Legislature(2009 - 2010)BUTROVICH 205

04/05/2010 03:30 PM RESOURCES


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03:34:04 PM Start
03:34:38 PM SB245
03:36:25 PM HB280
05:08:37 PM Instate Gas Testimony - David Gottstein
05:24:29 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+= SB 309 GAS EXPLORATION\DEVELOPMENT TAX CREDIT TELECONFERENCED
Scheduled But Not Heard
+= SB 290 TAX CREDIT TO DRILL WELLS IN COOK INLET TELECONFERENCED
Scheduled But Not Heard
+= HB 280 NATURAL GAS: STORAGE/ TAX CREDITS TELECONFERENCED
Heard & Held
+ Bills Previously Heard/Scheduled TELECONFERENCED
*+ SB 271 OIL AND GAS PROD. TAX: CREDITS/INTEREST TELECONFERENCED
Scheduled But Not Heard
= SB 245 SALMON PRODUCT DEVELOP. TAX CREDIT
Moved SB 245 Out of Committee
            HB 280-NATURAL GAS: STORAGE/ TAX CREDITS                                                                        
                                                                                                                                
3:36:25 PM                                                                                                                    
CO-CHAIR   WIELECHOWSKI   announced  HB   280   to   be  up   for                                                               
consideration. [CSHB 280(FIN) AM was before the committee.]                                                                     
                                                                                                                                
3:36:30 PM                                                                                                                    
REPRESENTATIVE  MIKE HAWKER,  sponsor of  HB 280,  asked the  co-                                                               
chair if she had any questions.                                                                                                 
                                                                                                                                
CO-CHAIR MCGUIRE said she was comfortable with moving forward.                                                                  
                                                                                                                                
3:37:44 PM                                                                                                                    
REPRESENTATIVE HAWKER  said he finished explaining  Section 11 at                                                               
the last  meeting. It is  making sure that the  information about                                                               
the  disclosure  provision  for taxpayers  receiving  credits  is                                                               
communicated  between the  Department  of Revenue  (DOR) and  the                                                               
Regulatory Commission of Alaska (RCA).  But, the meat of the bill                                                               
is in  Section 12  about the  gas storage  facilities development                                                               
credit. It  is a volumetric-based  credit in the amount  of $1.50                                                               
per thousand cubic feet (tcf)  of storage capacity. The credit, a                                                               
financial support  for reducing the  cost of the supply  chain of                                                               
gas, is  to be passed  on specifically to consumers.  The storage                                                               
facility must be  opened and commence operation  during the years                                                               
2011-2015; so  this bill, in  fact, has  a sunset. The  credit is                                                               
capped  at $15  million,  which is  the equivalent  of  a 10  bcf                                                               
facility. It  has been estimated  that between  10 and 15  bcf is                                                               
the realistic level of commercial  storage to be brought forward,                                                               
and the credit was designed to not provide great excesses.                                                                      
                                                                                                                                
SENATOR  FRENCH  said  that responsible  commercial  efforts  are                                                               
already being  made on  a parallel track,  and this  has prompted                                                               
him to question how much stimulation is needed from the state.                                                                  
                                                                                                                                
REPRESENTATIVE  HAWKER  said  he  very much  shared  his  thought                                                               
process, but  HB 280,  that develops  a regulatory  framework for                                                               
the development of  gas storage that does not  currently exist in                                                               
Alaska statute,  is critical so  that a potential  investor knows                                                               
what they  might be investing  in. The reason for  providing this                                                               
credit is not to incent  development of storage capacity, because                                                               
that is already universally accepted  as being critical to moving                                                               
forward in  providing energy security,  but rather  to ultimately                                                               
to benefit the consumers at the  end of the supply chain, because                                                               
that development will  involve an incremental cost  in the supply                                                               
chain.                                                                                                                          
                                                                                                                                
REPRESENTATIVE  HAWKER  also  said he  recognized  the  potential                                                               
controversy from other  regions of the state who  might feel they                                                               
are not being supported equally. His  answers to that are the PCE                                                               
endowment and the  hundreds of millions of dollars  the state has                                                               
put into alternative energy development balance it out.                                                                         
                                                                                                                                
3:42:55 PM                                                                                                                    
REPRESENTATIVE HAWKER  said HB 280 also  addresses deliverability                                                               
requirements  to  make  certain  the state  is  not  providing  a                                                               
subsidy for a facility that isn't  fully used. Language on page 2                                                               
in Section  2 says  to be  considered for  a credit  a commercial                                                               
facility has  to be  moving more than  100 mmcf/year.  The Alaska                                                               
Oil  and  Gas  Conservation   Commission  (AOGCC)  certifies  the                                                               
storage capacity; a  minimum of 500 mmcf is  required. The credit                                                               
maxes out at 10 bcf.                                                                                                            
                                                                                                                                
CO-CHAIR WIELECHOWSKI  asked if he sees  the regulation component                                                               
kicking in under language on page 10, lines 11-12.                                                                              
                                                                                                                                
REPRESENTATIVE HAWKER  answered that the regulatory  provision is                                                               
a construct  of a  couple of  elements and that  is one  of them.                                                               
That  language  specifically  excludes proprietary  storage  from                                                               
being eligible for credits.                                                                                                     
                                                                                                                                
CO-CHAIR  WIELECHOWSKI said  he thought  the term  "available" on                                                               
page 10,  line 11,  was vague,  and asked  what he  thought about                                                               
adding  "at   competitive  rates  to  any   producer  or  utility                                                               
operating in Cook Inlet."                                                                                                       
                                                                                                                                
REPRESENTATIVE  HAWKER  answered  that  wouldn't  cause  him  any                                                               
concerns, but he  needed to confer with counsel  before making an                                                               
absolute commitment.                                                                                                            
                                                                                                                                
3:47:07 PM                                                                                                                    
JAN LEVY, aide to Representative  Hawker, stated that what he may                                                               
have been  asking on  page 10,  lines 11-12  that say  "a utility                                                               
regulated under  AS 42.05" is  not the provision that  causes the                                                               
storage facility to be regulated.  This just means that they have                                                               
to  be available  to the  utility  gas. They  wouldn't offer  the                                                               
storage space at  a competitive rate; they have to  offer it at a                                                               
regulated rate, because they will be regulated by the RCA.                                                                      
                                                                                                                                
SENATOR  FRENCH said  Section 9  is  the section  that puts  this                                                               
facility under RCA regulation.                                                                                                  
                                                                                                                                
REPRESENTATIVE HAWKER  agreed and  added that  it defines  what a                                                               
public utility is for the  purpose of regulation; it specifically                                                               
defines  a facility  that is  furnishing natural  gas not  to the                                                               
public for compensation, but to the utility-owned storage.                                                                      
                                                                                                                                
SENATOR  FRENCH  asked if  that  is  the  kind of  facility  this                                                               
measure envisions giving a credit to.                                                                                           
                                                                                                                                
REPRESENTATIVE HAWKER answered yes.                                                                                             
                                                                                                                                
CO-CHAIR WIELECHOWSKI asked if he  intended to limit the scope of                                                               
this bill  to below  the 68th  latitude, essentially  Cook Inlet,                                                               
and where that language would be located.                                                                                       
                                                                                                                                
REPRESENTATIVE HAWKER  answered that  the intent  of the  bill is                                                               
not to  limit storage that  is available  for utility gas  to the                                                               
Cook Inlet. This  sort of facility would be an  essential part of                                                               
adding  the ability  to  provide gas  delivery  in the  Fairbanks                                                               
arena. He  didn't want to  constrict the ability to  meet utility                                                               
needs.                                                                                                                          
                                                                                                                                
CO-CHAIR  WIELECHOWSKI  asked  if the  producers  could  possibly                                                               
attempt  to  define  what  they currently  have  in  Kuparuk  and                                                               
Prudhoe as a gas storage facility.                                                                                              
                                                                                                                                
