Legislature(2009 - 2010)

04/16/2010 02:55 PM FIN


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02:55:22 PM Start
02:55:44 PM HB126
03:01:40 PM HB184
03:03:07 PM HB421
03:08:46 PM HB412
03:25:12 PM HB226
04:11:48 PM Presentation by Dnr on Agia Regulations
05:24:36 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
CS FOR HOUSE BILL NO. 226(TRA)                                                                                                  
                                                                                                                                
     "An Act renaming Seldon Road and that portion of                                                                           
     Bogard Road that extends between Palmer and Meadow                                                                         
     Lakes as Veterans' Way."                                                                                                   
                                                                                                                                
3:25:12 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE WES  KELLER discussed  the legislation  as an                                                                    
opportunity  to honor  veterans. He  described the  need for                                                                    
the  signage as  the current  situation proves  confusing to                                                                    
drivers.                                                                                                                        
                                                                                                                                
Co-Chair Stedman  mentioned the fiscal note  from Department                                                                    
of  Transportation  and  Public  Facilities  for  $8,500  in                                                                    
general funds to install signs.                                                                                                 
                                                                                                                                
Senator Huggins  supported the legislation and  spoke to the                                                                    
popularity of the bill.                                                                                                         
                                                                                                                                
3:27:14 PM                                                                                                                    
                                                                                                                                
YUKON   TANNER,   TALKEETNA,   VETERANS  AND   FAMILY   (via                                                                    
teleconference) stated  that the  opportunity to  rename the                                                                    
signs  on the  street  was supported  by  the community.  He                                                                    
noted further support from the veterans.                                                                                        
                                                                                                                                
Representative Keller affirmed the  positive support for the                                                                    
legislation  expressed to  him  during  his travels  between                                                                    
Palmer and Meadow Lakes.                                                                                                        
                                                                                                                                
HB  226  was  HEARD  and   HELD  in  Committee  for  further                                                                    
consideration.                                                                                                                  
                                                                                                                                
3:29:05 PM     AT EASE                                                                                                        
4:07:27 PM     RECONVENED                                                                                                     
                                                                                                                                
^Presentation by DNR on AGIA regulations                                                                                      
                                                                                                                                
KEVIN BANKS,  DIRECTOR, DIVISION OF OIL  AND GAS, DEPARTMENT                                                                    
OF  NATURAL  RESOURCES,   explained  that  the  presentation                                                                    
includes regulations  regarding oil  and gas and  the Alaska                                                                    
Gas Inducement Act (AGIA) as  a potential inducement for the                                                                    
calculation  for   the  royalties  for  oil   and  gas.  The                                                                    
presentation  includes  regulations  designed  to  establish                                                                    
value for  natural gas and  other royalty issues.  He stated                                                                    
that  he had  colleagues available  to answer  questions. He                                                                    
spoke to the challenges in statute and regulations.                                                                             
                                                                                                                                
4:11:48 PM                                                                                                                    
                                                                                                                                
Mr.   Banks   began   with  the   "Proposed   AGIA   Royalty                                                                    
Regulations"  (copy  on  file). He  presented  the  overview                                                                    
beginning  with  Slide  3, "Overview  of  the  AGIA  Royalty                                                                    
Regulation."                                                                                                                    
                                                                                                                                
   zPurpose of the regulation is to make offer to modify                                                                       
     state lease contracts, consistent with requirements of                                                                     
     the Alaska Gas Inducement Act (AGIA)                                                                                       
        zEstablish method to determine "fair market value"                                                                     
          (FMV) of the state's royalty share of gas                                                                             
          production    that     increases    clarity    and                                                                    
          predictability of royalty value                                                                                       
        zEstablish terms under which the state will modify                                                                     
          its ability  to exercise current rights  to switch                                                                    
          between taking  royalty in value (as  money) or in                                                                    
          kind (as  gas), that  reduces lessees  exposure to                                                                    
          stranded or insufficient transportation                                                                               
        zLessee who qualifies for royalty inducements can                                                                      
          elect either (or both) Valuation or Royalty                                                                           
          Switching provisions                                                                                                  
                                                                                                                                
