JOINT MEETING HOUSE RESOURCES STANDING COMMITTEE SENATE RESOURCES STANDING COMMITTEE January 26, 2000 2:12 p.m. HOUSE MEMBERS PRESENT Representative Bill Hudson, Co-Chair Representative Beverly Masek, Co-Chair Representative John Cowdery, Vice Chair Representative John Harris Representative Jim Whitaker Representative Reggie Joule HOUSE MEMBERS ABSENT Representative Ramona Barnes Representative Carl Morgan Representative Mary Kapsner OTHER HOUSE MEMBERS PRESENT Representative Dyson Representative Ogan Representative Williams SENATE MEMBERS PRESENT Senator Rick Halford, Chairman Senator Robin Taylor, Vice Chairman Senator Pete Kelly Senator Lyda Green Senator Georgianna Lincoln Senator Jerry Mackie SENATE MEMBERS ABSENT Senator Sean Parnell COMMITTEE CALENDAR BRIEFING: FINAL JUDGMENT ON KATIE JOHN CASE PRESENTATION BY ALASKA GASLINE PORT AUTHORITY PREVIOUS ACTION No previous action to record WITNESS REGISTER JOANNE GRACE, Assistant Attorney General Natural Resources Section Civil Division Anchorage Department of Law 1031 West Fourth Avenue, Suite 200 Anchorage, Alaska 99501 POSITION STATEMENT: Reported and answered questions on the Katie John case. KATHRYN SWIDERSKI, Assistant Attorney General Natural Resources Section Civil Division Anchorage Department of Law 1031 West Fourth Avenue, Suite 200 Anchorage, Alaska 99501 POSITION STATEMENT: Reported and answered questions on the Katie John case. HANK HOVE, Chairman Alaska Gasline Port Authority P.O. Box 71267 Fairbanks, AK 99707 POSITION STATEMENT: Presented on the Alaska LNG (liquid natural gas) Project. BRENT SHERFEY, Project Manager Petroleum and Chemical North America Bechtel Corporation 3000 Post Oak Blvd. Houston, Texas 77056 POSITION STATEMENT: Testified on behalf of the Bechtel Corporation. ACTION NARRATIVE TAPE 00-3, SIDE A Number 0001 CHAIRMAN HALFORD called the joint meeting of the House/Senate Resources Standing Committees to order at 2:12 p.m. Members present at the call to order were Representatives Hudson, Masek, Harris, Joule, and Senators Halford, Taylor, Kelly, Green and Lincoln. Representatives Whitaker and Cowdery and Senator Mackie arrived as the meeting was in progress. BRIEFING: FINAL JUDGMENT ON KATIE JOHN CASE JOANNE GRACE, Assistant Attorney General, Natural Resources Section, Civil Division Anchorage, Department of Law, came forward to present a report on the status of the Katie John case. This morning the state filed a notice of appeal in the Katie John case to appeal final judgment of the district court that was entered on January 7, 2000. The state has appealed the Katie John case before and the Ninth Circuit court of appeals issued a decision adverse to the state. The purpose of taking appeal from the final judgment at this point is to try again to convince the U.S. Supreme Court to review the Ninth Circuit decision finding that the authority of the Federal Subsistence Board extends to navigable waters in Alaska in which the United States has the federal reserved water rights. The reason they have this chance to take this appeal, at this point, five years after the Ninth Circuit issued its decision, is that the original Ninth Circuit decision was an interlocutory appeal. That means it was an appeal of an order by the district court that was not a final disposition of the case. It was an intermediate appeal of a controlling point of law but not of a final judgment. Normally, a party in a case must wait until a federal District Court is completely finished with the case and has entered final judgment before they have an opportunity to appeal. In some very rare cases, where there is a very important point of law that the District Court has decided, a party can petition the District Court and then petition the Ninth Circuit to consider the issue immediately. That is what the state did in this case. In the Katie John case the Federal District Court in 1994 ruled that the public lands to which the subsistence priority applied extended to all navigable waters in the State of Alaska by virtue of navigational services. At the same time the district court ruling did not depend on a second argument by the plaintiff in that case that the extent of public lands should be determined by the existence of a reserved water right in navigable waters. At that point, the state asked for a interlocutory appeal to the Ninth Circuit and the plaintiffs did as well. So the Ninth Circuit then decided that public lands consisted of navigable waters in which the United States has reserved water rights. At that point the state petitioned the U.S. Supreme Court to review that decision. One of the major points in opposition that the United States made at that point was that the Supreme Court should not consider this issue on an interlocutory appeal. The Supreme Court should wait until the district court had completely decided the case and issued a final judgment because considering it would be premature at that point. The United States told the Supreme Court that they should wait and see what the federal regulations looked like and they should wait to see if the state amended its constitution before it decides the issue. The case went back to the district court in 1995. The federal agencies began the process of identifying the waters in Alaska where the right existed and the district court case was stayed until those regulations became final in October. Now these regulations have become final, the district court has issued a final judgment and the state has the opportunity to appeal that. They do have to go through the Ninth Circuit again to try to get the Supreme Court to review the case. They don't expect the Ninth Circuit to reconsider its decision, but jurisdictionally, they have to appeal to the Ninth Circuit and then from that decision, petition the Supreme Court and try to convince them to take up the issue. Number 108 CHAIRMAN HALFORD noted that this question strictly deals with the water side so it does not challenge the subsistence federal law on federal lands. MS. GRACE agreed and said the only issue on appeal would be whether the public land to which the right applies in the corresponding authority of the Federal Subsistence Board to regulate includes navigable waters in which the United States holds a reserved water right. That would be the one issue that the state would be appealing. It is possible that the plaintiffs would cross appeal and argue that public lands by virtue navigational servitude, which was an alternative theory. That was the theory that the district court originally accepted. That public lands would include all the navigable waters in Alaska. That may happen. Number 127 SENATOR TAYLOR asked if the federal agencies have withdrawn the regulations that were imposed in January regarding subsistence fishing in marine waters. KATHRYN SWIDERSKI, Assistant Attorney General, Natural Resources Section, Civil Division Anchorage, Department of Law, answered that the federal agencies have not withdrawn any of the regulations that were published last January and became effective October 1, 1999. Those regulations specifically exclude federal subsistence jurisdiction in the marine waters of the Tongass and Chugach National Forests. There are some smaller areas of marine waters that appear to fall within their assertions of federal jurisdiction and those have not been revised. SENATOR TAYLOR noted there are several definitions here and it is tough to keep track of them. They did specify that these regulations would not be in effect in marine waters of the Tongass and the Chugach. What about the rest of the marine waters. Those are two withdrawals that they made that might have some implied claim of a reserved water right. There is no withdrawal on the rest of Alaska's coast. MS. SWIDERSKI answered that is correct. The regulations apply to all waters, navigable and non-navigable, that fall within the boundaries of identified federal units. In the regulation there is a listing of 33 federal units and then a list of about seven wild and scenic river components, so roughly forty federal areas would also include inland waters that are adjacent to the boundaries of those units. Marine waters would only be included to the extent they fall within the declared boundaries of those units. Significant marine waters would fall similarly in the Tongass and Chugach boundaries but those were specifically excluded from the scope of the regulations. SENATOR TAYLOR wanted to be clear that those have been specifically excluded, the only ones that are included are those 40 areas mentioned that were federal units or wild and scenic rivers. MS. SWIDERSKI answered correct. SENATOR TAYLOR asked how does that compare with the Supreme Court decision in the "Volcanic" case. MS. GRACE said the recent assertion of authority over waters in which there is a reserved water right is not based on title to the submerged land. The definition of public lands in Title VIII to which the subsistence priority and the authority of the Federal Subsistence Board applies is public lands are lands, waters and interest therein titled to which is in the United States. The Ninth Circuit decision in this case says that the reserved water rights in particular navigable waters in these federal areas (indisc.