My turn: If you want questions, this is for you

Citizens, legislators need to carefully consider proposed gas pipeline contract

Posted: Thursday, May 25, 2006

The state of Alaska and three for-profit companies have negotiated a contract to construct a natural gas pipeline. The contract requires "fiscal certainty" over its term, which could extend for 45 years. The Legislature is now in a special session to evaluate the proposed gas contract. The fiscal certainty of a petroleum profits tax is not in effect at this time.

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If you want definite answers about the gas contract under consideration by the state, this article is not for you. If you want questions, it may be. We Alaskans, both citizens and legislators, need to consider carefully some specific questions about the contract proposed by the governor.

The 20 percent joint venture: Although the language mentions a contract between the state of Alaska and three other parties, this is essentially a joint venture with each of the "partners" participating in the financing of the gas pipeline. Profit-oriented oil companies built the oil pipeline using nongovernment funds.

The argument that the state needs to have some ownership to make the project economically competitive does not make sense, since the state has the power to affect the economics through the tax structure. The state's participation in decisions may be limited because of its small 20 percent ownership share.

Shouldn't the profit-oriented companies build this gas pipeline, just as they did with the oil pipeline? Why does the state need to be a 20 percent partner in this project?

Mission of government: Government generally provides to all citizens the services and safeguards that the private sector cannot do efficiently. The costs to provide these services are financed by taxes and fees paid to government, which, in most cases, is not motivated by profit. In this contract, the state is participating in a profit-driven venture. A less risky approach would be to collect the fees and taxes without assuming the risks of ownership.

Projects undertaken for profit, especially oil and gas projects, are subject to economic risks, resource risks, social risks and unavoidable natural risks. Governments are subject to some of these risks and may lessen their exposure by limiting participation in profit-making activities.

Is investment in this project compatible with the mission of government in Alaska?

Permanent fund and asset diversification: The 1976 state law establishing the Alaska Permanent Fund Corp. states that the fund was created "to maintain safety of principal while maximizing total return."

If the permanent fund invests $5 billion into the gas venture, this would represent about 14 percent of today's $35 billion value of the fund and would be much larger than any other investment in one venture. The principles of asset allocation, portfolio management and risk-reward factors would be subject to questions about decisions under the prudent investor principle.

The fund has earned a 10-year rolling return averaging from 7.8 percent to 11.7 percent in the periods from 1985 to 2005. This has been achieved using asset diversification and investments in bonds, stocks, real estate and alternative investments (although the use of alternative investments is somewhat recent and controversial). The fund uses diverse firms to manage sectors of funds and various investment types.

Who would manage this one? What would the state do if the investment did not perform according to the permanent fund's goals?

The state of Alaska invests its assets to provide services and safeguards to its citizens using prudent investor criteria. Long-term decisions that limit the flexibility of the state to manage its activities are not in the best interests of present and future Alaskans.

Let's decide what to do with our gas based on today's knowledge and leave future decisions to be based on future knowledge. The gas has been there for many years; we don't have to accept this contract today.

• Sara H. "Sally" Willson is a Juneau resident who has taught accounting for 20 years.

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