REPRESENTATIVE  HAWKER  answered  that  the  proprietary  storage                                                               
exclusion on page 9, line  8, doesn't include "storage of natural                                                               
gas owned or  contractually obligated to the  owner, operator, or                                                               
manager of  the natural gas  facility". So,  if gas is  being put                                                               
back into a  well on the North Slope for  pressurization or other                                                               
purpose,  it would  not qualify.  The  credit is  intended for  a                                                               
consumer delivery facility.  Specific language excludes pipelines                                                               
as well. The intent is to pass the credit on to the consumer.                                                                   
                                                                                                                                
MS. LEVY added that this storage  facility has to be built within                                                               
a  certain  timeframe  and  it  would  have  to  agree  to  being                                                               
regulated.                                                                                                                      
                                                                                                                                
3:53:18 PM                                                                                                                    
REPRESENTATIVE  HAWKER  said  section   13  increases  access  to                                                               
existing  tax credits  for developers,  particularly in  the Cook                                                               
Inlet,  by  eliminating the  Cook  Inlet  penalty (the  point  in                                                               
statute  where the  differential tax  is established  between the                                                               
Cook Inlet  and North  Slope regions).  The credits  generated in                                                               
the Cook Inlet  have to be discounted as if  they were being used                                                               
in a  higher state tax  regime before  they can actually  be used                                                               
for  credit.  The  idea  is  to  keep  Cook  Inlet  on  an  equal                                                               
competitive  footing   with  other  regions  of   the  state  for                                                               
attracting investment capital.                                                                                                  
                                                                                                                                
Section 14  is also in  the production tax  arena and is  part of                                                               
the  accounting mechanism.  It talks  about how  all gas  that is                                                               
injected  into a  storage facility  is gas  that is  produced and                                                               
pays tax and  royalties. When that gas goes in  it is presumed to                                                               
be the first  gas to come out.  Native gas (at the  bottom of the                                                               
hole) is  the last gas produced,  and it doesn't get  taxed until                                                               
everything that  was pumped into  the reservoir is taken  out. He                                                               
explained that  this section is providing  a regulatory structure                                                               
that  makes it  easier for  the  industry to  build, manage,  and                                                               
account for  facilities, knowing that  when they put gas  in they                                                               
get it all out before producing any of the residual gas.                                                                        
                                                                                                                                
CO-CHAIR  WIELECHOWSKI asked  when Marathon  Oil would  get taxed                                                               
under this  section when  it puts gas  in a  third-party facility                                                               
and then pulls it out to sell.                                                                                                  
                                                                                                                                
REPRESENTATIVE HAWKER  answered at the  point they bring  the gas                                                               
to the surface  and move it into the marketing  arena. Putting it                                                               
into another  storage facility  does not  defer their  payment of                                                               
tax.                                                                                                                            
                                                                                                                                
MS. LEVY  added that the producer  is taxed as they  produce gas.                                                               
Gas  in a  storage facility  that is  underground will  have some                                                               
native gas  already and that  is the  "cushion gas." This  is the                                                               
gas that  may eventually come  out and people are  wondering when                                                               
it will get taxed.                                                                                                              
                                                                                                                                
REPRESENTATIVE HAWKER said  whether a producer flares  the gas or                                                               
puts it in  a cylinder above surface or pumps  it below ground is                                                               
irrelevant. The  point is that  the point of production  (POP) is                                                               
defined as the taxable point.                                                                                                   
                                                                                                                                
3:59:14 PM                                                                                                                    
SENATOR STEVENS joined the committee.                                                                                           
                                                                                                                                
SENATOR  FRENCH  said   native  gas  and  cushion   gas  are  not                                                               
synonymous in his  mind. Gas might have to be  pumped in that you                                                               
don't necessarily expect to get back out.                                                                                       
                                                                                                                                
REPRESENTATIVE HAWKER explained that  "cushion gas" is the amount                                                               
of gas  that is needed to  make the facility operate,  but native                                                               
gas already exists in the bottom  of the hole when the project is                                                               
started. Cushion  gas is pumped  in to get the  well pressurized;                                                               
then "working  gas" goes in  and out. The  bill says all  the non                                                               
native  gas  has  to  be  taken  out  before  one  starts  paying                                                               
production taxes.                                                                                                               
                                                                                                                                
4:00:20 PM                                                                                                                    
He continued on to Section 15  and explained that ACES requires a                                                               
two-year  amortization  of  the   credits.  In  the  interest  of                                                               
incentivizing  development,  particularly  doing  their  best  to                                                               
bring  in   better  capitalized   independent  players,   he  has                                                               
requested that the production taxes  be available to the investor                                                               
in one year, the first year,  rather than them having to amortize                                                               
it  over two  years. Section  16 is  support for  Section 15  and                                                               
clears up all the language they need to accomplish that mission.                                                                
                                                                                                                                
Section  17  is  the  issue   of  what  is  allowable  for  these                                                               
development credits  within the  existing credits. This  adds the                                                               
well-related expenses.                                                                                                          
                                                                                                                                
4:01:54 PM                                                                                                                    
CO-CHAIR WIELECHOWSKI  said as  he reads it,  Sections 16  and 17                                                               
relate  to  Section  18,  which  is sort  of  the  heart  of  the                                                               
incentivization.                                                                                                                
                                                                                                                                
REPRESENTATIVE HAWKER  agreed, and  said that  Section 18  adds a                                                               
new  subsection on  applying  for  a tax  credit  for well  lease                                                               
expenditures (page  16, line  2, (B)).  This concept  parallels a                                                               
proposal that the  executive has introduced on  a more state-wide                                                               
basis recognizing the difference  between the existing tax credit                                                               
structure,  which  is typically  for  areas  outside of  existing                                                               
defined  units, and  this structure,  which allows  the state  to                                                               
come back inside the unit and  provide credits for the well lease                                                               
expenditures that are intended to  increase, enhance, or mitigate                                                               
the decline  of well production  and are directly related  to the                                                               
processes of operating  a well and moving the  fluids.  Currently                                                               
those in-field expenses do not qualify.                                                                                         
                                                                                                                                
CO-CHAIR WIELECHOWSKI  said he understood that  subsection (m) in                                                               
Section 18  is really increasing the  ACES tax credit from  30 to                                                               
40 percent.                                                                                                                     
                                                                                                                                
REPRESENTATIVE  HAWKER agreed  and explained  that currently  the                                                               
ACES system  has a tiered 30  and 40 percent credit  available to                                                               
exploration  expenditures. That  differential has  to do  largely                                                               
with how  far away a project  is from an existing  site. With the                                                               
Cook Inlet's  small footprint, it's advantageous  and good public                                                               
policy to eliminate the requirement to  be stepped out so far and                                                               
increasing the  density of the  wells in existing units  needs to                                                               
happen. HB 280  asks to treat them just as  a straight 40 percent                                                               
credit; the 30 percent tier is being eliminated.                                                                                
                                                                                                                                
CO-CHAIR  WIELECHOWSKI asked  if lines  16-17 still  require that                                                               
the state gets the discovery data from the producers.                                                                           
                                                                                                                                
REPRESENTATIVE  HAWKER   answered  yes;  the  bill   was  crafted                                                               
carefully  to not  change any  of  the technical  aspects of  the                                                               
various  credits and  policy decision  previously made.  They are                                                               
attempting to increase access the credits in the Cook Inlet.                                                                    
                                                                                                                                
4:05:13 PM                                                                                                                    
SENATOR HUGGINS joined the committee.                                                                                           
                                                                                                                                
SENATOR  FRENCH asked  if the  definition of  "lease expenditure"                                                               
relates to the flow  of the oil and gas from  the casing head but                                                               
does  not  include  the  process   of  gathering,  separating  or                                                               
processing well  fluids downstream  of that  assembly (subsection                                                               
(o) in Section 18  on page 16, lines 2-7). Did  that mean up into                                                               
the well tree and the wing  valve and the place where you control                                                               
the flow  of the  oil out  of the ground  but not  the downstream                                                               
separators and gas compressors?                                                                                                 
                                                                                                                                