--coughing) an interest to which the United States has title in those waters and that thereby renders those waters as public lands. It is unrelated to the ownership of the submerged lands. The United States isn't claiming any title or authority based on title to a submerged land. It is based on an interest that they have in a reserved water right in the water that the Ninth Circuit has held--therefore rendered the public lands under this particular definition in ANILCA [Alaska National Interest Lands Conservation Act]. SENATOR TAYLOR asked if there are any navigable waters in Alaska today where the federal government has title to those waters. MS. GRACE explained that the United States doesn't claim title to the water. There are certainly areas where they claim title to submerged lands those are pre-statehood withdrawal areas. They claim title to interest in the water being a right to in-stream flows. SENATOR TAYLOR asked if this was based on the navigable servitude question or on the implied reservation of waters on a withdrawal. MS. GRACE replied, "The current Ninth Circuit decision is based on the existence of reserved water right not on the navigational servitude. The reserved water right is a doctrine that says when the United States reserves federal lands for a particular purpose, such as a park or wildlife refuge, by implication it also reserves water necessary to fulfill the purposes of the reservation. For example, if the United States takes federal land and creates a national park or wildlife refuge as of the date they are creating it, it is implicitly reserving ... say if one of the primary purposes of a park or national wildlife refuge was to protect fish habitat, then by implication it would also be reserving sufficient in-stream flows in the rivers within the park or wildlife refuge to preserve fish habitat." SENATOR TAYLOR asked if they are also reserving this in all the post-statehood withdrawals as well as the pre-statehood withdrawals. Are they exerting this based on the federal reserved water rights that pre-date statehood or all. MS. GRACE answered all of them. It is not an issue that is related to title to the submerged land. Whenever the reservation occurs, the water rights are created. Generally in the context of reserved water rights, it is significant when the right is created because it determines the right of the United States to that water vis-a- vis other water claims. But in the context of Title VIII of ANILCA it doesn't make any difference when the right occurs because it is just the mere existence of the right that creates...the water right that creates the determination that those rivers are public land and that thereby creates the subsistence priority and the authority of the Federal Subsistence Board to take over state management of those fisheries. SENATOR TAYLOR commented "That's the double shuffle of rhetoric by which they say they're not taking back what they gave us at statehood." He thanked her for that clarification and "was shocked to hear they are even making that claim in areas where withdrawal occurred after statehood but I understand the subtle distinction you are trying to make. You're indicating what their position is; that's not our state's position is it?" MS. GRACE said that their position is that Congress had no intent in creating that definition of public lands to include navigable waters because there was a reserved water right. SENATOR TAYLOR indicated that he is aware of litigation that occurred in Colorado where attempts were made by the federal government to utilize a reserved water right designation to control in-stream flow and other uses of waters there. Colorado had the same choice to roll over and surrender everything like Alaska is being told and let the federal government control the waters, but they chose to fight and each individual stream was litigated to find out the purpose of the withdrawal to find out if water had anything to do with it. As a consequence the federal government ended up with about six rivers out of 600 rivers and Colorado won the rest of them. Number 261 MS. GRACE explained that the doctrine states that when the reservation is created the federal government, by implication, reserves sufficient water to fulfill the primary purpose of the reservation. Number 265 SENATOR TAYLOR pointed out that in Colorado the federal government would frequently come in and list five or six purposes for which they have withdrawn the waters. Under the court decision the federal government was only allowed to maintain their reservation for the primary purpose, not the secondary or tertiary. He wondered if there is anything that indicates that when the federal government created the Tongass National Forest that they reserved the water rights and had a specific purpose for which they reserved those water rights. MS. GRACE indicated that the doctrine has been applied, generally, in case law, as of the date the reservation was created. She is quite sure that when the Tongass National Forest was created primary purposes of the reservation would not have been furthered by reserving water rights, but it is possible that the federal government will argue that they can change the primary purpose of a reservation after it is created and at that point implicitly reserve water rights. She added that even though in 1907 the primary purpose of the national forest did not include reserving water rights, if the U.S. Congress changed the primary purpose of the national forest to require water at that point they would argue the right is created. SENATOR TAYLOR explained that in Colorado the federal government was not allowed to invent new reasons for having reserved land and thus, by implication, water rights. They were held accountable for what they reserved it for at the time and what the primary purpose was at the time. MS. GRACE agreed and replied that the they were not allowed to create new purposes after the fact. She explained that she was referring to an act of Congress that changed the purposes of national forests, for example, to include recreational use. SENATOR TAYLOR said that in 1907 it was multiple use. MS. GRACE made her point that they may have a stronger basis for arguing that further rights were created when Congress changed the purposes outside the context of litigation. She referred to Title VIII of ANILCA and said that it is not so much a question of when the water right was created as it is a question of the mere existence of a water right. Number 312 SENATOR TAYLOR indicated that this is going to have huge implications not only in Alaska, but in every western state where there are large blocks of federal land and water flowing through them. He wanted to know if Sandra Day O'Connor was completely out of her mind when she wrote the decision in Dinkum Sands, which was only three years ago, that said that Alaska not only controls the submerged lands, but also the water above them and the fish that swim therein. MS. GRACE responded that the question of reserved water rights in Alaska has never been a big issue, because there are not a lot of competing interests claiming water rights. It was not a doctrine that really had any application in Alaska until the Katie John case. She indicated that it is their hope to convince the Supreme Court to review the Ninth Circuit decision, which will eliminate the problem about where, exactly, the right exists. If the definition of public lands is not based on the existence of federally reserved water rights, in essence, the issue goes away. Number 338 SENATOR TAYLOR wondered if procedurally they are back into the Ninth Circuit on the appeal of the Katie John case. MS. GRACE indicated that they have to go through the Ninth Circuit, because the Supreme Court cannot be petitioned for a review. SENATOR TAYLOR explained that the Peratrovich case, which deals directly with the reserved water rights claims in the Tongass National Forest, has now been stayed by the filing of the Glacier Bay lawsuit. He