Lawmakers review legalities of Palin's gas line bill

Senate asks if state can provide incentives without violating its constitution

Posted: Thursday, April 12, 2007

JUNEAU - A Senate committee continued its legal analysis of Gov. Sarah Palin's gas line bill, starting Wednesday with the most divisive subject: Can the state provide long-term economic incentives to North Slope producers without violating its own constitution?

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At issue are the kinds of incentives Alaska can provide to builders of a natural gas pipeline. Tax incentives promised before a pipeline is built could take away decisions the Alaska Constitution says must be preserved for future legislatures.

The issue comes up in the Alaska Gasline Inducement Act bill, and it is getting a thorough vetting by the Senate Judiciary Committee the next few weeks, said Sen. Hollis French, D-Anchorage, the committee chairman.

It's a debate that dates to 1998 when the state drafted the Stranded Gas Development Act, and it might not get settled until a future court review.

"It's a hugely important debate," French said. "The public has to know why we are so concerned with it or else they think we are just down here dancing on the head of a pin.

"There are enormous policy consequences because you are giving up your power to tax. If you make the wrong decision, you could threaten construction of the pipeline."

French, a former prosecutor, said he wants the committee, a five-person group that includes three members with law degrees, to make the governor's bill as legally invulnerable as possible should it be challenged in court.

It's a formidable task, said Jacqueline Lang Weaver, a University of Houston law professor, who specializes in energy policy.

"It's something that should be carefully drafted," she said. "Yet, still nothing ever guarantees you're not going to be in court."

Palin's bill, known by the acronym AGIA, is designed to stimulate competition for the right to build a pipeline that could deliver North Slope natural gas to Alaska and Lower 48 consumers.

It's also aimed generating future exploration beyond the 35 trillion cubic feet of proven reserves in the North Slope.

It aims to achieve both through inducements, including a 10-year gas production tax break for those producers willing to be among the first to commit gas shipments on the pipeline.

French has been questioning whether those tax breaks are constitutional since former Gov. Frank Murkowski agreed to give producers a 30- and 45-year tax freeze on oil and gas respectively.

That, French has said in several legal opinions, means Alaska would be surrendering its taxation power to the oil and gas producers, and that is not constitutional.

Larry Ostrovsky, attorney for the Department of Law's oil and gas division, said the exemption in AGIA is more limited in scope and time than Murkowski's plan.

"It's something consistent with past practices with the state," Ostrovsky told the Senate committee. "Of course we recognize there is a wide variety of options and the court could strike this down."

Donald M. Bullock, an attorney with the Legislative Counsel, said he is not convinced Palin's inducement would survive a constitutional test.

Reiterating the provision, Bullock said, "The power of taxation shall never be surrendered. It shall not be suspended or contracted away, except as provided in this article."

During a hearing recess, he added, "It says if there is an exception, it has to be provided by general law; it doesn't say a contract and it doesn't say a contract authorized by general law."

Part of the conflict lies with another constitutional provision that mandates the state develop its resources and that doing so may require economic incentives.

"We have to get the resources into development for the benefit of the people," said Sen. Gene Therriault, R-North Pole, who sits on the Judiciary Committee. "Do we need to give some certainty to get resource into production? Perhaps we do. How much can we justify? That could be something the courts may have to look at."

The committee's legal debate dovetailed into whether the state should provide any long-term incentives, also known as fiscal certainty, to producers.

Producers claim they are essential to making costs, such as production and property taxes, predictable rather than volatile over the life of a pipeline's use.

The University of Houston's Weaver said the producers are asking for nothing different than what they pursue with sovereign nations while negotiating international contracts.

She says the state is probably is trying to strike a balance between protecting itself legally while making the bill attractive for long-term investment.

"They want to pass it right the first time," Weaver said. "They don't want to give away the kitchen sink but they don't want to be where they don't get any bids without some guarantees.

"They have to make it fiscally sufficient to attract private enterprise or they are not going to come. If they pass a law and no one comes, they didn't provide enough."

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