On Tuesday, former Gov. Frank Murkowski wrote a letter to legislators, urging them to dig more deeply into TransCanada’s role in the contracts that are being negotiated to build the large diameter natural gas pipeline, which is estimated to cost as much as $65 billion.
“I am prompted to write each of you to express my growing concern over a major uncertainty associated with Senate Bill 138 – that is, how much revenue will the State lose by turning over to TransCanada what would otherwise be the State’s interest in the gasline?” Murkowski wrote. (See the full letter below.)
The state is partnering with TransCanada to own an equity stake in the pipeline and, among other things, is guaranteeing the company a 12 percent return on equity, which as Murkowski points out, is more than “twice what the State could borrow by issuing revenue bonds or tax-exempt bonds.”
In turn, TransCanada is financing much of the state’s investment. The question remains, however, if that arrangement is in the best interest of the state.
“This is a major policy call that has taken place without Legislative scrutiny,” Murkowski wrote.
Murkowski is urging legislators to pass one part of the agreement which would align the state with the producers who have lease rights to the gas, but to wait to pass the other part which establishes the state’s relationship with TransCanada.
When Murkowski was governor, he was also in the process of negotiating a large diameter natural gas pipeline, which at the time received much criticism. Gov. Sarah Palin, however, won the race before the contract could be finished. During her administration, legislation was passed and another contract was negotiated with TransCanada. That contract is still legally binding, and explains why the state has not looked for partners outside of the company.
Read the full letter below:
I am prompted to write each of you to express my growing concern over a major uncertainty associated with Senate Bill 138 – that is, how much revenue will the State lose by turning over to TransCanada what would otherwise be the State’s interest in the gasline?
SB 138 contains two parts: the Heads of Agreement which I urge that you pass this session. This brings gas owners and the State in alignment as each party owns North Slope gas.
The second part is the MOU between the State and Trans Canada. Unlike the 2007 AGIA agreement, the new MOU would pay for TransCanada’s services with what otherwise would be the State’s equity interest in the gas line. The tariff to the State is fixed at 12%, which is inflation proofed. This tariff is more than twice what the State could borrow by issuing revenue bonds or tax-exempt bonds.
Reports have noted that the MOU is a very complex document. Some of the lawyers who have appeared at the committee hearings of jurisdiction acknowledge parts are difficult to comprehend, let alone explain. Any legislator who takes the time to try to digest the document would agree.
Some take comfort in their belief that the MOU is non-binding and the state can “take the off ramp at any time”. This can be unrealistic. Take a quick look back at 2007 when TC entered in to the first AGIA agreement with the state. So far the state has expended more than $300 million with more to come, and we have yet to get a full explanation of what the State received for its money. Commissioner of Revenue Rodell stated that with TC’s participation the cost to the state would be $300 million annually in lost revenue once the gas begins to flow. The argument favoring this approach is that the capital costs of the project would be in the billions and would come at a time (2015-2021) of declining State revenues. TC would get the State’s share of the gasline by fronting these costs.
Commissioner Rodell said that the cost of lost revenue was worth the financing that TC would provide.
Really? Why have we not seen a side by side comparison of the costs and rewards to the State of TC holding the State’s share of the pipeline with the costs and rewards to the State of the State holding the State’s share of the pipeline.
This is a major policy call that has taken place without Legislative scrutiny.
There are major costs to the State of doing this. The “loan” is risk free to TC because the State pays all of its costs, including depreciation for TC’s up front capital costs (Exhibit C Item 6) and an inflation proofed cost of money at a base rate of 5%. Moreover, TransCanada will simply use the State’s Take or Pay agreement to transport our gas as security for the obligation it undertakes to pay for the State’s share.
What is the State’s alternative? There has been no discussion in the Legislature about going to the investment market to determine whether revenue bonds or other financing is available that would not require the state to pay down its savings during the 8 to 10 years before revenue starts to flow and would not require the state to give up its equity interest in the gas line.
Other questions remain yet to be answered:
Why share pipeline ownership with a non-gas owning company when the producers have the capacity to, and very well may, construct the LNG line themselves?
Having repaid 90% of TC’s expense for its work in the pipeline, what is the justification for TC to obtain any portion of the state’s equity share?
Why the special treatment for this particular company? Why not simply pay TransCanada for its services like any other company that provides services to the state?
When I was in the banking business, one of the rules of the road for a lending officer, was if you were lending your own personal funds, would you risk making the loan? Knowing what you know, but more importantly, being concerned about what you don’t know, are key factors in making this call?
A prudent approach would be for the Legislature to advance passage of the HOA this session. Then between sessions develop alternate means of financing Alaska’s equity portion of the gas line, so that Alaska does not “expend-down” its savings in the 8 to 10 years before first gas flows and the state can retain its equity.
Best wishes for a successful session.
Frank H. Murkowski
Contact Amanda Coyne at firstname.lastname@example.org