REPRESENTATIVE  HAWKER answered  yes. He  said this  language was                                                               
worked over very carefully with the Department of Revenue.                                                                      
                                                                                                                                
SENATOR FRENCH asked if that is the same approach ACES uses.                                                                    
                                                                                                                                
REPRESENTATIVE HAWKER  answered that it follows  along with ACES,                                                               
but increasing the credits.                                                                                                     
                                                                                                                                
4:07:32 PM                                                                                                                    
CO-CHAIR WIELECHOWSKI  said it  looks like  Section 18  has three                                                               
essential  changes;  increasing the  tax  credit  from 20  to  40                                                               
percent  in subsection  (m), changing  the  definition of  "lease                                                               
expenditure" in subsection (o); and he  asked if that is the same                                                               
as a lease expenditure under ACES.                                                                                              
                                                                                                                                
REPRESENTATIVE HAWKER answered they  are eliminating the existing                                                               
30-40 percent  credit, not the  20 percent. A new  subsection was                                                               
created to  define this issue  for Cook Inlet, and  that language                                                               
was taken from current statute  where the whole state was treated                                                               
as one.                                                                                                                         
                                                                                                                                
CO-CHAIR WIELECHOWSKI asked  if language on page  16, lines 8-10,                                                               
allows  overhead   expenditures  to   be  included  as   a  lease                                                               
expenditure.                                                                                                                    
                                                                                                                                
REPRESENTATIVE  HAWKER  answered  yes;   it  allows  an  overhead                                                               
component to expenditures  that had been in  previous versions of                                                               
the statute in an amount  that is consistent with the calculative                                                               
methods already established in state regulation.                                                                                
                                                                                                                                
CO-CHAIR  WIELECHOWSKI  asked  if  a percentage  is  assigned  to                                                               
overhead.                                                                                                                       
                                                                                                                                
REPRESENTATIVE  HAWKER recalled  that overhead  percentage is  at                                                               
4.5 percent.                                                                                                                    
                                                                                                                                
4:10:21 PM                                                                                                                    
CO-CHAIR  WIELECHOWSKI asked  if language  on page  15, line  25,                                                               
makes  the tax  credit transferable  and available  for immediate                                                               
use and  provides that it does  not expire. He asked  as a matter                                                               
of policy if the state wants tax credits that don't expire.                                                                     
                                                                                                                                
REPRESENTATIVE HAWKER  answered in this  case, they want  to vest                                                               
in  a developer  the value  for their  development efforts.  They                                                               
want this tax  credit available immediately to  all investors and                                                               
later on in the bill it  allows small producers to access the tax                                                               
credit  fund for  immediate cash  value for  the same  credit. He                                                               
thought  fully vesting  in  the value  is  an appropriate  public                                                               
policy in this arena.                                                                                                           
                                                                                                                                
4:11:33 PM                                                                                                                    
He went  on to  Section 19 and  said this is  where the  state is                                                               
allowed to use funds from the  oil and gas tax credit fund making                                                               
sure the  cash flow  moves to  the front  end of  the discounting                                                               
calculation.                                                                                                                    
                                                                                                                                
CO-CHAIR WIELECHOWSKI  said that  really is aimed  at encouraging                                                               
small producers.                                                                                                                
                                                                                                                                
REPRESENTATIVE  HAWKER said  this one  is specifically  to reduce                                                               
the cost of  adding the gas storage facility to  the supply chain                                                               
to the consumer.                                                                                                                
                                                                                                                                
4:13:14 PM                                                                                                                    
He went  on to explain  that Section  20 eliminates the  need for                                                               
proof of  spending money in  Cook Inlet  in order to  receive the                                                               
credits and  promotes the independent  small investors  the state                                                               
is hoping  to attract. Current  law says that before  the credits                                                               
can  be sold  back  to the  state further  proof  of spending  an                                                               
amount equal to the credit in Alaska is needed.                                                                                 
                                                                                                                                
Section 21 gives  the regulation authority that  is ubiquitous to                                                               
all bills.                                                                                                                      
                                                                                                                                
4:15:04 PM                                                                                                                    
Section  22 is  the  new directive  to the  RCA  to consider  the                                                               
consequences of saying  "no" to a long term  supply contract that                                                               
is brought before  them; something they have not  had to consider                                                               
before. They have to consider the  impact on the consumer of more                                                               
expensive gas or no gas.  This section applies that same standard                                                               
to the  Public Advocacy  division of the  Department of  Law when                                                               
they intercede in a filing.                                                                                                     
                                                                                                                                
4:16:15 PM                                                                                                                    
Section 23 requests an immediate effective date.                                                                                
                                                                                                                                
SENATOR HUGGINS asked  what the two largest hurdles  have been in                                                               
working this bill through the process.                                                                                          
                                                                                                                                
REPRESENTATIVE HAWKER  answered getting folks to  understand what                                                               
gas  storage is  and  then  reaching an  accord  about the  equal                                                               
importance  of allowing  proprietary storage  for the  purpose of                                                               
inventory management by  the producers - the  overall policy call                                                               
of whether credits  are a good thing or a  bad thing. He believes                                                               
there is a place for both.                                                                                                      
                                                                                                                                
SENATOR HUGGINS asked  the potential challenges of  RCA's role in                                                               
this.                                                                                                                           
                                                                                                                                
REPRESENTATIVE  HAWKER  answered  that the  chief  RCA  executive                                                               
helped craft HB 280. Earlier in  the session the RCA asked him to                                                               
provide the  commission specific  guidance on whether  they would                                                               
or would not regulate gas  storage facilities. The bill makes the                                                               
policy call that says if a  gas storage facility is a third-party                                                               
open-access facility  or one that  is owned by a  public utility,                                                               
that it is, in fact, regulated by  the RCA. It is also crafted so                                                               
that any  proprietary storage  that exists,  inventory management                                                               
only, is not  regulated by the RCA, but it  also does not receive                                                               
any of  the potential subsidization benefits  available under the                                                               
bill to facilitate consumer deliverability.                                                                                     
                                                                                                                                
4:19:32 PM                                                                                                                    
MARCIA DAVIS,  Deputy Commissioner, Department of  Revenue (DOR),                                                               
commented that she  liked the way the sponsor  used the expertise                                                               
of AOGCC,  DNR, DOR  and RCA  and allocated  to each  agency what                                                               
their role  is. However, some  gaps still  exist that need  to be                                                               
solved so  that it works well.  One of the dominant  concerns the                                                               
department has,  especially when  writing a  fiscal note,  is the                                                               
scope and where  gas storage gets included.  They heard testimony                                                               
saying this  was originally  intended and  designed to  solve the                                                               
deliverability problem for  Cook Inlet and they assumed  it was a                                                               
Cook Inlet  gas storage bill,  but as  they went through  it they                                                               
realized  that  the  definition of  "gas  storage  facility"  was                                                               
simply  the depleted  or nearly  depleted reservoir  pool in  the                                                               
state that  is available for gas  storage, and part of  their job                                                               
is to think  about "what if" and "what could  go wrong." She said                                                               
their worst nightmares are obviously  the large reservoirs on the                                                               
North Slope  and how they are  different from Cook Inlet.  One of                                                               
the concerns, for instance, is on  page 2, line 31, where it says                                                               
"depleted reservoir  or nearly depleted  reservoir or  pool". DOR                                                               
needs an  agency expert to say  if something is going  to qualify                                                               
as a gas storage facility.  The North Slope might have reservoirs                                                               
that contain both  oil and gas but they are  located in different                                                               
horizons of  that reservoir. And  what if it  still has a  lot of                                                               
oil but all  the gas is depleted or  what if it has a  lot of gas                                                               
but all of the oil is nearly depleted?                                                                                          
                                                                                                                                
Furthermore,  she said  the North  Slope  has a  long history  of                                                               
straight-forward  production,  but  now  to  optimize  production                                                               
producers are being  more creative. She thought  they would begin                                                               
to see movement  of resources into storage. For  instance, if gas                                                               
is a  limiting factor,  it might  come out; but  if it's  not yet                                                               
ready to be  produced, because of sharing  facilities, gas coming                                                               
out of one field might be going into another.                                                                                   
                                                                                                                                
