Own a Piece of the Pipe - Part 2

A Greater Likelihood of Success


In my first article Own a Piece of the Pipe - Part 1, I evaluated the use of the Permanent Fund Dividend check-off as a vehicle to fund state ownership of the pipeline. In this article I will evaluate the argument that state ownership enhances the likelihood of success of a gas pipeline; I will evaluate the justification for that position; and I will propose some principles that should be considered when developing a plan or strategy for State participation in a gas pipeline.

"If we take advantage of this opportunity, we have a greater likelihood of seeing a pipe come true."- Ethan Berkowitz.

In the Frequently Asked Questions (FAQ) portion of his website Ethan Berkowitz, as support for his position that state participation increases the chance for success of the pipeline, refers to the Alaska Natural Gas Development Authority report in FAQ Q.1, the Alaska Natural Gas Development Corporation report in FAQ Q.13, and the Alaska Gasline Development Corporation report in FAQ Q.16. The report I assume he is referring to is the Alaska Gasline Development Corporation Project Progress Report titled “Alaska Stand Alone Gas Pipeline Project Update and FY 2010 Deliverables.” Page 28 of that report states that “All cost of service models run indicate the predicted cost to consumer will be higher than the current costs in the Cook Inlet.”

Dan Fauske, the CEO of the Alaska Housing Finance Corporation, in his presentation of the report update to a group of legislators, recognized the challenged economics of the gasline when he stated "There will need to be some type of equity infusion or some type of subsidy.”

I assume this was the basis of Ethan Berkowitz's position that equity invested in the pipeline through the PFD dividend checkoff will at least partially address the need for equity infusion and create "a greater chance making a pipeline become real."

There are two problems with this position. First, the equity infusion or some type of subsidy Dan Fauske was referring to needs to be of the type of infusion that would ultimately reduce the tariff. Mere ownership does not reduce the tariff. A State capital contribution reduces the tariff, and I am sure Ethan’s  PFD owners are not interested in donating their dividends to the pipeline company.

And second, and most important, the report Ethan Berkowitz is using to support his position has nothing to do with a large diameter pipeline. It was drafted as an update on the in-state gasline! The Alaska Gasline Development Corporation was created “for the purpose of planning, constructing, and financing in-state natural gasline projects or for the purpose of aiding in the planning, construction, and financing of in-state natural gasline projects.” The Alaska Gasline Development Corporation and any reports it creates has nothing to do with a large diameter pipeline.

The economics of an in-state gasline and the large diameter gasline are entirely different. And the justification for state participation in a large diameter pipeline are entirely different that the justification for participation in an in-state gasline.

Major concerns of the large diameter pipeline are pipeline costs, cost overruns, tax stability,  and the long-term price of gas in the lower-48. The major hurdle for an in-state line is economics of size. The in-state need for gas doesn't justify the cost of building a gasline from the north slope to southcentral Alaska.

This means that the primary justifications Ethan Berkowitz is using to support state participation in the pipeline has nothing to do with the large diameter pipeline he is proposing to own. But it is possible for state participation to enhance the likelihood of success of the pipeline, just not for the justification proposed by Ethan Berkowitz.

Participation in a Large Diameter Gasline

 In order to draft a successful plan for state participation in a large diameter gasline, it is important to understand the view of state participation from a pipeline company standpoint.

The following are some principles that should be considered and followed if possible:

1) First, it must be remembered that the State does not have an automatic right to have an ownership share of the pipeline. It will only be invited to participate as an owner if it brings value or adds value to the pipeline entity.

2) A state entity would need to act like a corporation, not a regulator.

3) A state entity would need to keep information confidential that is normally kept confidential by a private corporation participating in the pipeline.

4) The State’s shareholders cannot have access to confidential information. Only information made available to the public in general will be provided to them. The State entity’s board of directors and staff will have access to confidential information, but only if they agree to keep the information confidential.

5) The State’s ownership interest cannot fluctuate throughout the time the pipeline is being built. Voting rights are based on ownership interest and cannot be changed just because more individuals want to invest their permanent fund dividends in the ownership of the state entity.

6) If there are cost overruns and all the other owners are required to pay their proportionate part of the overrun, the State will pay its proportionate share also.

7) The rights and responsibilities of the State entity that is participating in the pipeline cannot be subject to legislative changes that would violate their obligation under the participation contract they sign, commonly an LLC agreement.

8) Some pipeline companies would like to see the state own the same share of the pipeline as its royalty share of the gas. Other pipeline companies are not as concerned with this issue.

If a participation proposal is fashioned that meets the above criteria, it will have a greater chance of getting agreement from a pipeline company to allow the State an ownership position in the pipeline than if the criteria are ignored.