each receives. If Fairbanks was consolidated, the borough would receive every dollar available on the pro rata basis. As it is, the portions for the City of North Pole and the City of Fairbanks is subtracted from the borough government's entitlement. Clearly, a unified government such as Juneau would receive everything. MR. DENGEL explained, "What we did with boroughs and cities is we would just take the total population of the borough and that was the pot that we worked off from when we divided back up to the cities and then borough.... There's not additional money going into a borough, ..., there's 10,000 people in the borough, they'd get whatever 10,000 times the per capita ...." He recognized that the language may need clarification. REPRESENTATIVE HARRIS referred to the definitions section. He noted that the definition for "project" is fairly site specific. However, the majority of gas consumers would not live in those specified areas. Is there any language in the legislation mandating that the Alaska Gas Corporation construct a spur to the area with the most demand? MAYOR HOVE informed the committee that it was agreed upon that this natural resource be first put to use by Alaskans at beneficial rates to Alaskans. For example, there would not be petroleum refiners adjacent to our oil pipeline and producing products that are not that competitive. The language fashioned would allow any community to construct a pipeline to the point of transmission and take as much gas as the community could use. The prices would compensate the public corporation for its cost of capital and operations to that point on the pipeline. Number 1978 MAYOR HOVE used Anchorage as an example, as it will probably face a gas shortage from the Cook Inlet field in a few years. He noted the possibility that Anchorage could construct a properly-sized pipeline from Anchorage to Glennallen to receive access to gas in the pipeline itself. The language in the legislation would make it possible then for Anchorage to receive an unending supply of take-offs in the quantities desired. With regard to take-offs, Mayor Hove pointed out that gas is compressible which means that gas taken off can be made up through "artful operation of compression stations." For example, if gas is taken off in Fairbanks, the pressure can likely be increased north of Fairbanks to make up for the gas lost in order to ensure that the pipeline is fully utilized to the tidewater. MAYOR HOVE stressed that the mayors wanted to ensure access at affordable prices. Furthermore, they wanted to establish the Alaska Gas Corporation as a common carrier through competitive contracts with private industry and only hold the corporation responsible for the transmission of gas from the North Slope to tidewater. Everyone else wanting to hook up would have to do so at their own expense. REPRESENTATIVE OGAN referred to page 1, line 8 of the amendment which he interpreted as dedicating 25 percent of the profit to a special purpose. That is prohibited Article 9, Section 7 of the constitution. He wondered if the language "Subject to appropriation for the purpose," was utilized to meet the constitutional question. CHAIRMAN WHITAKER said, "That would not be my intent. And if we need to amend the constitution in order to ensure that this is a constant revenue stream to the municipalities, then I would suggest that we do that." MAYOR HOVE viewed this as a form of enterprise in which the state government will be involved. The profits from that enterprise will go to the state's general fund and the legislature will periodically make the appropriate appropriations to the municipalities. In that way, Representative Ogan's constitutional concern is avoided. CHAIRMAN WHITAKER concurred with Mayor Hove, however he expressed concern that it is easy to not appropriate. REPRESENTATIVE KEMPLEN referred to page 3, line 17 of the amendment which utilizes the same language, "Subject to the appropriation for the purpose." Since these impact grants would be appropriated during construction, these grants would not be able to come from the profits of the line. Therefore, Representative Kemplen inquired as to where the funding for these impact grants would come. Is it anticipated that the funds would come from the proceeds of the revenue bonds or from the general fund itself? MAYOR HOVE said that it is the intention that the revenue derived from the sale of revenue bonds, one percent, would fund the impact grants. REPRESENTATIVE KEMPLEN asked if that was allowable for distribution as bond monies. He was unsure that the proceeds from revenue bonds could be used. MR. WALKER stated that would be a cost of the project and would qualify for financing in that method, just as an additional cost of constructing the project. Mr. Walker agreed that he based that upon his past experience with bonding procedures. Number 1670 REPRESENTATIVE PHILLIPS commented that in order to make a profit from the pipeline, an export of the gas will have to occur. At what point is there a balance between the amount of gas dedicated for export in order to provide gas to the local entities at the well-head price. She asked how will it be balanced, if the state's demand exceeds the amount exported which allows local entities to utilize the gas at the well-head price. MAYOR HOVE said that Alaska would not be able to put a dent in the quantity of gas in the pipeline, unless Alaska grew by a order of magnitude. He indicated that Anchorage's needs could be met without negative impacts. In any event, the state would derive the revenue in the same amount from its residents as it would from sales in Korea, for example. The language reflects that "we" will pay the cost of transportation to the point of take-off. No communities would be requesting any type subsidy for the purpose of access. Mayor Hove pointed out that although Alaska is the provider of energy to a large portion of the United States, if not the world, Alaskans pay more for their energy than most. That was puzzling to Mayor Hove, who felt that