wondered why it would not be a waste of judicial time to go through the Ninth Circuit again and go through that briefing just to petition again on the very same subset of issues that is encompassed in the Peratrovich case. MS. GRACE indicated that the main issue the plaintiffs seem to be pushing in the Peratrovich case is the question of title to the submerged land. They did raise other claims based on navigational servitude and possibly water rights, but they are not pursuing that at this time because of the Katie John case. They are pursuing the claim that the federal government has title to the submerged land underlying the waters within the Tongass National Forest, and; therefore, those are all public lands under ANILCA. The Supreme Court review of the Ninth Circuit petition of the Katie John case might have some impact on claims in the Peratrovich case, but those aren't claims that the plaintiffs are really pursuing at this time. Number 364 CO-CHAIR HUDSON wondered when they would be filing. MS. GRACE indicated that they filed that morning and there is a copy of the notice of appeal. CO-CHAIR HUDSON wondered when the next substantive action will take place. MS. GRACE stated that she expected a briefing to be scheduled with the Ninth Circuit within six to eight weeks. The briefing will take three months, but the real issue is how quickly the Ninth Circuit will decide on the case; some cases have been pending before the Ninth Circuit for years. She believes that the case will go quickly; expecting it to take less than a year. At that point the party has 90 days to petition the Supreme Court and the United States has about 30 days to respond; how quickly the Supreme Court would decide whether to take the case depends on whether the Ninth Circuit petition is filed during the Supreme Court session, which goes from October to June. She concluded that it would take between one and two years to find out whether or not the Supreme Court would take the case. CO-CHAIR HUDSON wondered what the relationship is between the two filings: the Katie John case and the Glacier Bay case. MS. GRACE explained that the issue in the Katie John case is whether public lands under ANILCA include waters that are subject to a federal reserved water right. At this point they don't believe that the federal agencies are claiming to have a reserved water right in marine waters, because it has been uniquely a fresh water issue. The Glacier Bay case seeks to quiet title of the lands underlying the marine waters, so the Glacier Bay case should not have any impact on the Katie John decision and vice versa. Number 403 REPRESENTATIVE DYSON wondered if there are any cases where reserved water rights have been assumed to extend beyond the reserved lands, for example, the tributaries of a river that flow through a federal area. MS. SWIDERSKI responded that she is not aware of any cases where they have extended the water rights upstream or downstream from a particular federal area; however, with the reserved water right would come the right to enjoin other users, presumably upstream users, who are interfering with the water right as it flows through the federal area. Number 417 SENATOR LINCOLN wondered whether or not the Katie John case would be an issue, currently, if the subsistence issue had been resolved during the special session. MS. GRACE indicated that if there had been a constitutional amendment during the special session the subsistence priority would apply everywhere and there would not be a concern with the federal government usurping state authority to regulate navigable waters; the state would have authority to regulate everywhere. SENATOR LINCOLN wondered what the impact of the judgement on the Katie John case will be on Alaska's resources, specifically, the fisheries. MS. GRACE said that it would have no impact, because as it stands the Federal Subsistence Board has authority to regulate fisheries in the waters that the agencies have identified. SENATOR LINCOLN asked what the basis was for the "administration" to decide to go forward with the appeal. Number 436 MS. GRACE explained that the Governor believes that the subsistence priority should apply everywhere in the state. The problem with the definition of public lands in Title VIII of ANILCA is that there are two sides of that coin; on one side public land defines where the subsistence priority applies, which is something that the Governor wants to maximize, on the other side public land determines the area where the federal government can usurp the state authority to regulate fishing. Maximizing the public lands as it pertains to the right minimizes the area that the state has authority to regulate. It is her understanding that the "administration" supports the subsistence right everywhere and believes that it is something that must be accomplished through a constitutional amendment. This appeal is really about the fact that the Katie John decision took away the state's authority to regulate its own resources. One of the main arguments in the Katie John case is that there is a court doctrine called the "clear statement doctrine," that says that courts will not infer a congressional intent to usurp a traditional state police power unless Congress makes that intent manifestly apparent. The reason for that doctrine is to insure that federal legislation is not interpreted in such a way to alter the delicate balance of power between the federal and state government unless Congress has thoroughly considered and fully intended that to be the result. She pointed out that the argument in this case is that Congress did not make clear in ANILCA an intent to take away the state's authority to regulate navigable waters in which there is a federal reserved water right. She indicated that although the Governor does support a subsistence right everywhere and continues to fight for that he also believes that he has to defend the state's authority to regulate its resources where Congress really didn't make clear any intent to usurp that authority. Number 468 SENATOR LINCOLN wondered if they anticipate requesting additional funds to appeal the case. MS. GRACE indicated that she is not authorized to talk about it. She said that it is a matter for the Department of Law. SENATOR LINCOLN wondered how aggressively they are going to proceed with the appeal process. MS. GRACE said that they have discussed hiring outside counsel with the specialized knowledge in Supreme Court practice; it is really a specialized area and although the Department of Law has many fine attorneys there have not been enough Supreme Court cases for the attorneys to develop that kind of expertise. Number 478 SENATOR KELLY clarified that the Governor does not believe in subsistence rights everywhere as Ms. Grace stated three times in her testimony. He does not believe in subsistence for the people in his district; he believes in subsistence apartheid. SENATOR TAYLOR pointed out that he was fascinated by Ms. Grace's response to Senator Lincoln's question about the constitutional amendment and it was very carefully worded, because the answer was absolutely correct but only gave half the story. He stated, "In answer to her question when she said, 'If we'd of passed a constitutional amendment would subsistence not now be in all our waters,' and you said, 'well, yes it would,' and that we would then regulate them. The other half of the shoe that you didn't mention was that that regulation is required under the federal law, as we know we've all written letters to the Secretary of the Interior how many different times on how many different modifications, that federal law has to be mirrored within our state laws. And that the ultimate resolver of all disputes on subsistence, after we've adopted it, is going to be in federal court. Not the state court; a federal judge sitting some place even in Anchorage or San Francisco or the Ninth Circuit court of appeals will decide whether or not a commercial fishery opens or closes, whether or not sport fishing is allowed or closed, all personal use permits according to the regulations you and I were talking about earlier, personal use permits that all of Alaskans are used to and understand if you come from a community too large those will not be allowed. If in fact they have to close any fisheries to protect subsistence. It's a nice half-answer, but it fails to mention what the ramifications are of us adopting a law, so I'd have to question it a little different way. Had we adopted the amendment, which ever one over the last ten years you want to take, assuming one I guess in compliance with what