Equal Time for Parnell

Some have complained that I only write about Ethan Berkowitz, but actually, I write about what I hear or read in the press. Recently, I finally got a chance to listen to a soundbyte from Governor Parnell thanks to a posting from the Fairbanks Daily News-Miner. If your are interested in watching the soundbyte go to:

http://www.youtube.com/watch?v=wLkf1TJxhH4&feature=player_embedded#!

In the video Governor Parnell defends his position on the Alaska Natural Gas Pipeline and the need to continue to support the $500 million reimbursement to TransCanada and ExxonMobil by citing the benefits of AGIA. The problem is that most of his justifications are either wrong or are of little value.

The method I have used in the article is to quote the governor and then provide my analysis and response, and where appropriate I have also provided the subject law or regulation.


It assures that there are 5 offtakes for gas for Alaska communities. – Governor Parnell

This is his first justification for supporting the $500 million.

Offtakes will occur where they are economic, not based on a demand by the state. As I stated in a previous article regarding the benefits of AGIA, or lack thereof, the only reason the Palin administration demanded 5 offtakes was because the Murkowski administration required 4. Offtakes will occur wherever the demand is sufficient to pay for the facilities necessary at the offtake site to provide access to the gas. Offtakes are about economics, not about meaningless demands. The state could have demanded 10 offtakes sites and the pipeline company would have agreed because the basis for the offtake site was that it would be paid for entirely by the entity taking the gas.

The real answer to the offtake issue is that all compressor stations should be designed to allow for offtake of gas.

My evaluation of this justification. – It’s not wrong, it’s just not important and certainly doesn’t justify giving a pipeline project $500 million.

AGIA must have #12 at AS 43.90.130(12) is reprinted here for your convenience.

(12) commit to provide a minimum of five delivery points of natural gas in this state;


It ensures that tariffs, instate tariffs for gas delivered to Alaska communities are measured by distance sensitive rates, meaning we are only going to pay for mileage for that gas from Prudhoe to Fairbanks for Fairbanks gas. We are not going to pay for mileage from Prudhoe to Chicago and back to Fairbanks which is what the producers could do if Alaska didn’t have that kind of protection. – Governor Parnell

Governor Parnell states that without the protection of AGIA the producers could charge Alaskans a tariff that included the cost of transporting the gas from Prudhoe to Chicago and back to Fairbanks. This simply isn’t true. It wasn’t true when AGIA was passed, and it is not true now. Surprisingly, AGIA even cites the federal law that would prohibit what the governor says could happen. So the Governor must know his statement is untrue and that protecting distance based tariffs is not a reasonable justification for providing TransCanada and ExxonMobil $500 reimbursement for moving the project forward.

My evaluation of this justification. – It’s wrong and doesn’t justify giving a pipeline project $500 million.

AGIA must have #13 at AS 43.90.130(13) is reprinted here for your convenience.

(13) commit to
    (A) offer firm transportation service to delivery points in this state as part of the tariff regardless of whether any shippers bid successfully in a binding open season for firm transportation service to delivery points in this state, and commit to offer distance-sensitive rates to delivery points in this state consistent with 18 C.F.R. 157.34(c)(8); and
    (B) offer distance-sensitive rates to delivery points in the state consistent with 18 C.F.R. 157.34(c)(8);

18 C.F.R. 157.34(c)(8) is reprinted here for your convenience

    (8) Based on the In-State Study and the delivery points within the State of Alaska identified in paragraph (c)(1) of this section, there must be an estimated transportation rate for such deliveries, based on the amount of in-state needs shown in the study. Such estimated transportation rate must be based on the costs to make such in-state deliveries and shall not include costs to make deliveries outside the State of Alaska;


It assures access to that pipeline on favorable rates for future explorers so that the producers don’t control the pipeline but there is possibilities for more abundant cheaper gas from other areas. – Governor Parnell

This is the state’s “rolled-in” rates argument which I have written about previously. The governor’s argument here is accurate. AGIA does require that the pipeline company advocate for “rolled-in” rates, but that does not mean that this position is in the best interest of the state.  There is no argument from either pipeline proposal or the shippers that the first expansions by compression will be through “rolled-in” rates. So, as a practical matter, the demand by the state that the pipeline company propose “rolled-in” rates is unnecessary because it is in the pipeline company’s interest and the shippers interest, and the FERC will probably require it. The real debate is over expansions by “looping,” building a second parallel pipe beside the first in order to expand that segment of the pipeline. I have written about this in other articles, but the effect of requiring the pipeline company to propose “rolled-in” rates under these circumstances will probably result in the state arguing for a reduced tariff for the owners of gas found in offshore federal waters where the state receives no royalty or taxes, the reduced tariff to be paid for by existing shippers already shipping gas in the pipeline, including in-state shippers. The result will be an incremental increase in the price of gas in Alaska to be paid for by Alaskans to benefit a gas owner that will pay no royalty or taxes to the state, clearly the wrong position.

My evaluation of this justification. – This argument I would rate as accurate but either not important or slightly detrimental to the state depending on which expansion the governor is referring to. But you certainly wouldn’t pay $500 million for a pipeline company to hold a position that is either not valuable to the state or possibly could hurt the state’s interests in the future.

AGIA must have #7 at AS 43.90.130(7) is reprinted here, in part, for your convenience.

(7) commit that the applicant
    (A) will propose and support the recovery of mainline capacity expansion costs, including fuel costs, from all mainline system users through rolled-in rates as provided in (B) and (C) of this paragraph or through a combination of incremental and rolled-in rates as provided in (D) of this paragraph;


That $500 million dollars is protection for Alaskans in a deal that gets negotiated between multinational corporations. I think that’s a fair price to pay to assure that Alaska interests are protected. – Governor Parnell

I am not sure what the Governor is arguing here, but I think he is arguing that the $500 million is justified to protect Alaska’s AGIA requirements. As I stated above and in a previous article on AGIA, the $500 million was an incentive to encourage a pipeline company to do what no rational pipeline company would do, to move forward to filing for a FERC certificate after a failed open season. The only way to get a pipeline company to do this was to pay for the vast majority of the costs of doing so.

Maintaining the obligation to pay the $500 million may be the right answer, but it is not for the reasons stated by the governor. Justifying the commitment of $500 million to the project should be based on whether it helps move the project forward. Does it encourage the major players BP, ConocoPhillips, TransCanada and ExxonMobil to resolve their differences and move a single project forward or does it continue to provide one of the bases of dissention between the parties? Currently the “20 must-haves” of AGIA are one of the bases of disagreement between the parties. BP and ConocoPhillips do not agree with the requirements of AGIA. TransCanada has agreed by contract to meet the requirements of AGIA, but TransCanada’s partner, ExxonMobil has not agreed to those requirements. Currently AGIA stands in the way of the major parties to the pipeline in resolving their differences. Someday it may be time to abandon the requirements of AGIA, but the state may want to consider maintaining its commitment of $500 million to the project, but only if it can be used as a tool in the negotiations to bring the parties together and move the project forward, not as a burden that stands in their way.