energy policy should be changed. REPRESENTATIVE PHILLIPS commented then that the first step would be to ensure that there are contracts to sell this gas before moving forward. CHAIRMAN WHITAKER agreed, but noted that the cost must be determined first which is at the heart of this feasibility study. REPRESENTATIVE OGAN read Article VIII, Section 5 of the Alaska Constitution which reads as follows: "FACILITIES AND IMPROVEMENTS. The legislature may provide for facilities, improvements, and services to assure greater utilization, development, reclamation, and settlement of lands, and to assure fuller utilization and development of the fisheries, wildlife, and waters." He assumed that "lands" also referred to resources which would upon an initial reading provide the constitutional authority. Representative Ogan requested that Legal Research and Services be contacted for an opinion on the constitutional authority in this case. Number 1440 MANO FREY, Executive President, Alaska American Federation of Labor and Congress of Industrial Organizations (AFL-CIO), testified via teleconference from Fairbanks. He supported this legislation moving forward. Mr. Frey commented that the AFL-CIO has strong relationships with Yukon Pacific, Alyeska, and Alaska's oil industry. He looked forward to working on this legislation as it moves through the legislature. This is visionary and an opportunity for the state to be involved in the entire scope of a resource that belongs to all of Alaska. Furthermore, this would ensure that Alaskans are trained for all aspects of this. Mr. Frey encouraged this legislation being moved forward. CHAIRMAN WHITAKER asked if there were any questions of Mr. Frey. There bing none, the discussion amongst the committee continued. REPRESENTATIVE OGAN pointed out that thus far, the committee has heard from those that have something to benefit from this legislation. This is a major departure in policy for the state to become involved in the pipeline. Number 1147 MAYOR HOVE noted that he is an average businessman and that is how he tends to approach things. He said, "Because of my work on HB 393 last year, and because of my recognition and, I think the recognition of everyone who was working with that bill, we were really on the bubble as far as creating margins was concerned. There wasn't much, if any, margin to create there under that circumstance where we had to rely on private financing either through equity or through straight flat out debt or bonds. The fact that, the internal ... capitalization rate that oil companies use that we were told, at least for the purpose of evaluation of taps is in the area of 10 percent. And when you can then think in terms of selling bonds that cost you half of that, 5 percent, that changes everything." Therefore, it should be a public corporation because only public corporations can sell revenue bonds of that nature. In response to how such can be justified, Mayor Hove said it is the only way the project will be achieved. Mayor Hove pointed out that this legislation limits the function of the public corporation owned by Alaskans to the "negotiation and execution of contracts with private enterprise firms engaged in design, construction, and ultimately operation." Mayor Hove understood that to be all the corporation would do and he was comforted with that knowledge. Mayor Hove stressed that if something as encompassed in HB 170 is not attempted, Alaska's natural gas resource would still be stranded. REPRESENTATIVE KEMPLEN referred to the legal opinion regarding the exemption of the incomeable earnings. If the Alaska Gas Corporation is just a shell for a private sector operation, he was unsure that the corporation would qualify for the tax benefits. He suggested clarification regarding the shape and form of this corporation and its relationship with the state. Number 0836 CHAIRMAN WHITAKER stated that Representative Kemplen was correct and noted the need for further study. Even if the project is determined by the IRS not to be properly designed to receive tax-exempt status, Congress can provide a specific exemption for the project. The Alaska Railroad Corporation operates under such a situation. REPRESENTATIVE HARRIS reminded the committee that the legislature's work on gas last year resulted in a sponsor group which he wanted to continue. He indicated that there has been an effort put together by Arco and four other companies to attempt a project. He hoped the work on this legislation did not slow their investment in a solution. CHAIRMAN WHITAKER concurred with Representative Harris regarding the sponsor group continuing its work. He announced his intent to provide other interested parties with the opportunity to come forward. MAYOR HOVE informed the committee that he went to San Francisco last March to sell the last portion of a general obligation bond issue for school construction in the amount of $27 million. He explained that such a process requires discussions with underwriters and rating agencies about the desirability of the community. During one of the breaks, Mayor Hove mentioned that he was going to be involved in a project in Alaska which would require a large amount of capital which he estimated to be in the $7 or $8 billion range. He inquired as to how such a revenue bond issue be structured. Mayor Hove said that the group was so focused on this possibility that the group could not be brought back to task on the $27 million general obligation bond. REPRESENTATIVE PHILLIPS commented that it is encouraging to know that Alaska's economic stability and passage of trust and financial legislation have helped those corporations in Alaska that would be eligible for such a project. Number 0501 MAYOR HOVE pointed out to the committee that the Fairbanks' Borough Assembly passed a resolution in support of this legislation. CHAIRMAN WHITAKER pointed out that this is an accomplishable task. ADJOURNMENT There being no further business before the committee, the House Special Committee on Oil & Gas meeting was adjourned at 6:34 p.m.