4:15:33 PM                                                                                                                    
                                                                                                                                
Mr. Banks continued with Slide 4: "Requirements in AGIA"                                                                        
                                                                                                                                
   zValuation regulations must:                                                                                                
        zMinimize retroactive adjustments in royalty value                                                                     
        zEstablish    FMV   based    on   reliable    trade                                                                    
          publications                                                                                                          
        zAllow reasonable and actual deductions for                                                                            
          transportation and processing                                                                                         
        zAllow for reasonable share of unused capacity                                                                         
        zAllow deductions under the 1980 settlement                                                                            
          agreement                                                                                                             
                                                                                                                                
4:18:44 PM                                                                                                                    
                                                                                                                                
Mr. Banks addressed Slide 5:  "Dynamic North America Natural                                                                    
Gas Market"  He explained that  oil travels down  a pipeline                                                                    
and  is   evaluated  at  "pump  station   one,"  Valdez,  or                                                                    
refineries on  the west coast.  The oil values  are reported                                                                    
effectively. He  noted that the North  Slope adds complexity                                                                    
with the assumption that the  gas will flow into Alberta. He                                                                    
noted that the gas might bypass  Alberta to go into the West                                                                    
Coast.  He pointed  out that  other areas  exist within  the                                                                    
pipeline  system  to  capture  value  for  the  purposes  of                                                                    
calculating  royalty and  to  provide  relevant and  correct                                                                    
transportation tax  deduction. Thirty years ago,  gas in the                                                                    
United  States was  under strict  regulation by  the federal                                                                    
government.  He spoke  of a  current liquid  market for  gas                                                                    
throughout the country.  He observed that the  market of the                                                                    
changes  include the  development of  a royalty  system that                                                                    
captures enough flexibility and  allows for understanding of                                                                    
the expectations.                                                                                                               
                                                                                                                                
4:22:10 PM                                                                                                                    
                                                                                                                                
Mr. Banks described Slide 6: "Overarching Principles"                                                                           
                                                                                                                                
        1. Reduce lessee uncertainty                                                                                            
        2. Maintain state's full royalty value                                                                                  
        3. Incorporate natural gas industry practices to the                                                                    
          extent doing so is consistent with (1) and (2)                                                                        
                                                                                                                                
He stated that  the lessees account for  royalties using the                                                                    
same   accounting  systems   and  marketing   tools  already                                                                    
established.  He   explained  that   a  prediction   of  the                                                                    
royalties is not possible.                                                                                                      
                                                                                                                                
4:24:29 PM                                                                                                                    
                                                                                                                                
Mr.   Banks   discussed   "Overarching   Principle:   Reduce                                                                    
Uncertainty" on Slide 7.                                                                                                        
                                                                                                                                
   · Eliminate "higher-of" lease valuation terms                                                                                
   · Establish value based on published prices                                                                                  
   · Minimize or eliminate retroactive adjustments                                                                              
   · Allocate volumes Pro rata to increase clarity of gas                                                                       
     value and costs of transportation and processing                                                                           
                                                                                                                                
Mr. Banks  elaborated on the  various slides.  The published                                                                    
prices  will be  a  mechanism to  capture  full fair  market                                                                    
value. He commented on the need for regulations to allow                                                                        
updates of the price publications, destination markets, and                                                                     
location differentials as the market evolves.                                                                                   
                                                                                                                                
4:27:31 PM                                                                                                                    
                                                                                                                                
Mr. Banks elaborated on Slide 8: " Overarching Principle:                                                                       
Full Value Under Lease"                                                                                                         
                                                                                                                                
   z"Full Value" without gross proceeds                                                                                        
                                                                                                                                
         Gas components are valued for residue gas, gas                                                                        
          plant products, unprocessed gas, LNG                                                                                  
                                                                                                                                
         Published prices in destination markets establish                                                                     
          value                                                                                                                 
                                                                                                                                
         Ability to update price publications, destination                                                                     
          markets, location differentials                                                                                       
                                                                                                                                
         Valuation      backstop      "basket"      ensures                                                                    
          unrepresentative destination market published                                                                         
          price doesn't distort reasonable value                                                                                
                                                                                                                                
         No negative royalty                                                                                                   
                                                                                                                                
    Pro rata allocation of value and costs back to the                                                                         
     lease establishes fair distribution and ensures full                                                                       
     value                                                                                                                      
                                                                                                                                