the Secretary [of the Interior] would accept, because he is the ultimate arbitrator of every decision we make around here whether it's good or bad; assuming we had done that what basis would you have at this point in time to even be appealing or stay as you have in the Peratrovich case. In fact you would have given up that -- all of those legal arguments on the reserved water right question that you claim this Governor wants to defend us on, you'd of given up all those things by adopting or conceding to the fact that the federal government does in fact have this reserved right, which I think most of us here at the table would dispute that they have such a right. Can you answer that?" Number 508 MS. GRACE stated that if they had passed a constitutional amendment then Alaska would have management of the fisheries and there would be a subsistence priority for the rural residence of Alaska that would apply statewide. There would be no need to litigate reserved water rights or title to submerged land in order to determine the scope of the right, because the scope of the right would be statewide. SENATOR TAYLOR responded, "To finish your sentence -- statewide and dictated to us by the federal government on its interpretation of what its federal law means when applied in the field." MS. GRACE indicated that it is correct that the federal courts would be able to review state management statewide. SENATOR TAYLOR pointed out that at any time if they did not find the state in compliance with their interpretation of the federal law they would assert the very same jurisdiction they are claiming to assert today, because the reserved water rights question would have been forfeited. MS. GRACE said that the reserved water rights question would just have no relevance, not necessarily forfeited in a legal sense. SENATOR TAYLOR stated that Alaska's right to manage its fisheries in the navigable waters, which has been assumed throughout in the Submerged Lands Act and the Alaska Statehood Act, would go down the drain, because Alaska would have embraced a federal concept that the federal government has the authority and the state would not now be contesting it and fighting to keep it under state control. MS. GRACE explained that the state management would be subject to judicial review in isolated cases, but she doesn't think it is fair to say that the state would be giving up its right to manage its water ways; the state would have that right in a way that they don't have it when the Federal Subsistence Board is managing subsistence. SENATOR TAYLOR wondered why the reserved water rights issue is not being contested in any of the cases; why is the "administration" dodging the issue. He mentioned the issue in Glacier Bay. Number 538 MS. GRACE responded that the federal authority that the National Park Service is claiming to have on fisheries in Glacier Bay National Park is not based on a reserved water right; Title VIII does not apply in Glacier Bay National Park. The federal authority is based on the fact that they claim title to the submerged land; that the submerged land is park land that the National Park Service has authority over. The state's claim is that they are not National Park Service lands, but state lands and that is why the reserved water rights issue has not been raised and it is being limited to a title issue. SENATOR TAYLOR said, "So, we could win Glacier Bay on your brief and the federal government would still regulate on the fisheries, because they would say that no subsistence is allowed there ... You're arguing only the limited technical aspects of who owns the submerged land." MS. GRACE explained that the fact that there is no Title VIII subsistence right in Glacier Bay National Park really has nothing to do with the title to the land. It is not really an issue between the state and federal government it is something that is in federal law. SENATOR TAYLOR indicated that if it doesn't have anything to do with it then why in the world is the federal government paying some $300,000 to the fisherman so they won't crab fish there anymore. MS. GRACE clarified what Senator Taylor was asking that if they were to establish that those are state waters rather than park service lands then the exception to Title VIII for Glacier Bay National Park would not apply to those waters. SENATOR TAYLOR responded, "Right." MS. GRACE stated, "There would be a subsistence right in those waters." SENATOR TAYLOR pointed out that they haven't extended it to marine waters yet. If the state sells a crab fishing license that says that the fishermen are allowed to fish for crab in Southeast Alaska, then that fishing license would still have some validity in those waters if the state fought for their right to issue that license in those waters. MS. GRACE reiterated that the National Park Service is asserting their authority on the basis that they consider the submerged land their claim. Number 571 SENATOR TAYLOR said that he understands their claim. He wondered why they are not fighting on behalf of those fishermen and users of that water. He asked why the state has failed to request a stay pending the outcome in the Katie John case. MS. GRACE replied that it is probably not too late to do it, but it is extremely unlikely that they would receive such a stay. She indicated that it is not something they have really thought about, so they will now. CO-CHAIR MASEK agreed with Senator Taylor that if there was a constitutional amendment -- TAPE 00-3, SIDE B CO-CHAIR MASEK continued that in ANILCA, unless there are changes that go along with the constitutional amendment the state will not get its management back. She wondered if the judgement were overturned by the Ninth Circuit court of appeals or the U.S. Supreme Court would the state retain its existing management authority in navigable waters. MS. GRACE explained that the Federal Subsistence Board, since October 1, 1999 has taken over fisheries management for subsistence purposes in navigable waters. She indicated that the state would not maintain its current status, but would regain its former status as being the regulator of fisheries in almost all waters of Alaska. Before the Katie John case the Federal Subsistence Board had authority to regulate fisheries in non-navigable waters on public land, which is fairly insignificant compared to the authority they have now. Number 577 SENATOR MACKIE indicated that he understood some of Senator Taylor's line of questions and some he didn't. He suggested to Senator Taylor that some of the questioning was going toward policy decisions and some of the policy decisions are not for Ms. Grace and Ms. Swiderski to make. SENATOR KELLY agreed with Senator Mackie, but also can't help but notice the absence of the Attorney General when it comes to discussing an incredibly important case. CO-CHAIR HUDSON said that he feels encouraged that the "administration" is filing on the Glacier Bay case and if they win that one they win something substantive. He indicated that if the state can make a clear understanding of what the federal governments responsibilities and authorities are and what the states are then they will be miles ahead of where they are at the present time. Number 542 SENATOR TAYLOR said that he appreciates Ms. Grace and Ms. Swiderski coming before the committee, but he is disappointed in the fact that cases that appear to be some of the narrowest most constrained arguments and issues are not yet being addressed. He pointed out that the overriding question is what is the federal governments authority in Alaskan waters and what was conveyed to the state at statehood. The argument that they are giving has been constrained by the "administration" in the way that they've approached it. When he hears statements like "we could win Glacier Bay" and still have no resolution of the issue of reserved water rights that is frightening. He indicated that possibly it is to the benefit for political purposes for some individuals to keep that issue from being determined. He believes that when it is determined the state wins. He voiced his frustration about the fact that they are not being allowed to defend the state as vigorously as the constitution calls upon the Attorney General's office to defend it; it is that lack of defense that has caused them to sit on the issue for ten years. He encouraged them in every way to do what they can to insure that the state is protected and that the matters go forward. He wondered if the Attorney General's office would appreciate the support of the legislature in the form of an amicus brief on the Katie John case and Glacier Bay