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.

Own a Piece of the Pipe - Part 1

A Straight-forward Idea or a Complex Evaluation


At first blush, Ethan Berkowitz’s Owning a Piece of the Pipe idea seems fairly simple. In fact he stated, "To us and most Alaskans this is a pretty straight forward idea, the notion that Alaskans should also have the right, if they individually choose, to be able to own a piece of the pipe."

The idea may sound simple, but the implementation is decidedly more complex.

For example, Ethan Berkowitz has selected the Permanent Fund Dividend check-off as the appropriate vehicle to raise funds for participation in the pipeline project. But no analysis is provided regarding the impact on Alaska businesses if the program is as successful as he hopes.

A successful PFD check-off program will divert money from the Alaska economy and Alaska small businesses to a pipeline project that may or may not need the assistance of Alaska financial support to be viable.

"If we have about 20 percent of Alaskans participate in this proposal, which is what our projections would be, we'll see the cumulative effect of about $800 million in investment."

Ethan Berkowitz projects about 20 percent of Alaskans will participate in the opportunity to invest in the pipeline resulting in the cumulative effect of about $800 million in investment and perhaps close to $1 billion.

What will the impact be of diverting as much as $800 million to $1 billion away from the Alaska economy and into supporting a gas pipeline project? Many small Alaska businesses, in order to balance their budgets each year, depend on people spending their Alaska PFD’s and purchasing goods and services in Alaska. I think that Alaska small businesses would be very concerned about the impact on the viability of their businesses of such a large diversion of permanent fund dividends to the pipeline project.

An analysis should be done of the impacts of such a substantial loss of revenue to Alaska businesses prior to proceeding ahead with such a proposal.

Who will invest?

Diane Benson, the lieutenant governor candidate, says she would have been excited to have an opportunity like this when she was a young mother of limited means. Her statement suggests that she believes all Alaskans, regardless of their financial status, would seriously consider investing their PFD’s in the pipeline. Actually, reality is far different than the picture she projects. A young mother of limited means is barely able to balance her budget. The last thing she is going to consider is taking her PFD, investing it in a pipeline project, paying the taxes on the PFD income, and hoping some day that her investment will return a profit to her. She, and many others like her, will be using their dividends to catch up on paying bills, and possibly, they hope, have a little left over to do or spend on something special with the surplus.

The typical person that will be able to invest their PFD in the pipeline is a middle to upper income individual that does not need the PFD to pay for the basic necessities of life, a person that has sufficient surplus income that they can afford to lose it if the pipeline project fails to reap a profit.

So even though this program is touted as benefiting all Alaskans, as a practical matter, a much smaller cross-section of Alaskans will be able to avail themselves of the opportunity to participate. And if they participate, there has been no research, and apparently the question hasn’t even been asked, about the impact on the Alaska economy of these individuals diverting their PFD’s to the gas pipeline instead of investing them in their local community.

Ethan Berkowitz may want to reconsider using the Permanent Fund Dividend check-off as the vehicle for providing Alaskans with an opportunity to participate in the pipeline.

He may find that the negative impacts from the loss of revenue to the economy will exceed the benefit received by the pipeline. He might still want to consider some form of state ownership or participation in the pipeline and perhaps allow the public the opportunity to participate in the project through participating in the financing of the project. Perhaps the public could be provided the opportunity to purchase bonds in the project instead of acquiring an ownership interest. This would be a much safer, less risky venture for the Alaska public.

If Ethan Berkowitz continues to propose this idea, the next stage of his multi-part plan should begin to address this issue.