4:29:31 PM                                                                                                                    
                                                                                                                                
Mr. Banks Slide 9: "Overarching Principle: Incorporate Gas                                                                      
Industry Practices"                                                                                                             
                                                                                                                                
   zUse   well   established   regulatory   structure   and                                                                    
     methodology     where     practical    to     determine                                                                    
     transportation costs (i.e. FERC)                                                                                           
   zIncorporate use of published indices based on                                                                              
     commercial practices                                                                                                       
   zUsed elements of  MMS regulations                                                                                          
                                                                                                                                
         Used as baseline; modified where necessary to                                                                         
          reflect differences in circumstances of Alaska                                                                        
          project                                                                                                               
                                                                                                                                
         North Slope producers have extensive experience                                                                       
          in complying with MMS gas regulations in Lower 48                                                                     
                                                                                                                                
FRED HAGEMEYER, MANAGING DIRECTOR, BLACK AND VEATCH CORPS,                                                                      
discussed Slide 10: "Key Valuation Concepts and Approaches"                                                                     
                                                                                                                                
   1. Destination where gas is valued                                                                                           
   2. Publishing value at destination                                                                                           
   3. Backstop measure of FMV for residue gas                                                                                   
   4. "Actual and reasonable" transportation and processing                                                                     
     deductions                                                                                                                 
   5. Appropriate deductions for unused capacity                                                                                
                                                                                                                                
4:33:09 PM                                                                                                                    
                                                                                                                                
Mr. Hagemeyer commented on Slide 11: "How to Determine                                                                          
Destination"                                                                                                                    
                                                                                                                                
  zA lessee's gas is valued for royalty at "Destination"                                                                       
   zA lessee's qualified gas is generally considered to be                                                                     
     at "Destination" when it first:                                                                                            
             1. Enters a first destination market;                                                                              
             2. Has  been   sold    in   an   arm's   length                                                                    
               transaction; or                                                                                                  
             3. Has been processed to extract residue gas                                                                       
               and gas plant product                                                                                            
   z"Destination values" are determined with reference to                                                                      
     "first destination markets"                                                                                                
   zFirst destination market is the first liquid market                                                                        
     where ANS gas is physically transported to and bought,                                                                     
     sold, processed, or regasified that has a reliable and                                                                     
     widely available published price                                                                                           
                                                                                                                                
4:34:20 PM                                                                                                                    
                                                                                                                                
Mr. Hagemeyer discussed Slide 12: "Department to Publish                                                                        
Information Necessary to Determine Destination Value"                                                                           
                                                                                                                                
   zThe department will publish on its website prior to                                                                        
     the royalty reporting period:                                                                                              
        zThe location of all First Destination Markets                                                                         
        zThe name of the source of the published price for                                                                     
          residue gas, gas plant products at the First                                                                          
          Destination Market                                                                                                    
        zAppropriate location or quality differentials to                                                                      
          establish FMV with reference to First Destination                                                                     
          Market                                                                                                                
        zReasonable gas treatment, processing, or re-                                                                          
          gasification cost allowances                                                                                          
                                                                                                                                
4:36:15 PM                                                                                                                    
                                                                                                                                
Mr. Hagemeyer discussed Slide 13: "Alternative Destination                                                                      
Value for Residue Gas"                                                                                                          
                                                                                                                                
   zBasket  of  published  indices   used  to  calculate  a                                                                    
     "backstop" fair market value to published index prices                                                                     
     at destination markets                                                                                                     
   zBasket is relied upon only  when the published price at                                                                    
     a destination market is less than 95% of the basket                                                                        
     price; i.e. a safety valve                                                                                                 
   zThe  alternative destination  value protects  the State                                                                    
     from being locked in to a valuation rule that fails to                                                                     
     reflect fair market value                                                                                                  
   zPricing  elements making  up the  basket determined  by                                                                    
     market liquidity criteria                                                                                                  
   zBasket reflects  the volume  weighted average  of value                                                                    
     received by the market.                                                                                                    
                                                                                                                                