SENATOR FRENCH asked  if this is a Cook Inlet  concern or a North                                                               
Slope concern.                                                                                                                  
                                                                                                                                
MS. DAVIS replied a North  Slope concern. Generally in Cook Inlet                                                               
as gas is being produced  a market is readily available, although                                                               
there are  different times  of the  year when  it will  be stored                                                               
until it's needed  in a higher quantity than it  can be delivered                                                               
later on.                                                                                                                       
                                                                                                                                
SENATOR FRENCH asked  where North Slope gas would be  sold to the                                                               
public.                                                                                                                         
                                                                                                                                
MS. DAVIS  replied that the  North Slope has utilities;  the Dead                                                               
Horse Utility  is one and  other owners actually utilize  gas for                                                               
running their  facilities. Nothing limits  who the public  or the                                                               
utility is.                                                                                                                     
                                                                                                                                
CO-CHAIR WIELECHOWSKI  asked if  they could  say this  applies to                                                               
below the 68th degree latitude.                                                                                                 
                                                                                                                                
MS.  DAVIS  said  she is  sensitive  to  Representative  Hawker's                                                               
comment that he doesn't want  to harm the interests in Fairbanks,                                                               
if someone  ever wants to store  gas on the North  Slope and then                                                               
move it to  Fairbanks, and she was open to  working that out with                                                               
him.                                                                                                                            
                                                                                                                                
SENATOR  FRENCH asked  if one  of  the administration's  concerns                                                               
could  be alleviated  by defining  gas that  goes into  a storage                                                               
facility as that gas which has been taxed.                                                                                      
                                                                                                                                
4:25:50 PM                                                                                                                    
MS.  DAVIS replied  that language  actually leads  to the  second                                                               
large  concern the  administration  has with  the description  of                                                               
native and  non-native gas being  produced in Section 14  on page                                                               
12.  Representative   Hawker  was   absolutely  correct   in  his                                                               
description of  the norm,  which is that  typically when  a (Cook                                                               
Inlet)  producer produces  gas and  sells  it, that  is the  sale                                                               
point the DOR can readily look at  to see the volume sold and the                                                               
price. In this instance, the concern  is if a utility owner wants                                                               
to buy gas  (from Marathon, for instance) and store  it, and then                                                               
wants to  draw it out  in January and doesn't  want o the  DOR to                                                               
say that  is "producing gas" and  therefore they must pay  a tax.                                                               
This is not the case, because  the assumption is the tax got paid                                                               
when they bought  if from the producer. With  current language, a                                                               
producer could  produce gas and  because they don't  have storage                                                               
they pay  to store it  until they "produce  it when they  need to                                                               
sell  it." The  department's dilemma  is that  a production  took                                                               
place, but now it's held  in suspension. The department wants the                                                               
freedom to work  with that system and assess a  gas when it "gets                                                               
produced out and sold." If language  gets "hard wired" to say the                                                               
gas gets  taxed when the  producer produces it, a  smart producer                                                               
could game  the system by having  it taxed in the  summer when it                                                               
is cheap.                                                                                                                       
                                                                                                                                
SENATOR  FRENCH  asked  how the  producers'  proprietary  storage                                                               
wells work now.                                                                                                                 
                                                                                                                                
MS.  DAVIS replied  that  she has  done  some investigation  into                                                               
whether  there is  a  long-standing rule  or  method of  treating                                                               
proprietary storage and that is  unresolved. The question came up                                                               
two or three years ago, and only one taxpayer is doing that.                                                                    
                                                                                                                                
SENATOR FRENCH asked if people  within the department agree as to                                                               
where the point of production (POP) is.                                                                                         
                                                                                                                                
MS.  DAVIS answered  that they  know where  the POP  is, but  the                                                               
question is on when the sale  takes place and what value they use                                                               
to assess against  that gas. Is it the prevailing  value before a                                                               
sale has  taken place  or is it  the value at  the time  the sale                                                               
actually  takes place?  The department  would  take the  position                                                               
that it should be the value at the time the sale takes place.                                                                   
                                                                                                                                
4:29:40 PM                                                                                                                    
SENATOR FRENCH  asked how  much gas  in Cook  Inlet is  sold like                                                               
that  where  the department  doesn't  know  the price  isn't  the                                                               
majority of what is sold.                                                                                                       
                                                                                                                                
MS. DAVIS replied  very little; but they are trying  to get ahead                                                               
of the curve, because they want to  see a lot of gas produced and                                                               
they want  producers to  have the  freedom to  store gas  and not                                                               
worry about it. It seems fair  to give the department the freedom                                                               
to tax it when  it gets sold. A simple fix would  be to say "non-                                                               
native gas owned  and stored by a person other  than the producer                                                               
of  the  non-native gas  that  is  withdrawn...is not  considered                                                               
produced."                                                                                                                      
                                                                                                                                
4:30:42 PM                                                                                                                    
CO-CHAIR WIELECHOWSKI asked if she wants to change Section 14.                                                                  
                                                                                                                                
MS. DAVIS  replied yes,  on the  bottom of page  12, line  30. An                                                               
insert  would  limit the  application  of  that sentence  to  the                                                               
situation where the non-native gas has a change of ownership.                                                                   
                                                                                                                                
On  page 2,  line 31,  it would  be helpful  to have  some agency                                                               
advise the DOR when "depleted or nearly depleted" has happened.                                                                 
                                                                                                                                
In terms  of administering  the DOR  credit on  page 10,  line 11                                                               
that  says "must  be available  for the  storage of  gas that  is                                                               
owned  by  a utility  regulated  under  AS 42.05,"  their  credit                                                               
hinges  on  the  commencement  of  commercial  operation  and  it                                                               
relates  to  a  gas  storage   facility.  She  didn't  previously                                                               
appreciate  the  nuance  in this  sentence  until  Representative                                                               
Hawker  pointed it  out. The  way this  phrase is  used here  the                                                               
concern is that a utility providing  gas to the public is clearly                                                               
a utility  that is regulated under  AS 42.05. But in  addition, a                                                               
public  utility can  also be  the company  that is  providing the                                                               
storage service  (page 8 - what  a "public utility" is).  So, two                                                               
entities would be regulated under  AS 42.05 - the storage company                                                               
itself and the  utility that is acquiring and using  gas that the                                                               
storage facility is  providing. To them, this means  that the gas                                                               
storage  facility must  be  usable  and available  for  use by  a                                                               
utility. It doesn't  say that the gas storage  facility itself is                                                               
a regulated  utility, but she  hoped that  the section on  page 8                                                               
applied.                                                                                                                        
                                                                                                                                
4:34:25 PM                                                                                                                    
MS. DAVIS  said she  is having trouble  connecting the  dots, and                                                               
she wanted to make  sure the intent is for the  credit to only go                                                               
to a gas storage facility that  is regulated and not to a private                                                               
proprietary one.                                                                                                                
                                                                                                                                
She  wanted  to make  sure  the  DOR  would be  providing  needed                                                               
confidential  information  to   the  legislature  and  interested                                                               
parties in  reference to Section 11,  on page 9, lines  17-21. If                                                               
you can  imagine a company  that owns  more than one  gas storage                                                               
facility, she  explained, this language  allows them to  give the                                                               
name of the  company and the total amount of  the credit, but she                                                               
wouldn't be  able to  break it  down by  facility, which  is what                                                               
they want to  do since the credit  is a capped on  a per facility                                                               
basis.  So,  she  suggested  to  insert  "for  each  gas  storage                                                               
facility"  on line  19 after  "claimed  by that  person under  AS                                                               
43.20.046".                                                                                                                     
                                                                                                                                