case. MS. GRACE responded that it is a question for the Attorney General. She added that the decision to appeal the final judgement on the Katie John case is very much a decision to defend the state's authority to regulate its resources in navigable waters, which has been the position of the Governor since he came into office and the appeal is a demonstration of that. Number 474 CO-CHAIR MASEK wondered if the case challenges subsistence priority on public lands. MS. GRACE explained that the subsistence priority applies to public lands and that is the way that the scope of the right was determined; a rural resident has a right to a priority in hunting and fishing on public lands. This case does challenge the current definition of public lands not because the "administration" would like to challenge the subsistence priority in that area, but because the authority of the federal government to take over fisheries management also applies to public lands. CO-CHAIR MASEK wondered what would happen on the Yukon River if the state lost the appeal on the Katie John case and the final judgement went through. MS. SWIDERSKI replied that if the state did not prevail on the Katie John appeal than the status quo would remain in place and the federal agencies, which have asserted authority over segments of the Yukon River, would continue to manage for subsistence purposes in those segments. Number 448 CO-CHAIR HUDSON wondered if the courts determination on the Katie John case would have to take into consideration the agreement between Canada and the United States, specifically on the river system. MS. SWIDERSKI indicated that those obligations are overriding, so the United States commitment to the treaties would stand and the federal agencies would regulate within the context of meeting the treaty obligation. SENATOR HALFORD said that they would be looking forward to seeing the initial briefs. He called an at-ease at 3:15 p.m. and called the meeting back to order at 3:35 p.m. Number 419 HANK HOVE, Chairman, Alaska Gasline Port Authority, stated, In October of 1999 the voters of the Fairbanks Northstar Borough and the North Slope Borough and the city of Valdez formed a port authority for the purpose of the construction and operation of a gas pipeline, which would finally, after over 20 years, commercialize that vast natural resource, which we as residents of the state of Alaska possess on the North Slope. We have a nine member board of directors ... composed of three individuals from each community. In the Northslope Borough we have Mayor George Ahmaogak, Richard Glenn and Thomas Napageak and from the city of Valdez Mayor Dave Cobb, will be joining us here just momentarily when he completes another meeting, Dave Dengel and John Kelsey and from Fairbanks myself, former Attorney General Charlie Cole and Barbara Schuhmann. We have we think made considerable progress since October and we have now formed a development team, which consists fundamentally of the port authority itself and we have secured as an EPC role player in the form of Bechtel, which is a world renowned construction and engineering firm. We have with us a Yukon Pacific Corporation [YPC], which has worked for 18 years and has expended considerable sums of money to obtain the permits necessary to build an LNG [Liquid Natural Gas] facility and a pipeline. We have also secured the services of Taylor Dejongh and Merrill Lynch and also general counsel from the lower 48 with great expertise in areas of the this nature, O'Melveny and Myers, and our general counsel from the state of Alaska is Walker, Walker, Wendlandt and Osowski ... . The overview of the project is, of course, the treatment and transport of natural gas via pipeline from Prudhoe Bay to Valdez. This pipeline, as permitted by Yukon Pacific [Corporation], fundamentally parallels the existing TAPS [Trans-Alaska Pipeline System] line and at Valdez we would convert the natural gas to liquid natural gas and ship it to the Far East markets, which all the markets plan for the sale of Alaska natural gas. At Prudhoe Bay we would build a conditioning plant, that plant is for the purpose of removing water and carbon dioxide from the gas as it comes up out of the field and then transporting it to tide water in a pipeline with a diameter of up to 48 inches and which would have future capacity for transporting up to four billion cubic feet of gas per day should the markets demand. At Valdez we would construct the liquid natural gas plant that chills the gas to a liquid and prepares it for shipment. The chilling of the gas essentially, I'm sure many of you already know this, essentially reduces the volume of the gas down to one-sixteenth of its former level when it was a vapor or a gas. The technical environmental challenges to building a pipeline in Alaska are considerable as we all know. As residents of this state we know that it braces us with challenges of some of the harshes cold weather environments in the United States, if not in the world, and that the pipeline of the sort that is proposed here by the port authority would be passing through areas of continuous and discontinuous permafrost. The pipeline would have pressures of greater than 2,000 pounds per square inch and the gas would be chilled to a temperature lower than 32 degrees Fahrenheit and the preservation of the sensitive habitat of wildlife and migratory herds and birds and streams and rivers continued native fisheries is extremely important and was given particular attention in the permitting process as YPC went through that process in obtaining the permits. The challenge also before us is that of minimizing impact on the ongoing operation of the TAPS pipeline due to construction and operation of the new gasline would require considerable coordination between our contractor and Alyeska, who is the present operator of TAPS and we also need to arrange for the minimization of impact to existing Purdoe Bay operations due to construction and later through the operation of the new gas conditioning facility. So, those are some of the challenges that face us in that area. In implementation challenges we find that there have been a number of studies, and I'm sure members of this committee are very well aware of all of them, over the past 20 years to define a project, to design a project and to market and fund a project. None of them have indicated, under the typical private enterprise kind of approach to this particular problem, none of them have demonstrated that they have associated with any of the plans sufficient margins to be able to attract financing from one thing or for being able to deliver gas to its market at a price that would find a buyer. The project viability and the schedule driven by energy supply and market conditions is a factor that challenges us. Our project viability has increased because of the nature of the public/private kind of enterprise with which we are proposing. Where we bring certain advantages in terms of financing and in terms of tax structure on net revenues that markedly change the economics of a gas pipeline, where it might formally have been at the margins or less or lower, this project plans and [is] operated through a port authority kind of scheme, in fact, changes the economics of an Alaska gas pipeline in a very positive direction. The final bullet there on this page [The Implementation Challenges] kind of says it all in terms of what I've already said in terms of in the past the minimal financial benefits for a pure private sector solution just did not work out in terms of commercializing Alaska's gas and created a need for this kind of innovative public/private solution. So, why is our project different. Well, there are substantial fiscal advantages using an Alaska gasline port authority method. There is the matter of not having exposed the net profits to federal income tax, which is the most dramatic example of the advantage offered by a port authority kind of approach to this problem. Also, to a lesser extent in terms of importance, is the availability to some extent to tax exempt financing for such a project, which would not typically be available to a strictly private sector kind of approach. Also, as Alaskans and as a port authority formed only for one purpose we, therefore, only have one focus and that focus is on the commercialization of Alaska's gas. ... We have one project that is driving us and we only will ever do one project and that is an Alaska gas pipeline. Regulatory efficiency is also an advantage because of our association and their association with us of the Yukon Pacific Corporation, which presently