4:37:44 PM                                                                                                                    
                                                                                                                                
Mr. Hagemeyer discussed Slide 14: "Actual and Reasonable                                                                        
Cost of Transportation and Processing- Non Arms Length                                                                          
Transactions"                                                                                                                   
                                                                                                                                
   zNon-arm's  length  transportation  cost  allowance  for                                                                    
     Alaska and Canadian mainline is based on the terms                                                                         
     proposed in the Open Season offer                                                                                          
        zIf affiliated lessee negotiates a lower rate,                                                                         
          then the transportation cost allowance will be                                                                        
          based on this negotiated lower rate                                                                                   
   zOther  pipelines  -  Cost deductions  calculated  using                                                                    
     FERC based cost of service methodology                                                                                     
   zGenerally  follow  MMS  methodology to  establish  non-                                                                    
     arm's length processing deductions                                                                                         
                                                                                                                                
4:39:13 PM                                                                                                                    
                                                                                                                                
Mr. Hagemeyer discussed Slide 15: "Deductions for Unused                                                                        
Transportation Capacity"                                                                                                        
                                                                                                                                
   zUnused  capacity deductions  were  designed to  balance                                                                    
     the need to mitigate producers risk, but not expose                                                                        
     the State to bearing unintended costs                                                                                      
   zDeductions are  allowed for  Unused Capacity  on Alaska                                                                    
     and Canadian mainlines                                                                                                     
   zUnused  Capacity  =   Allocated  Capacity  -  Allocated                                                                    
     Shipments                                                                                                                  
        zAllocated    Capacity    -   Portion    of    firm                                                                    
          transportation  capacity  acquired  by  lessee  in                                                                    
          first binding open  season to transport production                                                                    
          from  state  leases;  measured with  reference  to                                                                    
          actual state lease production                                                                                         
        zAllocated  Shipments  -  greater of  shipments  of                                                                    
          production  from   state  leases  or   a  pro-rata                                                                    
          allocation of total shipments from all sources                                                                        
                                                                                                                                
4:40:46 PM                                                                                                                    
                                                                                                                                
Mr. Hagemeyer acknowledged Slide 16: "RIK/RIV Switching                                                                         
Issue"                                                                                                                          
                                                                                                                                
   zUnder lease the State has the option of taking its                                                                         
     royalty share of production either in kind (RIK) or in                                                                     
     value (RIV). This option creates a risk for shippers.                                                                      
        zIf the  State switches  from RIV to  RIK, shippers                                                                    
          may  have stranded  capacity corresponding  to the                                                                    
          royalty volumes                                                                                                       
        zIf the  State switches  from RIK to  RIV, shippers                                                                    
          may  not  have  sufficient capacity  on  a  timely                                                                    
          basis                                                                                                                 
        zAdditionally,  shippers'   marketing  arrangements                                                                    
          need  to be  reconciled with  the State's  RIK/RIV                                                                    
          election                                                                                                              
   zGiven the substantial tariffs on the Alaska project,                                                                       
     the potential exposure associated with the State's                                                                         
     RIV/RIK option is significant                                                                                              
                                                                                                                                
4:42:27 PM                                                                                                                    
                                                                                                                                
Mr. Hagemeyer noted Slide 17: "RIK/RIV Solution: "Capacity                                                                      
Follows the Gas"                                                                                                                
                                                                                                                                
   zSwitching from RIV to RIK:                                                                                                 
        zState obligated to  seek capacity corresponding to                                                                    
          the State's  RIK share  ("RIK Capacity")  from the                                                                    
          Producers via a pre-arranged deal                                                                                     
        zReleased  capacity will  be  acquired at  original                                                                    
          contract rates  (state forgoes opportunity  to get                                                                    
          a better deal)                                                                                                        
   zSwitching from RIK to RIV:                                                                                                 
        zCapacity  corresponding to  the State's  RIK share                                                                    
          ("RIK Capacity")  reverts back  from the  State to                                                                    
          the Producers at contract rates                                                                                       
   zState requested and FERC approved a waiver to allow                                                                        
     pre-arranged deals for FT capacity at contract rates,                                                                      
     consistent with these terms                                                                                                
   zIncrease notice period for RIK/RIV switching                                                                               
        z120 days when between 100,000 & 200,000 MMbtu/d                                                                       
        z180  days when  quantity is  greater than  200,000                                                                    
          MMbtu/d                                                                                                               
                                                                                                                                
