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The Palin Papers:
Governor's Major Oil and Gas Initiatives
Gov. Palin's Extravagant Claims on National Stage By
Richard A. Fineberg |
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(Continued from Home Page) Although natural gas pipeline planning and financing arrangements differ from those of oil pipelines, from an economic standpoint, the underlying concerns are the same and the pipeline tariff is a key landmark. In both arenas, the state has a fundamental interest in assuring low tariffs for two reasons - to promote continued development and to enhance state revenue. Achieving these ends is not a simple task. The potential for mistakes - and for mischief - is magnified when the erstwhile independent company is tackling the largest private venture ever undertaken on this continent and three companies control 95% of the natural gas discovered on the North Slope. At first glance the Palin approach looks like it could be the right answer - particularly to an analyst who, like myself, is familiar with the tariff overcharges of the North Slope's Big Three on Trans-Alaska Pipeline System (TAPS). But I found that the voluminous raft of documents the Palin administration released in support of the AGIA proposal in late May 2008 did not stand up well under closer review. Based on a two-month inquiry into the thorny questions associated with North Slope natural gas transportation issues, I summarized my concerns in a July 22, 2008 report to AkPIRG. I was able to further refine these concerns in response to questions I received during my July 25, 2008 testimony to the Alaska State Senate Select Committee on Energy (see August 3, 2008 Petroleum News article covering that testimony).My report analysis and subsequent dialogue with administration officials and key consultants suggests to me that Governor Palin's proposal is unlikely to deliver the low natural gas pipeline tariffs she has promised without clear solutions to important, troubling questions that remain unanswered. (26) I strongly endorsed Governor Palin's starting point - the quest for low tariffs. But when I reached very different conclusions regarding the probable outcome of her proposal and could find no explanation for those differences, I felt it was necessary to make sure that Governor Palin was aware of the information that led me to part company with her gas line team's conclusions and recommendations. I therefore put together a packet of pertinent documents for Governor Palin, highlighted for easy review. When I gave them to her at a public gathering in Fairbanks August 12, I requested a short meeting to explain my concerns. These seven documents, listed in reverse chronological order, are posted here. 1. Memo to Governor Sarah Palin (Aug. 12, 2008)
2. Letter to Deputy Commissioner Marty Rutherford (Aug. 6, 2008)
3. Letter from Deputy Commissioner Marty Rutherford to Senator Fred Dyson (July 30, 2008)
4. Letter to Alaska State Senator Fred Dyson (July 29, 2008)
5. Letter to Alaska State Senator Charlie Huggins (July 26, 2008)
6. Outline of Testimony to State Senate Special Committee on Energy (July 25, 2008)
7. Bullet Points for Unaddressed Questions Report (July 22, 2008)
To
place these documents and my more recent effort to reach Governor Palin on the
national and Alaska current events calendar: The Alaska State House approved the
TransCanada's AGIA proposal July 23; the Alaska State Senate endorsed the project
August 1; the short meeting I requested with Governor Palin Aug. 12 has not taken
place; with the exception of Item 3 above, to the best of my knowledge the Palin
administration has not responded to my concerns; the surprise announcement of
Governor Palin's as Senator John McCain's running mate was made August 29. Two pieces of possibly significant background information did not figure into in my analysis of the AGIA project, or in the preparation of the documents presented above:
The materials I researched, presented to Governor Palin and posted here indicate that there is an even more fundamental disconnect between the realities of natural gas pipeline financing and the overly simplistic approach to these problems that the Palin administration has adopted. Based on the still unanswered questions I have raised, I have reluctantly concluded that both the the Greenberg Traurig role in the Palin administration's endorsement of TransCanada's AGIA proposal and Deputy Commissioner Rutherford's past ties to TransCanada warrant further investigation. I now count these among the many troubling aspects of Governor Palin's natural gas line proposal - details in which Governor Palin appears to me to be distinctly disinterested. I am not asserting wrongdoing, but I can say this: The possibility of conflicts of interest at high levels on an issue of this magnitude seriously sullies Governor Palin's image as an ethics reformer. The
Palin Papers: Part III: Implementing Policy This section looks at the manner in which state agencies administered one oil and gas policy initiative under Governor Palin during the first half of 2008. The case in point here is the failure to implement a provision of the petroleum production tax legislation enacted during the 2007 special session that dealt with pipeline shipping charges (tariffs). (32) In divvying up revenue from Alaska petroleum operations, pipeline shipping charges (tariffs) play a particularly important role. Hundreds of millions of dollars per year ride on the correct accounting for transportation costs, which are subtracted from the market price of oil and gas to determine the base on which state royalty and production tax payments are calculated. When ownership of production and pipelines overlap, pipeline overcharges reduce state and federal revenues while inhibiting competition from independent (non-owner) shippers.(33) Since 2002, a steady stream of state and federal regulatory and court decisions have confirmed that the major North Slope oil producers have reaped billions of dollars in excessive profits from their simultaneous ownership of Alaska North Slope production rights and TAPS. (34) The
process of restoring equity and sanity to the tariff process is exceeding slow.