has many of the permits required to, not only construct, but to operate this pipeline. And the cost-effective technology of the conversion to LNG that we think is an efficient method of conversion that we planned. And the project economies, that we think that we can bring to this project, further enhance the possibilities and probabilities, in fact, we think of achieving success and the schedule and speed of development. Most other proposals that have to do with the commercialization of Alaska gas and the construction of the pipeline say that there is a market out there in 2010. That we think is also true, there is a market out there in 2010, but there is also a market window open in roughly the year 2005. So, our proposal envisions bringing Alaska's gas to market five years sooner than anyone else claims that it is possible to do and we think only we could actually meet that timetable. Presently, any other proposal would need to be permitted from the start, from the first permit to the last permit. That is a long and expensive process; it would take a great deal of time and if engaged in would cause you to miss the 2005 time frame, which is the earliest that Alaska gas can find a market. We are the only ones that can meet that timetable. The benefits to Alaskans are many. We will finally, for the first time, be able to provide for gas to many of Alaska's communities who presently do not enjoy access to this low-cost and lower-polluting fuel. Only Anchorage, the Mat-Su Borough and Kenai Peninsula presently in the state of Alaska enjoy access to this fuel. If this pipeline is constructed Alaska's second largest borough, Fairbanks, would now have access to it; Valdez would, and all other corridor communities up and down the pipeline as well would have access to this efficient and lower- cost fuel supply. And we would expect that these new energy supplies would also stimulate business development throughout the state, which can also have a very beneficial side effect on our economy at a time when we're wondering what we're really going to do about our economy. Also it provides for, when sized properly, a potential spur line to the Cook Inlet to provide for an expanded gas supply for consumers there and also possibly to provide for fuel for gas-intensive industrial applications. And, finally, and for us most importantly for us as Alaskans, the insurance of long term gas availability. Also to the benefit of Alaskans; during the course of constructions of the pipeline it is the estimate of Bechtel that over 10,000 construction jobs would be created. This would not quite reach the magnitude of the construction of TAPS, but none the less there would be a very, very significant boost to the Alaskan economy for the period of the construction of the line and would have, also, direct contribution to the Alaska economy of $2 to $3 billion in local purchases of goods and services in support of the construction of the pipeline. After construction would be completed, permanent jobs in the form of 400 in-plant and pipeline operations jobs would be in the economy of Alaska over the long term, for the life of the project in fact, which would be several decades. And, of course, then there's the indirect service and support employment that would result in the increased activity surrounding operations of the pipeline. This would have a $100 million per year impact on the Alaskan economy and would improve, by the way, not something that we are directly responsible for, but as a member of the United States of America citizenry I think it's important for us to consider these smaller matters as well, would improve a very serious balance of payments problems to make up for all the Toyotas and Nissans and Hondas that we have bought over the years and no doubt will continue to purchase. And selling natural gas back to Japan would be an excellent way to at least partially eliminate that as a problem for the United States. And it would very significantly contribute to the state revenue, directly to the state of Alaska, and to its citizens. Gas is the cleanest burning fuel that is commercially available and we have, in Fairbanks, as some of you may know, a very serious air quality problem and there is an air quality problem in Anchorage, as well, for that matter and they presently consume gas, but we in Fairbanks and in other places in the state will benefit greatly in terms of the improvement in air quality as a result of burning this clean fuel, as opposed to coal, and as opposed to oil and to wood. And this pipeline would be an exemplary environmental project, adhering to the new regulations regarding air quality and it would make it a model for future Alaska projects. And it would be designed for the utmost safety both during the construction phases and the operational phases. And there are even benefits to the gas producers who are presently engaged in the production of crude oil on the North Slope. First, there is no capital required of them to construct this gas line and that is a matter of some advantage that they would then have capital available to do other projects of other sorts, maybe not, elsewhere in the world. We'll provide the capital for the construction of this pipeline. It would also provide for significant revenues as a result of the purchase of gas from the producers on the North Slope and over the long term would increase field life and oil recovery rate on the North Slope. What we are doing presently, at this moment, and in the near term, is that we are making gas market initiatives both including direct contacts with LNG off-takers in the Far East. We plan a trip to the Far East sometime probably in March, possibly even in February, for the purpose of meeting with possible buyers in China, Taiwan, Korea and Japan. Also, we will, sometime in the next few months, will receive the response to our ruling request from the IRS [Internal Revenue Service] concerning the port authorities exemption from federal income tax. We are very confident about the outcome of this particular ruling, but it is -- and we asked for it, really, only in order provide a degree of comfort to the investors in the pipeline who without it might find it somewhat less attractive as an investment vehicle ... . Number 178 BRENT SHERFEY, Project Manager, Petroleum and Chemical North America, Bechtel Corporation, indicated that first is the review of the existing regulatory and environmental permitting and approval processes that this project will entail. There have been many studies done in the past, but this is probably one of the most highly visible projects from an environmental viewpoint and will set a precedence in the future. They are also conducting the initial design basis for the gas plant on the North Slope for the pipeline itself, which involves engineering and hydraulic studies. He pointed out that the study is one of the largest procurement programs; procurement of some of the largest pipe in the world, which also entails delivery of 800 miles of pipe and the construction of the facilities. The logistics program is enormous and a study in itself. They are also concentrating on maximizing the Alaskan content of the procurement activities; finding suppliers and sources of material in Alaska to make sure that it is an Alaskan project. He explained that the construction plan and schedule is a process of sequencing the construction process and putting it into a schedule where the 2005 completion is still targeted. He indicated that there are such issues as working during the winter months and windows of opportunity to ship materials into Prudhoe Bay. Also, the issue of construction camps along the pipeline; locating and pre-building them in an adequate enough time to accommodate the various crews. He informed the committee that as a part of the permitting process is the environmental monitoring and inspection process during construction and during operations. The assurance that all the construction activities adhere to the regulatory requirements imposed by the agencies in good sound business practices; this will be a major part of their construction activity. He said that there will be a study of the Alaska labor market assuring that there are skilled Alaskans available for construction of the project. The operating maintenance plan is an overall program for identifying the operational components and maintenance components of the facilities. He indicated that with regards to the economic analysis they are running various scenarios. The preliminary financial plan is taking a look at optimizing the various sources of financing available and also