4:35:47 PM                                                                                                                    
A provision on  lines 25-28, page 11, says a  person claiming the                                                               
tax credit  when they contract  with a utility that  is regulated                                                               
under AS  42.05 must reduce  the price it would  otherwise charge                                                               
that utility  to reflect the tax  credit. It is in  the tax code,                                                               
but the DOR would have no  way of enforcing it. Ms. Davis thought                                                               
this language  duplicates section  7, which  requires the  RCA to                                                               
insure that  that happens. Assuming her  understanding is correct                                                               
she recommended dropping subsection (j).                                                                                        
                                                                                                                                
4:36:58 PM                                                                                                                    
Moving away from gas storage, and  looking at the Cook Inlet well                                                               
lease expenditure credit, Ms. Davis  said she would juxtapose the                                                               
bucket  of  costs  that  will   be  subject  to  the  40  percent                                                               
production  tax   credits  against  the  governor's   bill  of  a                                                               
statewide 30  percent tax  credit. She also  wanted to  point out                                                               
how  it  relates  to  the underlying  ACES  (Alaska's  Clear  and                                                               
Equitable Share)  as well. Essentially,  both of them  attempt to                                                               
get  at  well-related  expenses  that  don't  qualify  under  the                                                               
exploration  credit  because they  are  too  far away.  It's  the                                                               
"infield stuff"  the extra work  operators do to insure  they are                                                               
getting more production out of  fields that are already going and                                                               
that currently gets  the 20 percent capital credit.  Both of them                                                               
are lease  expenditures, but Representative Hawker  has pulled it                                                               
back to  being just applicable  to Cook Inlet and  the Governor's                                                               
bill applies to the entire state.                                                                                               
                                                                                                                                
MS. DAVIS said  they both have to be directly  related to a well.                                                               
The  explanation for  this under  HB  280 is  twofold. The  first                                                               
phase is essentially exploration  and development that is clearly                                                               
defined  as  a  qualified capital  expenditure  under  intangible                                                               
drilling costs  in the  current capital  credit section.  It also                                                               
includes another  phase of credit that  happens during production                                                               
and is intended  to cover just the well valve  assembly down hole                                                               
and expressly  excludes the upstream gathering  separation costs.                                                               
It includes an overhead cost  of 4.5 percent of expenditures. So,                                                               
you multiply  the total costs  of expenditures in "buckets  A and                                                               
B" by 4.5  percent, and that gets  added on as a  credit. It also                                                               
includes the seismic work within unit boundaries.                                                                               
                                                                                                                                
MS. DAVIS said  language in HB 337 got  simplified to essentially                                                               
the  same thing,  qualified capital  expenditures and  intangible                                                               
drilling  costs.  But a  lot  of  members questioned  what  would                                                               
actually be in production. The  department had envisioned a field                                                               
that  was up  and operating  as being  in production,  but things                                                               
like   well    deepening,   well   testing,    well   completion,                                                               
recompletion, well work over, and  sidetracking that are intended                                                               
to access new parts of the  reservoir are actually viewed as more                                                               
development;  it's not  ongoing day-to-day  work. So  in the  end                                                               
they disregarded  the production  piece out  of concern  that the                                                               
overhead allowance  is not  allowed under  any other  credit. And                                                               
both of them provide for seismic within the unit boundaries.                                                                    
                                                                                                                                
CO-CHAIR  WIELECHOWSKI  asked  what an  intangible  drilling  and                                                               
development cost is.                                                                                                            
                                                                                                                                
MS. DAVIS  replied that it is  defined under the IRS  code as all                                                               
costs  associated with  drilling  wells, which  includes the  pad                                                               
preparation, getting  the ice road  or access to it.  It includes                                                               
all costs whether they are  capital or operating. The question is                                                               
does it have salvage value at the  end of the day. If it does, it                                                               
doesn't count.  But if it's  going to  get consumed and  used and                                                               
not  really have  any  value and  be depleted  in  the course  of                                                               
drilling  the well,  it's going  to be  considered an  intangible                                                               
drilling cost. One  of the nice things about  referencing the IRS                                                               
code is that it  has a huge body of case  law developed behind it                                                               
that  makes it  very clear.  Companies know  what this  means and                                                               
won't have to wait around for the DOR to write regulations.                                                                     
                                                                                                                                
4:43:08 PM                                                                                                                    
KEVIN BANKS,  Director, Division  of Oil  and Gas,  Department of                                                               
Natural  Resources (DNR),  said  the  POP and  value  of gas  are                                                               
concerns.  He   said  the  department  considers   the  point  of                                                               
production to be  when a royalty event occurs -  that is when gas                                                               
leaves the lease and goes into storage.                                                                                         
                                                                                                                                
He  elaborated  that  the  department  also  has  an  issue  with                                                               
deciding what value is and if  they should try to ascribe a value                                                               
to royalty when gas is produced  or when it comes out of storage.                                                               
In their discussions with the  storage lessees and producers that                                                               
are  using storage  today,  Mr. Banks  said,  they have  actually                                                               
offered up  something of a  trade: that  storage costs are  not a                                                               
deduction  for royalty,  but royalty  will be  valued on  the day                                                               
that it  is produced. In other  words, they "let go  of the rope"                                                               
in terms of  trying to figure out when the  gas leaves storage to                                                               
come up with some sort of  value methodology. So, if the value of                                                               
gas is  sometimes low  and that's  when production  is occurring,                                                               
that is  the value they  will use  in calculating the  royalty in                                                               
that case. It  fits in nicely with HB 280  because now they don't                                                               
have  to figure  out whose  gas  is who's  when it  comes out  of                                                               
storage.                                                                                                                        
                                                                                                                                
4:45:12 PM                                                                                                                    
SENATOR STEDMAN joined the committee.                                                                                           
                                                                                                                                
4:45:46 PM                                                                                                                    
MR. BANKS  said when  the bill  came out  of the  House it  had a                                                               
measure  that says  the credit  allowed for  storage is  based on                                                               
$1.50  of the  storage working  capacity  and limited  it to  $15                                                               
million; now it's  limited to 25 percent of the  cost of building                                                               
the storage. This puts a nice  box around the state's exposure in                                                               
providing these  kinds of credits -  a good thing. At  least they                                                               
know,  when the  state is  committing funds,  that there  is some                                                               
kind  of potential  access that  will be  available to  utilities                                                               
with respect to storage.                                                                                                        
                                                                                                                                
Lastly,  on  the question  of  tax  credits for  exploration  and                                                               
development  wells,  he   recalled  discussions  about  potential                                                               
supply in  Cook Inlet and he  said all of the  new production the                                                               
department  examined  involved  the   drilling  of  wells  within                                                               
existing units. They are not  looking to rank exploration to find                                                               
new supplies  of gas. Having  said that, none of  that production                                                               
would have  received tax  credits under  existing ACES  law. This                                                               
bill then actually  provides that tax credit for  new supplies of                                                               
gas  that will  come  from  existing units  in  Cook  Inlet -  an                                                               
important point as  they are now targeting  the right development                                                               
activity.                                                                                                                       
                                                                                                                                
4:48:39 PM                                                                                                                    
MR. BANKS  went on to the  question of whether storage  should be                                                               
proprietary or third-party.  He explained that the  reason DNR is                                                               
involved at  all is that  the right to inject  outside substances                                                               
into an  existing lease for this  kind of purpose does  not exist                                                               
in the  current oil  and gas  lease. So,  the DNR  has to  have a                                                               
storage lease  so that  the owner  of the oil  and gas  lease can                                                               
move ahead and operate a storage  facility of any sort. That puts                                                               
the DOR  "in the hopper" when  it comes to extending  a new right                                                               
that doesn't  exist - that is  to inject and withdraw  gas from a                                                               
reservoir that  is already  under oil and  gas lease.  That means                                                               
there are no  opportunities in the Cook Inlet  for storage except                                                               
for those that  are currently under lease. Most of  that is under                                                               
state land with  an exception of Swanson River  where the federal                                                               
government has a storage lease.                                                                                                 
                                                                                                                                
