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My Turn: Why not the Permanent Fund?

Posted: April 12, 2014 - 11:04pm

Unlike other resource issues, Alaskans stand pretty much united in our efforts to monetize the huge gas reserves of Alaska’s North Slope.

The Legislature has spent a good portion of the current session holding hearings and listening to consultants on the administration’s proposal (SB138) and its two components, the MOU and the Heads of Agreement. I have expressed my concerns to the House and Senate committees regarding the MOU’s proposal to have TransCanada acquire what would otherwise be the state’s 25 percent equity interest in the gasline in exchange for being the bank and financing construction of the gasline.

Although I have the highest regard for TransCanada, this financing plan is a bad business deal for the state. Here’s why.

The Heads of Agreement between the state and the producers provides among other things that the state would take its 12.5 percent royalty gas in kind. This requires the state to market and transport its royalty gas, both of which create high risk to the state. In addition, the state gave up its severance tax in return for 12.5 percent more gas from the producers.

Thus, between its royalty and severance tax gas, the state is entitled to 25 percent of the gas. This entitles the state to own 25 percent of the gasline and gas treatment plant. This requires the state to pay 25 percent of the $60 billion cost of the project — $15 billion. This is where the MOU between the state and TransCanada comes in.

The MOU provides that TransCanada would fund what would have been the state’s interest in the gasline in exchange for the state’s interest in the gasline. The state would also agree to a Firm Transportation Agreement with TransCanada. This is a take or pay contract in which the state would agree to pay a tariff to transport its gas through what would have been its gasline.

Moreover, the MOU provides that the state would pay TransCanada’s costs if the project is abandoned along the way. There is no cap on these costs. The risk is on the state. TransCanada has very little risk if the gasline is not built.

Revenue Commissioner Angela Rodell estimated that this arrangement would cost the state $300 million more per year after first gas than if the state financed the gasline on its own. The Alaska Gasline Development Corporation, had a study done by Citigroup Global Markets Inc. and Samuel A. Ramirez & Co. Inc. in 2011. That study proposed to use tax free revenue bonds to provide 100 percent of the $8 billion to finance the in-state gasline. Former Department of Revenue employee and gasline expert Roger Marks prepared a report for the Legislature that points out that tax exempt debt “generally costs about 25 percent less than conventional debt.”

He concludes that $8 billion could be saved over 25 years by using 100 percent tax-free debt financing versus conventional financing.

The administration’s argument for using TransCanada as the bank is that the state will have cash needs, such as education, for which the $18 billion in the state’s savings account will be needed before first gas as the flow and price of oil goes down.

There is a better way for the state to fund the gasline and retain the $18 billion in its savings account while waiting for first gas — using the Alaska Permanent Fund. This would require a financing plan to be put together and a vote of the people to authorize the use of the Permanent Fund, but, Alaska would retain ownership of the gasline through the Permanent Fund. We would not need to outsource that ownership to TransCanada.

For example, if the gasline and gas treatment plant cost $60 billion and the state takes a 25 percent portion consistent with its ownership of the gas, the state would be required to pay $15 billion. The state could finance the $15 billion from the Permanent Fund, assuming an authorizing vote of the people. The state could meet its cash calls from the Permanent Fund. The Fund would charge the state the same rate it is planning to pay TransCanada.

Using the Permanent Fund for this purpose is unprecedented. That’s why the people of Alaska would have to approve it. If they vote to disapprove, Alaska should not take the far greater marketing and transportation risks associated with taking its gas in kind.

Serious consideration of financing through the Permanent Fund is warranted for a project of the magnitude of the gasline. Up to now, the Permanent Fund’s corpus has been generated from oil revenue, but oil flow is declining. New revenue from gas can replace a portion of disappearing oil revenue. Since 25 percent of gas revenue is constitutionally required to go into the Permanent Fund, what’s wrong with having those funds paid directly into the Fund as a consequence of its ownership of the gasline instead of being appropriated to the Permanent Fund by the Legislature from money in the General Fund?

The Legislature should extend the time frame of the MOU from the six months set out in Paragraph 4.2 of the MOU (which requires TransCanada to be paid on a cost plus 7.1 percent basis if the Enabling legislation does not pass) to 18 months. That would give the Legislature 12 more months to decide whether or not to pay TransCanada with what would otherwise be Alaska’s share of the gasline or come up with another more favorable financing mechanism, namely, the Permanent Fund. It would not impact the role spelled out for TransCanada in the Heads of Agreement.

I look forward to hearing from Alaskans on this extraordinary opportunity to insure the future growth of our Permanent Fund for all Alaskans.

• Frank Murkowski is a former governor for Alaska.

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Ronald Lind
Ronald Lind 04/13/14 - 06:16 am
not the permanent fund

One Alaskan who does not believe the Permanent Fund should be used to "invest" in Alaska projects. It should be invested for returns to the fund. To do otherwise opens it to being used for special project funding that do not benefit all Alaskans equally. There would be no end to "investments" that are worthy.
Create a mechanism for individual Alaskans to opt to invest their dividends, not the fund principle which belongs to all, in these worthwhile projects.

Karl Ashenbrenner
Karl Ashenbrenner 04/13/14 - 07:45 am
Frank the Bank

speaks about all Alaskans being helped by using the Permanent Fund....I am snorting coffee out my nose!

EdwardGomez Gomez
EdwardGomez Gomez 04/13/14 - 11:04 am
I have been saying that for years

I have been saying that we should use the PFD to pay for the gas line for years. Every time I say something about it. I get laughed at and my post is removed. I am not saying that the state should just go and take the money from the PFD I say put it to a vote let the Alasken residents choose. Think about it. All the new jobs for Alaskans. The 2nd divend we would get. Plus we would own it and we would not have to put up with outsiders telling us what to do with our pipeline. But this make to much sense. I have told lot of legislators that I have seen in Juneau funny how most of them roll there eyes at me iterated that I would even think that I would have an idea better then them. Well some day when everyone is fighting about who is going to control the new pipeline well there went all the money we just made to fight law suits against the partners that we have.

Janice Murphy
Janice Murphy 04/13/14 - 12:57 pm
Why not

Reverse some of the numerous tax breaks to energy corporations and use that money to fund whatever it is you want to fund. The Permanent Fund was devised by probably the best republican governor we ever had, Jay Hammond. Since then there have been many, many suggestions to divest the residents of their "windfall". What a disgrace. No I don't need the money but many look forward to it every year for things they otherwise couldn't afford. I'm going to control myself and not elaborate on how I really, really feel.

Guy Archibald
Guy Archibald 04/13/14 - 01:09 pm
Really can't put anything to the voters anymore

Unfortunately, with unlimited corporate campaign funds, there is no real power in a public vote anymore. Corporations swamp the airwaves with repetitive have-truths and scare tactics until enough marginally informed voters believe their drivel and vote against their best interests. Coastal Zone Management is an example as I am sure SB 21 will be as well.

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