April 2: Debating AGIA with the Governor

The following is Governor Palin's weekly gasline briefing released March 30, 2007.

My response is in bold text.

Since the AGIA has been introduced, the legislature and administration have been busy taking testimony from the producers and pipeline companies. I appreciate the legislature's considerable efforts at gathering industry feedback on AIGA. Because the goal of AGIA is to influence and induce industry's participation in building a natural gas pipeline, it is important to understand their perspective on what parts of AGIA are working and what parts need to be adjusted.

The AGIA approach has been advertised as a way to allow free market principles to drive the process. So why then is the stated goal of AGIA “to influence and induce industry's participation in building a natural gas pipeline”?

In fact, the state - not the free market- determines who wins under the terms of AGIA.

In AGIA's case, influence and induce means being able to use your influence to pick a winner regardless of their ability to make the project happen...and then using public money to enduce them to continue going through the permitting process.

When I hear about the state picking winners in any industry, I think back to those days sitting on the House Community & Regional Affairs Committee. Listening to testimony from state officials promising us that the state influenced seafood plant was just one fish away from being a money maker.

We are listening carefully to the industry's concerns. Some of their suggestions are very useful, while others reflect a desire to enhance their competitive advantage over others. Because AGIA is expressly designed to create a level playing field to increase the number of potential pipeline builders, we must carefully analyze all suggested changes to make sure that we don't destroy the competitive environment that AGIA creates.

In fact, five of the six major players (Enbridge, Trans Canada, Exxon, BP, Conoco-Phillips) all agreed to the same concern. AGIA as a public policy fails to recognize the serious risks associated with government picking a winner.

In plain English, the state is crazy if it thinks the producers are going to be forced to pony up thirty billion in natural gas commitments just because the state has pony upped a straw man to build a pipeline.

The reality is that this deal doesn't happen until the state sits down and negotiates with the producers regarding fiscal certainty terms. The alternative is spending the next decade in court with an outcome that will leave Alaska no closer to a gas line than we are today.

For example, the producers have all indicated that they do not need the $500 million dollar inducement to assist in permitting the pipeline. However, the $500 million dollar inducement is an important part of keeping the playing field level for all potential pipeline builders, producers as well as independents. Independent pipeline companies don't have direct access to gas and this is a huge risk to them. The state's financial inducement begins to level the playing field. While the state will in part recover its matching contribution in the form of lower tariffs over the life of the project, the contribution is the key to gaining maximum competition among producer and independent pipeline applicants.

In fact, most of the major players who could actually make this project happen, testified the $500 million was unnecessary. Many also testified they thought the provision to force an unqualified applicant to continue with the permitting process even though they didn't have financing was unrealistic. Not only would the state continue to risk subsidizing an applicant that's wasn't credit worthy, they'd also be committing the state to years of exclusivity with this same non-qualified applicant.

When asked by the Senate Resource Committee why the state wouldn't strike the requirement for a non-qualified applicant to continue, Commissioner Irwin responded by saying that eliminating the provision would eliminate any leverage the state would have over the producers.

So according to Irwin, AGIA's potential for success depends on having an applicant who can't make the project happen.

It's clear the Commissioner feels that by keeping the AGIA process going, they'll be in a stronger position to argue that the project is economically viable. Even though their argument of viability will rest on an applicant who doesn't have the viability to build the line by themselves. 

The $500 million in state matching money from AGIA is nothing more than cash to buy competition that otherwise couldn't afford to be at the table. Alaska will risk $500 million during the riskiest phase of a process where - by the Commissioners own words – credit worthiness and the ability to make the project happen isn't a requirement.

The producers have called for greater fiscal certainty. We understand their need to know how taxes and royalty will be valued in the future. AGIA goes a long way toward resolving these tax and royalty risks. We are now working with the industry participants and the legislature to ensure that the language of AGIA will provide maximum fiscal certainty around the gas production tax and royalty valuation and shipping issues, while not giving up important state sovereignty rights.

AGIA does nothing for greater fiscal certainty. It also does nothing to resolve tax and royalty issues. In fact, everything proposed in AGIA highlights the need for long term fiscal certainty. Even the ten year tax credit as proposed is based on a tax rate to be determined at a later date.

Over the last few weeks, testimony has mentioned sveral items including rolled in rates, unknown project costs and FERC certification conditions, as examples of hidden costs that AGIA fails to recognize.

AGIA is all about competition. The state's best interests are protected by legislation that protects a level playing field and encourages a competitive process that allows each applicant to propose a project that both meets the state's requirements and gives the state the greatest value. We need to remain vigilant that amendments to AGIA do not destroy this fundamental competitive framework, through amendments that favor individual participants.

If AGIA was all about competition, the state wouldn't need to play such a heavy role in prescribing the outcome.

If AGIA protected a level playing field, it wouldn't reward an applicant who can't afford to build the project with a multi-year exclusive to build the project.

If AGIA was about protecting a "fundamental competitive framework" , Commissioner Irwin wouldn't consider an applicant who has no financing, no gas and no hope of constructing the project....in Alaska's best interest.