From  the perspective  of  the department,  he  thought a  public                                                               
purpose  should be  served if  it is  going to  extend a  private                                                               
right  over public  land. Their  principle then  is that  storage                                                               
should be offered to third parties  and that there should be some                                                               
opportunity  for others  to use  the  storage in  some way.  That                                                               
position gets  stated in the  form of a  lease that they  gave to                                                               
some  of their  applicants. For  him that  was the  start of  the                                                               
discussion about what this would look like.                                                                                     
                                                                                                                                
MR. BANKS  said he  would allow lessees  to meet  existing supply                                                               
contracts  from storage,  but as  that  obligation declined,  the                                                               
access  in  the  form  of interruptible  service,  for  instance,                                                               
should be available to others.  Similarly, if there was a concern                                                               
on the part of the  developer about getting back their investment                                                               
in  the  storage  he  was  willing  to  take  into  account  some                                                               
methodology where  they become their own  "anchor-shipper" in the                                                               
storage  facility, so  they would  be  assured of  the amount  of                                                               
storage  they  would  need.  But  again,  as  that  space  became                                                               
available it should be offered to others.                                                                                       
                                                                                                                                
4:52:59 PM                                                                                                                    
MR. BANKS  said this  bill has  a commitment on  the part  of the                                                               
state  to see  storage developed  and  it provides  a credit;  in                                                               
order to get  the credit you have to be  regulated. He could work                                                               
with language in  Section 4 that says the  director cannot reject                                                               
an  application  solely  because it's  not  third-party  storage.                                                               
There  could   be  a  situation   where  they  would   reject  an                                                               
application,  for instance,  if the  surface facilities  that are                                                               
built in conjunction  with storage are on some kind  of refuge or                                                               
there  is some  other land  use conflict  that arises  because of                                                               
that. The word "solely" helps out in this regard.                                                                               
                                                                                                                                
CO-CHAIR WIELECHOWSKI  invited Ms. Davis  back. He asked  both of                                                               
them  if  this  bill  gets  them to  the  point  mentioned  in  a                                                               
presentation  from outside  consultants  hired  by the  utilities                                                               
that said 13 new  wells a year are needed for  the next decade as                                                               
well as gas storage.                                                                                                            
                                                                                                                                
MR. BANKS replied that the consultant  was PRA, and they used the                                                               
department's study  as a starting  point and  basically validated                                                               
their supply  numbers. These credits  target that kind  of supply                                                               
and  based on  the last  10 years  of experience  in Cook  Inlet.                                                               
Largely  now, Cook  Inlet producers  have certain  commitments to                                                               
supply gas  to the utility  with whom they have  contracted with.                                                               
He thought any  of them would drill wells in  order to meet their                                                               
needs. These credits reduce the cost  to the producer of making a                                                               
commitment to supply  a certain amount of gas,  and perhaps those                                                               
lowered costs will  be reflected in slightly lower  prices to the                                                               
consumer.  There  are no  guarantees,  and  the outcome  of  this                                                               
measure won't be known until time passes.                                                                                       
                                                                                                                                
MS. DAVIS responded  that she believes the gas  storage credit is                                                               
in the right  direction simply because it hasn't  been tried yet;                                                               
and they  all know that deliverability  is a crucial link  in the                                                               
ability for producers to economically  be able to drill expensive                                                               
wells. She also  observed that less than three  people have taken                                                               
advantage  of  the  corporate income  tax  exploration  incentive                                                               
credit that is currently on the books at 10 percent.                                                                            
                                                                                                                                
CO-CHAIR WIELECHOWSKI  asked Enstar  to comment on  their pursuit                                                               
of a Cook Inlet storage  facility with the TransCanada subsidiary                                                               
and if this bill is heading in the right direction.                                                                             
                                                                                                                                
4:59:47 PM                                                                                                                    
JOHN  SIMMS,  Manager,   Corporate  Communications  and  Customer                                                               
Services, Enstar Natural  Gas Company, said he  supported HB 280.                                                               
Enstar  also  supports anything  that  can  be presented  to  the                                                               
consumer as  a potential  savings. They  are moving  forward with                                                               
storage and  have notified  TransCanada that  they would  like to                                                               
exercise their  option to purchase  the SS and work  product, but                                                               
they weren't able to reach an agreement on commercial terms.                                                                    
                                                                                                                                
SENATOR STEDMAN asked if he had a timeframe.                                                                                    
                                                                                                                                
MR.  SIMMS answered  that  their  goal is  to  have this  project                                                               
initiated and under way by 2012.                                                                                                
                                                                                                                                
SENATOR STEDMAN asked  if their project would  go forward without                                                               
this bill.                                                                                                                      
                                                                                                                                
MR.  SIMMS answered  yes; both  Enstar  and South-central  Alaska                                                               
need storage, but anything else is appreciated.                                                                                 
                                                                                                                                
SENATOR  FRENCH  said when  they  spoke  to Singh's  (TransCanada                                                               
subsidiary) about  the issue  of regulation,  they said  they are                                                               
comfortable with it, and he asked  Mr. Simms if he is comfortable                                                               
with RCA regulation.                                                                                                            
                                                                                                                                
MR. SIMMS answered yes.                                                                                                         
                                                                                                                                
CO-CHAIR WIELECHOWSKI asked  him to talk about the  size of their                                                               
facility.                                                                                                                       
                                                                                                                                
MR. SIMMS said he couldn't talk  about it at this point. They are                                                               
still in negotiations.                                                                                                          
                                                                                                                                
5:03:27 PM                                                                                                                    
CO-CHAIR WIELECHOWSKI asked if this  facility solves all of South                                                               
Central's storage problems.                                                                                                     
                                                                                                                                
MR. SIMMS  answered that it  will help in  the near term,  but he                                                               
couldn't comment further.                                                                                                       
                                                                                                                                
5:04:10 PM                                                                                                                    
CO-CHAIR WIELECHOWSKI invited Representative Hawker back.                                                                       
                                                                                                                                
5:04:19 PM                                                                                                                    
REPRESENTATIVE  HAWKER  commented  that DOR's  issues  have  been                                                               
resolved amicably and  everything else could be  dealt with, too.                                                               
This bill  is not a panacea  for resolving all issues,  but it is                                                               
targeting an important area.                                                                                                    
                                                                                                                                
5:07:01 PM                                                                                                                    
CO-CHAIR  WIELECHOWSKI  asked  Mr.  SIMMS if  Enstar  intends  to                                                               
provide storage to others.                                                                                                      
                                                                                                                                
MR. SIMMS replied that he didn't know what the arrangements                                                                     
would be.                                                                                                                       
                                                                                                                                
CO-CHAIR WIELECHOWSKI set HB 280 aside for further work.                                                                        
                                                                                                                                
^Instate gas testimony - David Gottstein                                                                                        
            Instate gas testimony - David Gottstein                                                                         
                                                                                                                              
5:08:37 PM                                                                                                                    
DAVID GOTTSTEIN thanked them for hearing his views on CSHB 369                                                                  
and the gas pipeline in general. The following is his statement:                                                                
                                                                                                                                
     I  come  at  the  pipeline questions  not  only  as  an                                                                    
     interested Alaskan,  but as  a 20-year  company analyst                                                                    
     and Registered Investment Advisor  with degree from the                                                                    
     Wharton  School,  having  also  been  a  logistics  and                                                                    
     supply chain  manager in a major  grocery operation for                                                                    
     almost  ten years.  Perhaps the  intersection of  these                                                                    
     two disciplines  allows me to  look at the  question at                                                                    
     hand  differently   than  most  because   any  pipeline                                                                    
     project   is  largely   a  combination   of  economics,                                                                    
     logistics and finance.                                                                                                     
                                                                                                                                