4:45:18 PM                                                                                                                    
                                                                                                                                
Mr. Hagemeyer detailed Slide 18: "Value of Royalty                                                                              
Inducement to Producers"                                                                                                        
                                                                                                                                
   zThe AGIA regulations provide value to producers while                                                                      
     protecting State interests                                                                                                 
   zSome of the key provisions that provide value to                                                                           
     producers include:                                                                                                         
        zValuation   -   moving   away   from   "higher-of"                                                                    
          provision                                                                                                             
        zTransportation -                                                                                                      
             zAdopting      FERC-like     approach      for                                                                    
               transportation deductions, rather than MMS-                                                                      
               like approach                                                                                                    
             zAllowing deductions for unused capacity                                                                          
        zRIK/RIV  switching -  FERC waiver  allows capacity                                                                    
          transfer deal at contract rates                                                                                       
                                                                                                                                
4:47:54 PM                                                                                                                    
                                                                                                                                
Mr. Banks discussed Slide 19: "Aggressive Assumptions were                                                                      
made to Establish Upper Bound of Value to Producers"                                                                            
                                                                                                                                
   zRecognize that the value of and need for these                                                                             
     provisions may be lower depending on the facts of the                                                                      
     project going forward:                                                                                                     
        zMethane  valuation -    Assumed  impact of  moving                                                                    
          away from "higher-of" provision is not offset by                                                                      
          market basket concept                                                                                                 
        zTransportation  deduction   for  non-arm's  length                                                                    
          transactions - Assumed that alternative was MMS                                                                       
          methodology                                                                                                           
        zUnused capacity  deduction -  Assumed that  no YTF                                                                    
          gas is found                                                                                                          
        zRIK-RIV  switching -  Assumed that  entire royalty                                                                    
          volume is switched from in-value to in-kind                                                                           
   zVery approximate estimates of the value to producers                                                                       
     from provisions in the 1980 Royalty Settlement                                                                             
     Agreement have also been shown here to provide a more                                                                      
     complete picture of royalty value to producers                                                                             
                                                                                                                                
4:52:41 PM                                                                                                                    
                                                                                                                                
Co-Chair Stedman  wished to communicate the  amount of money                                                                    
discussed and the potential liability exposure.                                                                                 
                                                                                                                                
Mr. Hagemeyer noted  that the assumption shown  on Slide 20:                                                                    
"Estimated Value  or Range  of Value  to Producers  from Key                                                                    
Provisions   in  AGIA   Regulations  and   1980  RSA."   The                                                                    
assumption is  that the state  takes the RIK for  the entire                                                                    
25 year period  without a waiver or  regulatory element. The                                                                    
exposure exemplified  in the graph  is to the  producer with                                                                    
RIK RIV switching.                                                                                                              
                                                                                                                                
Mr. Hagemeyer noted that the  exposure to the producer could                                                                    
equal either zero or $17  billion. He spoke to the agreement                                                                    
that fuel  cost allowances, gas treatment  plant allowances,                                                                    
and the  central compressor  plant allowances  combined over                                                                    
twenty five years equal $6  billion. He highlighted that the                                                                    
calculation encompasses  25 years.  He pointed out  that the                                                                    
assumptions are aggressive.                                                                                                     
                                                                                                                                
4:56:17 PM                                                                                                                    
                                                                                                                                
Mr.  Banks  clarified  that "higher  up"  is  a  retroactive                                                                    
calculation involving  auditing to  capture the  "higher up"                                                                    
value.  Transportation  deduction  is   a  comparison  of  a                                                                    
methodology.  He estimated  that approximately  127 trillion                                                                    
cubic   feet   of  undiscovered   economically   recoverable                                                                    
reserves exist on  the North Slope, which means  that if any                                                                    
gas is found the number for unutilized capacity is altered.                                                                     
                                                                                                                                
Co-Chair Stedman clarified that  the RIK-RIV switching is on                                                                    
the industry side  of the ledger with a  $7 billion exposure                                                                    
to  the  state.  Mr.  Hagemeyer  agreed,  in  a  worst  case                                                                    
scenario.                                                                                                                       
                                                                                                                                
