Jan 5: AGIA - Q: What do you know that we don't know? A: The truth!

Sometimes with government it helps to be paying attention and it always helps to have a really good tape recorder. Especially when the people you're dealing with can't seem to be honest.

At yesterdays press conference, where Governor Sarah Palin and her gas line team announced that Transcanada was the only  qualifying applicant under AGIA, Deputy Commissioner of Revenue Marty Rutherford got caught in what can only be described as a lie about Transcanada's application.

AGIA's strict structure prohibited any bidder from making contingent offers or unauthorized terms or conditions.

The presence of such, are cause for instant disqualification.

For instant Sinopecs application was reportedly denied because their bid imposed unauthorized conditions.

Towards the end of the press conference, Anchorage Daily News reporter Wesley Loy asked the following question about Transcanada's application.

Loy: "Did they ask for, either in their initial application or subsequently, or just informally, did they ask for any state support or seeking additional federal support or backing guarantees, some other terms that would help them be a little more secure in their proposal? I don't know if it's a price floor or what, but I wouldn't ask if I didn't have some inkling".

Department of Natural Resources Deputy Commissioner Marty Rutherford quickly responded:

Rutherford: "The answer is no. It would not have made it through the completion review if it had conditions for their project proposal based upon some future action. The answer is no they did not".

So Loy asks if Transcanada has asked for any provisions or federal support different from what is in the original AGIA request.

 Palin's team answers with an emphatic "no".

Just one big problem with Palin's teams response; it wasn't true.

Transcanada's AGIA Proposal Executive Summary Page 16

"Transcanada will work with the state to jointly seek authorization to use the Federal loan guarantee available for the APP to fund any cost overruns. Negotiated rate shippers will have the option to repay these loans using a toll surcharge that is only to be paid when natural gas prices are above the predetermined minimum threshold."

This is a dramatic departure from anything in AGIA and calls for congress to completely change the federal loan guarantees already in  place for the project. Currently the federal loan guarantees of $18 billion are only applicable in the event the project fails after construction.

So to expect Congress to tweak turn these loan guarantees into a risky form of bridge financing for cost overruns is an impractical ask.

Furthermore, the presence of this in Transcanada's proposal highlights one of the many flaws of AGIA; if there are cost overruns, it's the shippers not Transcanada who will carry the burden of repaying them.

With a guaranteed rate of return on the cost of the pipeline construction, Transcanada has no skin in the game. By asking Congress to accept the responsibility of cost overruns, they also avoid any responsibility for project mismanagement. Even when the price reaches the minimum threshold, it's still the shippers who would have to pay for Transcanada's construction cost overruns.

However, that wasn't the biggest  unauthorized condition from Transcanada's proposal that Deputy Commissioner Rutherford wasn't honest about.

"Transcanada in partnership with the state, would seek to establish a mechanism through which the U.S. Government would assume some or all of the initial risk of the project by acting as a bridge shipper".

So to put this into layman's terms, say you throw a $30 billion party and nobody comes. However, you still have to pay expenses. You are going to ask the federal government to pay your bill until the time that people finally show up.... and oh by the way, nobody really knows who is showing up or when.

So not only are we going to ask Congress to change loan guarantees to cost overrun guarantees but now we're going to also ask them to agree to accept tens of billions of unqualified liabilities.

Brilliant.  

I can just imagine the response from Congress. Memo to Alaska: We hear you have $40 billion in the bank. Pay the bill yourself.

But aside from the sarcasm, both of these represent huge financial considerations that are not contemplated or authorized within AGIA, and just as importantly represent "additional federal support" that Deputy Commissioner Rutherford emphatically denied that Transcanada had asked for in their AGIA proposal.

Furthermore, Transcanada appears to be making their push to FERC certification contingent upon additional federal support.

During the AGIA hearing last spring, Transcanada was very vocal about their opposition to the condition in AGIA which mandated that an AGIA license holder push on to FERC certification even if they held a failed open season. (i.e. Throw a party and nobody comes)
We think it's best after a failed open season, to step back and try and work it out with shippers, a Transcanada executive told the legislature last spring.

At Friday's press conference, Deputy Commissioner Rutherford was asked about Transcanada's prior stance during legislative hearings on AGIA and their concerns about pushing on to certification after a failed season and their AGIA application. Did they commit to accepting that condition?

Rutherford responded, "The answer is clearly yes. By submitting their application they agreed to that condition".

However reading Transcanada's proposal, their words give a distinctly different impression. It appears that pushing on to FERC certification is contingent upon Congress agreeing to provide a financial guarantee if there is a failed open season.

"As part of the alternative credit concept, Transcanada commits to file its FERC application for certificates, even if sufficient shipper commitments are not obtained during the open season".

This clearly appears to be a little more than just a subtle  suggestion for Congress to hold them harmless, it appears that as far as Transcanada is concerned it is "as part of" or in other words, contingent upon.

After Rutherford quickly and emphatically denied Transcanada was seeking concessions outside of the AGIA parameters, Governor Palin could be heard in the background asking the reporter, "What do you know that we don't know"?

When it comes to Transcanada's proposal, obviously we know a lot more than Palin's gas line team is willing to be open and transparent about.  

The bottom line is that Transcanada's conditions are not compatible with the "take it or leave it" structure of the AGIA RFP. They represent conditional offers that the state cannot deliver on and that Congress will not deliver on. 

I can see why Governor Palin's gas line team is trying to gloss over these substantial departures from AGIA's rigid structure. Without Transcanada, that would mean there wasn't one viable bidder among the bunch.