     The  most  important  thing I  have  to  say  regarding                                                                    
     logistics is,  since logistics  is mostly  about moving                                                                    
     weight and  cubic volumes at  the lowest cost  per unit                                                                    
     of distance,  that any effort  to get Alaskan's  gas to                                                                    
     Alaskans that doesn't  include material export capacity                                                                    
     will be terribly short-sighted and  will cost the State                                                                    
     of Alaska  at least  tens of  billions of  dollars over                                                                    
     time in lost opportunity,  in addition to saddling most                                                                    
     Alaskans with  much higher energy costs  for decades to                                                                    
     come  than   they  would  have  to   pay  otherwise  by                                                                    
     piggybacking  on  top  of an  export  volume-based  and                                                                    
     efficient distribution  network. That  means at  a very                                                                    
     minimum,  a  large  diameter pipeline  from  the  North                                                                    
     Slope to a  logistical sweet spot in  the Interior must                                                                    
     be  the  anchor  of  any pipeline  project.  We  should                                                                    
     concurrently spur  to Fairbanks  and South  Central and                                                                    
     then  let  the  markets   determine  the  fate  of  the                                                                    
     remaining logistical  foot-print, or rather  sizing and                                                                    
     routing,  of any  further distribution.  When economics                                                                    
     justify it,  albeit Canada,  Valdez/LNG, and  any value                                                                    
     added processing.                                                                                                          
                                                                                                                                
     A bullet or  rather small diameter line is  a very high                                                                    
     cost  alternative   and  makes  everything   else  less                                                                    
     economic. Only by  finding competitively cost efficient                                                                    
     ways  to deliver  gas  and gas  products  on an  export                                                                    
     basis  will we  be able  to generate  the economies  of                                                                    
     scale for a  gas pipeline sufficient to  begin to lower                                                                    
     what will otherwise be high energy costs for Alaskans.                                                                     
                                                                                                                                
     The  oil and  pipeline companies  must wait  until they                                                                    
     fill a pipeline through  the open season process before                                                                    
     they can commit  to build because they  are looking for                                                                    
     immediate  economic rent  and returns  on capital.  And                                                                    
     they   can't   otherwise   finance  such   a   project.                                                                    
     Therefore,  regardless of  how  they  may be  posturing                                                                    
     now,  uncertainty about  intermediate to  long-term gas                                                                    
     pricing and demand  means it could be a  decade or more                                                                    
     before boards  of directors  will be  in a  position to                                                                    
     vote   to  dedicate   the  large   capital  investments                                                                    
     necessary for  a massive project  such as  the Canadian                                                                    
     route. Everything they  do in the meantime  is the cost                                                                    
     of posturing  to maintain an  option to  actually build                                                                    
     only when they want to.                                                                                                    
                                                                                                                                
     But  we can't  afford, though,  to freeze  in the  dark                                                                    
     waiting.  Only  the  State of  Alaska  has  the  vested                                                                    
     interest  in  making  sure  we  get  Alaskan's  gas  to                                                                    
     Alaskans  in the  shortest amount  of time  and provide                                                                    
     for an efficient distribution  network. One not offered                                                                    
     by a  small diameter  line. We also  need no  leave our                                                                    
     destiny  to   the  calendars   of  outside   boards  of                                                                    
     directors  with  very  different  interests.  CSHB  369                                                                    
     recognized  that,  and  therefore could  be  the  right                                                                    
     instrument  to  move  forward  on  with  some  critical                                                                    
     adjustments,  but the  document must  first conform  to                                                                    
     the  economics,  I  believe,  and  not  the  other  way                                                                    
     around.                                                                                                                    
                                                                                                                                
     The most  important thing I  have to say  regarding the                                                                    
     economics, and  I am not suggesting  this position, but                                                                    
     rather just  offering the  baseline economics,  is that                                                                    
     the State of Alaska,...is the  only entity as the owner                                                                    
     of the  resource who  could write a  check for  cash to                                                                    
     pay for  the pipeline, charge  zero for the  tariff and                                                                    
     make between  $50-100 billion. That is  because we make                                                                    
     the  vast majority  of our  money selling  the resource                                                                    
     not  in the  transportation of  it. When  you start  up                                                                    
     with the economic  focus and calculate what  you get by                                                                    
     investing  the  $3  billion  extra  it  would  take  to                                                                    
     increase the size  of the pipe from the  North Slope to                                                                    
     the   Interior  suitable   for  export   capacity,  the                                                                    
     economic  and business  decision  becomes quite  simple                                                                    
     because the  returns are enormous.  Only the  state can                                                                    
     afford to incubate  or have a portion of  the pipe idle                                                                    
     for  a period  of time  and wait  for the  rest of  the                                                                    
     market to  come to it.  It puts  us in a  very powerful                                                                    
     negotiating position.  How long  can we wait  until the                                                                    
     pipe  needs to  be filled  before we  lost he  bet? The                                                                    
     answer  is 50-100  years  if  you look  at  it from  an                                                                    
     economic and  financial perspective.  I would  be happy                                                                    
     to  share  with  staff  how  to  make  those  financial                                                                    
     calculations.                                                                                                              
                                                                                                                                
     5:13:09 PM                                                                                                               
     And I  am not talking  about having the State  take any                                                                    
     construction  risk, or  to design,  build, maintain  or                                                                    
     manage  the  project. That  would  be  done by  private                                                                    
     sector partners  who gain rights  to future  tariffs as                                                                    
     negotiated. Hopefully this would  include the Big Three                                                                    
     and TransCanada.  And we can further  separate economic                                                                    
     rights from governance rights in our negotiations.                                                                         
                                                                                                                                
     So here are 12 things that  the State of Alaska gets if                                                                    
     it underwrites  and elevates to Investment  Grade a gas                                                                    
     pipeline   with   efficient  export   potential,   made                                                                    
     possible  by $3  billion  extra dollars  and a  patient                                                                    
     development capital,  which could be financed  a number                                                                    
     of different ways:                                                                                                         
   · 1. We avoid saddling Alaskans with high energy costs                                                                       
     for 30 years  or however long it might take  to pay off                                                                    
     the bonds necessary for a  small diameter high cost per                                                                    
     unit line.  Only when export volumes  are achieved will                                                                    
     economies  of   scale  be  available  to   pass  on  to                                                                    
     consumers  in  the form  of  lower  energy tariffs  and                                                                    
     costs.                                                                                                                     
   · 2. We avoid putting an export project at materially                                                                        
     greater risk in terms of  time and money by moving from                                                                    
     a highly inefficient logistical  foot print to a highly                                                                    
     efficient one.  Since we won't  then have to  build two                                                                    
     sets of pipe to move the  same amount of gas that could                                                                    
     move much more efficiently the same amount of gas.                                                                         
   · 3. We get gas to Alaskans in as little as six to eight                                                                     
     years.                                                                                                                     
   · 4. We put our future and destiny on our timeframe                                                                          
     instead  of   that  necessary   for  an   alignment  of                                                                    
     unpredictable,   disparate,  and   naturally  competing                                                                    
     factors and interests outside of out control.                                                                              
   · 5. By  announcing to the  energy community that  we are                                                                    
     prepared  now   to  build,  and   we  invite   them  to                                                                    
     participate, we  force them  to act  for fear  of being                                                                    
     left behind.                                                                                                               
   · 6.  We  greatly  invigorate the  potential  for  adding                                                                    
     volumes  not only  to  the gas  pipeline,  but the  oil                                                                    
     pipeline  as well.  This is  because not  only will  we                                                                    
     also make it possible for  new oil and gas explorers on                                                                    
     a  spot  basis,  not  having participated  in  an  open                                                                    
     season  necessary to  secure capacity,  the opportunity                                                                    
     to  explore and  produce,  knowing they  can get  their                                                                    
     product  to market.  And when  the look  for gas,  they                                                                    
     will  find   more  oil  and  vice   versa.  Yesterday's                                                                    
     continental shelf rulings magnify this potential.                                                                          
   · 7.  The Oil  and Gas  Conservation Commission  (AOGCC),                                                                    
     for the first time will  be empowered to maximize their                                                                    
     mandate  by maximizing  the trade-off  of  oil and  gas                                                                    
     values, unconstrained by capacity limitations.                                                                             
   · 8. We  position many parts  of rural Alaska  to benefit                                                                    
     with  reliable access  to lower  cost energy  over time                                                                    
     because of economies of scale.                                                                                             
   · 9. We  create the  opportunity to approach  Hawaii most                                                                    
     importantly about Alaska  being a long-term significant                                                                    
     solution  to their  energy needs  with  a project  that                                                                    
     could  actually  happen   unfettered  with  any  export                                                                    
     limitations.                                                                                                               
   · 10.  We  will  jump  start  the  economy  and  generate                                                                    
     decades of  improved prosperity for all  Alaskans. With                                                                    
     a  long-term  fiscal  plan   based  upon  the  rational                                                                    
     management  of our  energy  wealth  resulting in  being                                                                    
     able to continue contributing to  the Permanent Fund in                                                                    
     material ways for many years to come.                                                                                      
   · 11.  We avoid  to  a considerable  degree exposing  the                                                                    
     state to  long-term fiscal decay and  hopefully put off                                                                    
     until  long  into  the  future  pressures  to  use  the                                                                    
     Permanent Fund to help pay for state government.                                                                           
   · 12. If  we have  buyers and  a pipeline,  the producers                                                                    
     will have  no choice  but to supply  our gas.  The view                                                                    
     that the  producers hold the key  to everything doesn't                                                                    
     have to be.                                                                                                                
                                                                                                                                