4:58:49 PM                                                                                                                    
                                                                                                                                
Co-Chair  Stedman asked  about  the  mid-range expected.  He                                                                    
referenced Slide  16 and asked  about the  comment regarding                                                                    
significance  to  switching.  He  asked  if  the  industry's                                                                    
liability was $17 billion. Mr.  Hagemeyer clarified that the                                                                    
reference  on   Slide  16  exhibits  the   exposure  to  the                                                                    
producer.                                                                                                                       
                                                                                                                                
Mr. Banks  pointed out that  it is as  if one eighth  of the                                                                    
pipeline  is empty  regarding  the  industry's exposure.  He                                                                    
explained that  the state's royalty share  equals one eighth                                                                    
of total production.                                                                                                            
                                                                                                                                
5:01:10 PM                                                                                                                    
                                                                                                                                
Co-Chair  Stedman asked  for an  estimation  of current  gas                                                                    
consumption  with  five hundred  as  the  royalty share.  He                                                                    
estimated that  the current natural gas  consumption in Cook                                                                    
Inlet is  250 million cubic  feet per day. He  advocated for                                                                    
in-state development of our gas resources.                                                                                      
                                                                                                                                
Co-Chair Stedman  stated that 500  is a large amount  of gas                                                                    
for the state. Mr. Banks agreed.                                                                                                
                                                                                                                                
Mr.  Banks pointed  out that  RIK oil  is not  sold in  spot                                                                    
sales as long term contracts  are preferred allowing for the                                                                    
development of local refineries.                                                                                                
                                                                                                                                
Co-Chair  Stedman asked  if the  regulations lock  the state                                                                    
down   under   AGIA.   Mr.    Banks   responded   that   the                                                                    
transportation  deduction might  provide  an entitlement  in                                                                    
terms of an interpretation of actual and reasonable.                                                                            
                                                                                                                                
Co-Chair  Stedman  asked  about  a  deadline  of  May  first                                                                    
regarding regulations. Mr. Banks  responded that the comment                                                                    
period is over and the  regulations will be published by the                                                                    
end of the  open season. Co-Chair Stedman asked  if the AGIA                                                                    
lock down  date was May first.  Mr. Banks did not  agree. He                                                                    
explained that  regulations must  be promulgated  during the                                                                    
open season.                                                                                                                    
                                                                                                                                
Co-Chair Stedman asked  if the tax structure  is locked down                                                                    
in  statute instead  of  the  regulations. Co-Chair  Stedman                                                                    
asked  how confident  Mr. Banks  was about  his answer.  Mr.                                                                    
Banks responded that  he would return to  the committee with                                                                    
a confident answer.                                                                                                             
                                                                                                                                
Co-Chair  Stedman  understood  that  regulations  allow  the                                                                    
ability to expose the state  to billions of dollars and lock                                                                    
the state down.                                                                                                                 
                                                                                                                                
5:06:20 PM                                                                                                                    
                                                                                                                                
Mr.  Banks responded  that commitments  are  defined in  the                                                                    
regulations. The  access to the  regulations is made  in the                                                                    
open season  commitments. The lessee is  required to provide                                                                    
an  open  bid  in  the  open  season  to  have  a  precedent                                                                    
agreement  within 120  days.  The lock  down  occurs in  the                                                                    
acceptance of  the state's offer. The  qualification for the                                                                    
offer  is defined  in  the  regulations. The  transportation                                                                    
services  agreements  allow  for  the open  season  and  the                                                                    
regulations  accepted in  the offer.  The qualification  for                                                                    
the offer depends on the commitment to the pipeline.                                                                            
                                                                                                                                
Co-Chair  Stedman   clarified  that  the  lock   down  is  a                                                                    
contractual bind  beginning on May  first, but there  may be                                                                    
ability  for   the  state  to  change   the  regulations  in                                                                    
September. He expressed concern  about the ability to expose                                                                    
the state  to up to $7  billion without much input  from the                                                                    
legislature.  When low  gas  and high  oil  prices occur,  a                                                                    
substantial offset to our revenue  stream exists. He claimed                                                                    
that he  asked to  have a cash  flow analysis  run regarding                                                                    
expected outcomes  for the  state. He  requested a  net cash                                                                    
flow analysis  for a worst  case scenario. He  stressed that                                                                    
the policy calls were sizeable.                                                                                                 
                                                                                                                                