taking a look at the various risks. SENATOR KELLY asked Mr. Hove how the rest of the state benefits from this project. Number 037 MR. HOVE responded that any activity that they may be involved in that produces revenue should probably be shared with Alaska, because all citizens in the state have an interest in the North Slope and what is there. He indicated that they proposed sharing more than half with the State of Alaska directly to its general fund for appropriation by the legislature for whatever purpose. They also considered the application of about half that amount for distribution directly to every resident of the State of Alaska and a small fraction, about ten percent, directly to the residents in the communities that form the port authority originally in October of 1999. After putting aside reserves for ensuring ongoing and efficient operations and all costs have been met and paid then all the net amount left over will be distributed directly back to the State of Alaska in one form or another. TAPE 00-4, SIDE A SENATOR LINCOLN said she hoped the lack of attendance is not viewed as a lack of interest in the project. She knows there is a lot of interest due to the questions posed. She declared a conflict of interest because Valdez is part of her district. She has questions regarding alternative routes and the impact of a merger on the port authority. Number 039 MR. HOVE stated he appreciates the questions being asked. He noted the lack of attendance is not interpreted negatively. He said only one route is being proposed. This is the route that is presently permitted. The route goes from Prudhoe Bay through Fairbanks paralleling TAPS to Valdez. He indicated there are other organizations with different routing ideas, but the Alaska Gasline Port Authority has not analyzed any of those. He thinks a time window of 2005 needs to be made for sales to the market. Taking the time now to permit a new route would use up so much time and resources and cause failure to meet that marketing window. It is his opinion that an alternative stream of revenue is needed in the state and is needed as soon as possible. MR. HOVE referred to the BP Amoco merger with ARCO. He indicated the difficulties encountered have not enhanced the opportunities to engage in substantive discussion with the producers regarding the sale of natural gas to the port authority. He believes the merger has had a negative effect on "their being able to remove their focus, particularly on the part...of BP from the merger to a supply of gas." CO-CHAIR HUDSON said there was a recent presentation on the proposal for the gas-to-liquids which would require a portion of the gas to be converted to liquids then move down the pipeline through the batch process. He does not believe there is any negative effect on the project proposed by the Alaska Gasline Port Authority. He asked if this is Mr. Hove's understanding. Number 101 MR. HOVE thinks there is room for both projects. He does not feel there is an impact in any way on their project by the existence of the gas-to-liquid demonstration project or outright commercial production of gas-to-liquids. He said it does not concern them so long as there is an adequate supply of gas available to make the project economical. REPRESENTATIVE HARRIS referred to Mr. Hove's earlier discussion of the IRS ruling. He wondered what would happen if the ruling is not positive to the economics of the project. MR. HOVE said it would not be positive. He commented it would essentially return them to a completely private sector type of economic model which would not allow them to offer any significant advantage as a port authority. He explained the port authority has never received a negative opinion on this from any counsel they have sought. He stated, It was more or less a Pro Forma thing and, as I indicated before, we...are going through it fundamentally...to assure the financial markets that we have done what we need to do to ensure that their investment is more secure than it might otherwise be should we not seek the ruling and later learn that the income was not tax exempt...We're very, very confident that it will come through. SENATOR KELLY asked if the IRS determination would be strictly up or down, or something in-between. MR. HOVE replied it is his understanding that it is an up or down situation. Number 150 CO-CHAIR MASEK inquired how far along the Alaska Gasline Port Authority is with their permits and if those permits are in place. MR. HOVE explained that everyone engaged in this process is essentially a team player. The port authority developed the concept and provides the legal authority for proceeding. He noted that Williams Company, should they be successful in concluding an agreement, will provide great expertise in the construction and operation of gas pipelines. He further commented, "Bechtel brings what we all know Bechtel brings ... they're probably the world's largest engineering firm, and a terribly successful firm, too." With respect to permits, he said YPC, another team member, is the owner of the permits, not the port authority. All these major players have been brought together for one purpose: to commercialize Alaska's gas, which has been stranded on the North Slope for over 20 years. He stressed that everyone wins here, if everyone one plays well. Number 190 CO-CHAIR MASEK, on the issue of construction jobs, would like to see a plan on getting people to work on the pipeline. She also wanted to know which agencies will be used to get Alaskans to work on the construction of the project. MR. HOVE said local unions need to be engaged to develop training programs that will enable members to work on this pipeline or even other pipelines. He thinks this needs to be done across the state whether it is a union or a non-union situation. He mentioned that YPC, in the course of securing permits, engaged in some project labor agreements with union locals across a quarter of the pipeline. There exist today agreements which relate to those permits and address the issue of preparing Alaskan workers to work on this project. He is vitally interested in the local hire. CO-CHAIR MASEK asked Mr. Hove to provide later on, as the project progresses, an outline of the plan to hire local Alaskans. MR. HOVE expressed it would be a privilege to do so. REPRESENTATIVE WHITAKER asked Mr. Hove to put the permitting advantage in a time frame. MR. HOVE estimated a new permitting process would consume three unnecessary years of work. REPRESENTATIVE WHITAKER wondered if it would assume a successful culmination to that extra three years of effort. MR. HOVE replied that would be the assumption. He asked if there was a satisfactory outcome. REPRESENTATIVE WHITAKER responded yes. He asked if that assumption is not a given. MR. HOVE said that is true. REPRESENTATIVE WHITAKER indicated he would like to run through some key components to taking a commodity, such as gas, to the market place. He requested Mr. Hove provide an estimation of his confidence level with regard to those key components. The first component he asked Mr. Hove to address is the market. Number 244 MR. HOVE said it is the belief that the market for Alaska gas exists in the Far East. He explained the market exists because the economy is recovering and growing in the Far East and will once again become a vital and growing consumer of Alaska gas. In addition, there is a considerable effort being undertaken for the privatization of electric power plants. Electric power plants presently consume either coal or oil. According to the current plan, these power plants would be converted to burn natural gas. It is believed this natural gas should come from Alaska in the form of LNG. He said these are the two principal causes for a market to be created in the Far East. REPRESENTATIVE WHITAKER wondered what Mr. Hove's level of confidence is with respect to penetrating that market. MR. HOVE stated there is an assumption, based on previous discussions with potential buyers in the Far East, that the market does and will exist over there. He explained, "Though, what we are going to do is engage in discussions with those markets ourselves,...to judge for ourselves, probably this next month or the month after, first of all, the extent of interest, and, secondly, the level of consumption, and perhaps even to engage in some very preliminary discussions about terms." He noted Representative Whitaker's question would be easier to answer in a matter of weeks. He indicated the port authority would not have progressed to the extent they have by simply betting on a market or expecting one to appear. Number 