     5:17:18 PM                                                                                                               
     So how do we do earn all this? By doing the following:                                                                     
                                                                                                                                
     Appropriate  enough money  this  session  to fully  vet                                                                    
     this  approach.  This  can be  done  separately  or  by                                                                    
     amending HB 369 to focus  on a large capacity line from                                                                    
     the  North Slope  to an  Interior  hub. Including  what                                                                    
     role the State of Alaska  could play in order to insure                                                                    
     the project  moves forward as  soon as possible,  on an                                                                    
     Investment Grade  basis. No research being  done at the                                                                    
     state level currently contemplates this scenario.                                                                          
                                                                                                                                
     If we get  our gas to a hub, the  ratepayers can afford                                                                    
     to take it  the rest of the way. Just  doing this alone                                                                    
     this year will put pressure  on the majors to take this                                                                    
     upcoming season more seriously.                                                                                            
                                                                                                                                
     We can  wait for  multiple open  seasons before  we get                                                                    
     started, adding at least one  to two years to a project                                                                    
     or  we can  start now.  The sooner  we announce  to the                                                                    
     world   we   are   doing  this   the   sooner   serious                                                                    
     negotiations can begin with potential buyers.                                                                              
                                                                                                                                
     In  terms of  the  legislation,  I support  legislation                                                                    
     that attempts to do something,  but without focusing on                                                                    
     the economics,  we lose the  economics. Putting  a time                                                                    
     limit on the process  handicaps and limits the results.                                                                    
     I would  rather see us  engage in an  expedited process                                                                    
     rather than mandate a timeframe that limits a result.                                                                      
                                                                                                                                
     I  have no  prejudice  in terms  of  what state  entity                                                                    
     manages  the  process  as  long   as  the  members  are                                                                    
     qualified, could  with any extra advantages  that might                                                                    
     be inherent in  a particular entity. I  will offer that                                                                    
     one could  it would seem, greatly  expedite the process                                                                    
     by avoiding  another time consuming RFP  process simply                                                                    
     by renegotiating  the AGIA license with  TransCanada as                                                                    
     authorized within  AGIA to convert  the state to  a co-                                                                    
     developer  of  the  big pipe  to  the  Interior  owning                                                                    
     whatever  rights  the  private sector  chooses  not  to                                                                    
     adequately bid on. In the  end, that could even be very                                                                    
     little.                                                                                                                    
                                                                                                                                
     5:19:12 PM                                                                                                               
     The only  way we lose  this bet  is if China  and India                                                                    
     don't  grow sufficiently  in the  next 50-100  years to                                                                    
     make North Slope  gas economic. That should  be an easy                                                                    
     bet. The  only tough decision  there might be is  if we                                                                    
     generate perhaps 2 BCF/day of  demand from in-state use                                                                    
     and Hawaii,  along with Japan and  South Korea perhaps,                                                                    
     with  an 80-90  percent chance  of success  and we  are                                                                    
     also  faced with  a much  larger Canadian  opportunity,                                                                    
     and there isn't  enough gas for both  projects. Only if                                                                    
     the Canadian  option rises  significantly above  the 50                                                                    
     percent  likelihood in  a  predictable timeframe  might                                                                    
     there be  a real choice to  make. But we don't  have to                                                                    
     make  that  decision  until  we  are  faced  with  that                                                                    
     option.                                                                                                                    
                                                                                                                                
     Thank you,  members of the  committee, for  allowing me                                                                    
     to present.                                                                                                                
                                                                                                                                
5:19:54 PM                                                                                                                    
SENATOR FRENCH  asked the significance of  the "investment grade"                                                               
labeling.                                                                                                                       
                                                                                                                                
MR. GOTTSTEIN replied  that it means a few things;  on one end it                                                               
means that purchasers  of gas can with  reliable enough certainty                                                               
expect that  the project  will be done  and that  everything will                                                               
happen  according  to  plan.  For  instance,  a  defined  benefit                                                               
pension plan needs  to achieve certain actuarial  rates of return                                                               
with a  high probability of doing  so. If it buys  a revenue bond                                                               
for  a bridge  and its  debt  service coverage  ratio is  1 in  3                                                               
meaning it needs  100,000 cars a week to pass  the bridge, but it                                                               
can pay for its debt service with  only 75,000. There is a lot of                                                               
debt  service   coverage;  so   rating  agencies   and  insurance                                                               
providers might say it's suitable  for investment. Typically that                                                               
would mean a triple  A or a double A rating.  There in some sense                                                               
must be a tie to a revenue stream  if it's a revenue bond. On the                                                               
other hand,  that could  be eclipsed  while bringing  the state's                                                               
considerable credit worthiness to bear  and simply make a general                                                               
obligation  of  the  state  and  instantaneously  it  would  have                                                               
investment grade  status because it wouldn't  require the success                                                               
of the project in order to have the bond holders get paid.                                                                      
                                                                                                                                
He  said  he  doubts  that  the pipeline  project  would  not  be                                                               
successful, but  he is  painting two ends  of the  spectrum about                                                               
what  the state  would  have to  do to  be  investment grade.  He                                                               
explained:                                                                                                                      
                                                                                                                                
     Today we  have a chicken  and an egg  situation keeping                                                                    
     us from  being investment grade; that  is the producers                                                                    
     won't  commit to  a  pipeline until  they  fill it  and                                                                    
     buyers won't  commit to buying  until they know  it's a                                                                    
     real project  and have some  way of  determining things                                                                    
     like  tariff. So  the  only entity  because  we have  a                                                                    
     vested interest in capacity that  can, in effect, trump                                                                    
     that whole  process and say we'll  take the development                                                                    
     risk necessary to make this  investment grade that will                                                                    
     take  us much  further down  the road  into a  position                                                                    
     where we  actually have pipe  and we actually  have the                                                                    
     opportunity to get buyers.                                                                                                 
                                                                                                                                
CO-CHAIR WIELECHOWSKI thanked him again for his testimony.                                                                      
                                                                                                                                
5:23:03 PM                                                                                                                    
DON  ETHRIDGE,  Alaska  AFL-CIO,  said  the  legislation  is  for                                                               
building a  line and it states  to use Alaska hire  to the utmost                                                               
possible, and "There is only one way  to do that; and it's with a                                                               
project labor  agreement." That is  what they want to  see during                                                               
the planning process.                                                                                                           
                                                                                                                                
5:24:29 PM                                                                                                                    
CO-CHAIR WIELECHOWSKI thanked everyone for their input and                                                                      
adjourned the meeting at 5:24 p.m.                                                                                              
                                                                                                                                

Document Name Date/Time Subjects
SB 271 - Bill Packet.pdf SRES 4/5/2010 3:30:00 PM
SB 271