Mr. Banks stated that there  is an approximate indication of                                                                    
the cash flow analysis in the graph shown on Slide 20.                                                                          
                                                                                                                                
5:09:51 PM                                                                                                                    
                                                                                                                                
Mr. Banks noted the  consequences of making decisions during                                                                    
the  development of  regulations designed  to strike  middle                                                                    
ground. He cited fiction in  the valuation number because of                                                                    
the  assumption that  the state  will  acquire greater  than                                                                    
fair market value.                                                                                                              
                                                                                                                                
Co-Chair Stedman stated his concern  involving $7 billion of                                                                    
exposure without any  state input. He discussed  the idea of                                                                    
a cash flow  analysis for the state. He asked  about the net                                                                    
cash flow  in the  worst case  scenario. He  expressed great                                                                    
concern that $7 billion is a sizable policy call.                                                                               
                                                                                                                                
5:12:48 PM                                                                                                                    
                                                                                                                                
Co-Chair Stedman  voiced that the legislature  was not privy                                                                    
to the full  exposure of the treasury. He  observed that the                                                                    
presentation included  only small snapshots of  the analysis                                                                    
run.   He  stressed   that  his   comfort  level   with  the                                                                    
information provided is low.                                                                                                    
                                                                                                                                
5:15:09 PM                                                                                                                    
                                                                                                                                
Co-Chair Stedman alleged that  the legislature receives only                                                                    
bits and  pieces of information from  the administration. He                                                                    
asserted  that  the  state might  face  a  fully  subscribed                                                                    
gasline  while the  ability to  maneuver under  AGIA remains                                                                    
restricted.                                                                                                                     
                                                                                                                                
Mr. Banks  responded that if  the department  was attempting                                                                    
to obscure the downside risk  assumed by the state, he would                                                                    
not have offered the presentation.  He noted the regulations                                                                    
mitigate for a balance and  resolve the exposure problem for                                                                    
the  companies.  He  did  not  believe  that  the  presented                                                                    
assumptions   would  be   the   outcome.  Co-Chair   Stedman                                                                    
responded   that    worst   case    scenarios   occasionally                                                                    
materialize. He wished  to see a worst case  scenario run on                                                                    
the proposal.                                                                                                                   
                                                                                                                                
Mr.  Banks commented  on  past  proposals. Co-Chair  Stedman                                                                    
added  that the  past  proposals  were thoroughly  discussed                                                                    
with the  legislature. Mr. Banks clarified  that the current                                                                    
proposal  was  to build  a  pipeline  as opposed  to  merely                                                                    
planning one.                                                                                                                   
                                                                                                                                
5:20:46 PM                                                                                                                    
                                                                                                                                
Senator Thomas  asked about the mitigating  factors on Slide                                                                    
17.  He asked  about the  assumptions regarding  the reasons                                                                    
for  switching  that led  to  the  chart  on Slide  20.  Mr.                                                                    
Hagemeyer explained  that Slide  17 explains the  actions to                                                                    
mitigate the  risk perceived by the  producers. He continued                                                                    
that  Slide  20   suggests  the  potential  of   a  lack  of                                                                    
mitigation of risk.                                                                                                             
                                                                                                                                
Senator  Thomas  asked  about  the  concerns  regarding  the                                                                    
reasons  for   switching  and   its  frequency.   Mr.  Banks                                                                    
responded  that  concerns  raised include  unused  capacity.                                                                    
Another  concern was  that a  producer may  have midterm  or                                                                    
long term contract commitments and  gas taken in the form of                                                                    
RIK would compromise those commitments.                                                                                         
                                                                                                                                
5:24:36 PM                                                                                                                    
                                                                                                                                
Co-Chair   Stedman   appreciated    the   presentation.   He                                                                    
maintained that  the magnitude of the  state's exposure must                                                                    
be  discussed. He  stressed the  hope  for a  gasline and  a                                                                    
successful open  season. He hoped  for the success  of AGIA,                                                                    
but wanted to ensure ample revenue.                                                                                             
                                                                                                                                

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