0277 REPRESENTATIVE WHITAKER asked what Mr. Hove's level of confidence is regarding financial feasibility. MR. HOVE wondered if he meant financial feasibility by the investor. REPRESENTATIVE WHITAKER said that is correct. MR. HOVE stated, Well, actually, we often, when we get bogged down internally discussing issues that relate to your question, we often have to come back to the fundamental realization that the...investors in this project are going to be making the final determination as to whether it's viable or not viable. They will not invest in a market...they don't think is a viable investment...So, we're counting, first of all, on bringing to them the absolute best data that we can, the most accurate and refined data that we can, in order to assure the financial investment community that what we are proposing is in fact real and is worthy of their attention, and, finally, worthy of their investment. Number 296 REPRESENTATIVE WHITAKER asked what the obstacle is that would keep the project from moving ahead. He wondered what component of success is lacking at this point. MR. HOVE replied the single biggest obstacle is the lack of access to the supply of gas from the North Slope. REPRESENTATIVE WHITAKER inquired if there have been discussions with the North Slope producers. MR. HOVE said yes. REPRESENTATIVE WHITAKER asked if there have been discussions with ARCO. MR. HOVE said no. REPRESENTATIVE WHITAKER wondered if attempts had been made to have initial discussions with them. MR. HOVE said, "Yes, indeed, we did." REPRESENTATIVE WHITAKER asked what their answer was. MR. HOVE responded, "They could not talk about sale of gas until the merger was concluded." REPRESENTATIVE WHITAKER wondered if there have been discussions with EXXON. MR. HOVE replied yes. REPRESENTATIVE WHITAKER asked how EXXON responded. MR. HOVE indicated EXXON's response was not positive in terms of being able to secure a supply of gas. He said there had been two meetings with EXXON. EXXON responded to their terms sheet which had been submitted to them in revised form twice. He explained that EXXON does not have much hope for the port authority achieving a supply of gas from them. Number 317 REPRESENTATIVE WHITAKER asked if there have been discussions with BP. MR. HOVE said yes. REPRESENTATIVE WHITAKER wondered what BP's response was. MR. HOVE commented that BP feels their terms sheet is wholly unsatisfactory and had other concerns with the proposal. REPRESENTATIVE WHITAKER asked if there is an ongoing dialogue with BP at this time. MR. HOVE stated there are no scheduled meetings with any of the producers at this time. REPRESENTATIVE WHITAKER asked if there have been discussions with the State of Alaska regarding its royalty gas. MR. HOVE said there was considerable discussion going on with Commissioner Shively and Commissioner Condon during the course of the development of the charter agreement. He believes it was ultimately assumed by both commissioners that "the amount of gas we required, being (indisc.) of that which the charter agreement called for, would be made up for the by royalty gas owned by the State of Alaska." He pointed out this would be a wholly unsatisfactory situation because it presumes the continuation of the consumption of gas in those relative ratios. The problem with this is the royalty gas would run out years before running out of (indisc.) gas from the producers. He does not think the financial community would look beneficially upon the circumstance for the supply hanging upon such a tenuous thread. He said the field needs to be drawn down so the State has a one-eighth royalty interest. He feels if this is not done sooner there will be a gas supply problem again. Number 346 REPRESENTATIVE WHITAKER wondered if Mr. Hove had made the Administration aware of that. MR. HOVE said he had. REPRESENTATIVE WHITAKER wondered what their response was. MR. HOVE replied, "It was one and a half billion cubic feet a day, and that's it." REPRESENTATIVE WHITAKER asked if Mr. Hove has had discussions with the Alaska North Slope sponsor group. MR. HOVE indicated there have been two meetings. Number 355 REPRESENTATIVE WHITAKER asked Mr. Hove how he would characterize the meetings with everyone excluding the industry sponsor groups. He excluded the industry sponsor groups because he feels they are taking Mr. Hove seriously and attempting to work with him. He thinks it is important that everyone understand that this is an opportunity to take a huge commodity resource to market, but not all is being done to do this. MR. HOVE said it struck him, as a participant in these discussions, that the producers either do not realize or choose not to recognize the effect of their decision not to produce Alaska's gas prior to today. He stated, I was struck, I guess, by the fact that they think of it as theirs. They are the owners, but they are only lease holders, and we only leased it to them, originally, with the intent of their doing something with it, and they never have done anything with it. And we as the State of Alaska in this residence have suffered for that for many, many years...that they have a mandate, actually, or a duty, at the very least, to contribute to the state and to the State of Alaska and its residents, but they haven't, and so they've made their investments elsewhere in the world and they've produced gas elsewhere in the world; places in the world that charge rent for keeping gas in the ground. Only in Alaska, to the best of my knowledge, do we offer to warehouse for free...a natural resource for a company that has that resource under a lease-hold interest. Only in Alaska can that occur. Free of charge. No penalty. And that is why, fundamentally,...we have not seen Alaska's gas come to be produced or to reach a market because we do not extract rent for the privilege of storing it here. Number 392 REPRESENTATIVE HARRIS asked, "What is the philosophy of this group as far as the use of Yukon Pacific both with its permits and its expertise in the market place in the Orient?" MR. HOVE responded that YPC has been engaged in all of the work that has gone into the creation of the permits to the extent that they exist today. He said it is not 100 percent permitted and there are still some permits that are required to be obtained. He indicated YPC has developed relationships with people in the process. He feels these relationships will be extremely valuable in the construction and operations phase. He referred back to his mention of the existence of certain labor agreements and stated he is very pleased that YPC engaged the environmental community throughout the process. It is his hope this will in someway make the job easier. He explained that YPC possesses considerable historical knowledge and technical expertise. Number 424 REPRESENTATIVE HARRIS asked Mr. Hove to clarify how long it would take without the permits in place. MR. HOVE replied it would be three years and cost over $100 million for a newly permitted pipeline. REPRESENTATIVE HARRIS asked, "If you can get the permits?" MR. HOVE stated that is correct. SENATOR KELLY requested Mr. Hove explain the tax-exempt status, how it works, and why it works for investors. MR. HOVE reemphasized that the tax-exempt part of the financing is a very small part and somewhat complex. He explained, To the extent that Alaska's gas would be consumed by Alaskans in-state, there is an excellent chance that bonds that could be pro-rated against the expenses to the extent that we sell the gas. Say it's (indisc.-coughing) then maybe 7 percent of the bonds sold to finance the construction of the line would enjoy tax-exempt status. SENATOR KELLY wondered about the income from the project that goes to the investors. MR. HOVE indicated the income would be in the form of repayment of the bonds bearing a certain interest rate. SENATOR KELLY asked what the tax implications are of those. MR. HOVE responded that 93 percent of them will not enjoy tax- exempt status and will be paying taxes on that part of the income. Number 451 REPRESENTATIVE WHITAKER thinks Senator Kelly was also asking about the revenue stream associated with the project and the tax implications thereof. MR. HOVE understood. He clarified that the net revenues would not be exposed to federal income taxes. The distribution of the revenues to residents of Alaska becomes ordinary income and is subject to taxation. If the revenues were distributed to municipalities or to the State, they would forever escape federal taxation. Number 471 ADJOURNMENT CHAIRMAN HALFORD adjourned the joint meeting of the House/Senate Resources Committees at 4:39 p.m.