During the 2007 special session on production tax revisions (covered in Part I,
above), I assisted in the development of the legislation that was designed to
enable the Department of Revenue to substitute an estimated pipeline tariff for
an improperly inflated filed tariff when production and pipeline ownership interests
overlapped, thereby preventing the pipeline owners from using tariff overcharges
to reduce production tax payments. During the special session, the Department
of Revenue estimated this minor statutory change could increase state revenue
during the current year by as much as $200 million. (35) As noted
above, this change to petroleum production tax statute was considered and approved
by committees in both houses and adopted as part of the final petroleum production
tax revision. At a June 4, 2008 workshop on the department's proposed regulations, a knowledgeable tariff attorney advised the department that the agency's proposed discounted cash flow method was inappropriate and would result in increased shipping costs. (37) This outcome would reverse the intent of the statute by nullifying (rather than supporting) the effects of the court and regulatory decisions that tariffs were excessive, handicapping independent developers and reducing state revenue. Commenting as a private citizen, in a June 11, 2008 letter I recommended that the department abandon its present approach and seek a simpler solution that would be consistent with the intent of the statute. (For my comments on the Palin administration's apparent intent to reverse the intent of this portion of the ACES statute aimed at preventing tariff abuse, click here. The department's latest plans for implementing the pipeline tariff component of the revised production tax statute are unclear. (38) Conclusion: Was Governor Palin Really There? Governor Palin sounds welcome calls for transparency and public involvement, but her delivery, with disturbing regularity, fails to measure up to her insouciant promises. And although Governor Palin deserves credit for taking action to put the centerpiece oil and gas issues into play in special sessions of the state Legislature, this analysis shows that her two major policy initiatives were fundamentally flawed by internal contradictions that undermined her stated public policy goals. It is troubling that in the area that she claims as her strong suit - energy policy - Governor Palin is prone to proffer major oil and gas policy initiatives that are inherently defective, coupled with broad generalities that, on inspection, simply do not add up. In the case of her 2007 oil tax revision, the Legislature - not Governor Palin - delivered the necessary fiscal course corrections to save her initial proposal from a slow train wreck. In 2008, Governor Palin's North Slope natural gas plan, for which she prematurely and inaccurately took credit in her national debut September 3, is far from a done deal and may even be headed down the wrong track. During the first six months of 2008, the Palin administration's implementation failure on the portion of the 2007 "ACES" production tax revisions dealing with pipeline tariffs heightened my growing concern about the new governor's management style and capabilities. Shortcomings in the governor's efforts on the pipeline tariff issue, coupled with her team's flawed gas line analysis, suggest that the problems I had dismissed in 2007 as anomalies were in fact harbingers of what was to come. Details matter: Governor Palin proclaims the importance of transparency and dubbed her production tax measure "Alaska's Clear and Equitable Share." A well-tempered policy depends on a comprehensive and transparent overview. From this perspective, Governor Palin's failure to assure that her staff has summed up the industry, state and federal shares of the net revenue "take" clearly and accurately (documented in Part I, above) disfigures Governor Palin's stated objectives. Later
in the ACES campaign, when consultants came up with an interactive model to counter
industry misstatements, her team was finally within striking distance of producing
a comprehensive model that lived up to the governor's stated goals. Surely, I
thought at the time, the governor's team will take the next step and produce that
model; it never got there. Once again the Palin administration bureaucracy substituted
a welter of documents and obscure charts for a clear and comprehensive model whose
overview that would have enabled concerned citizens to evaluate the complex issues,
including the importance of pipeline tariffs. (39) In
2007 and again in 2008, after an initial public announcement on her centerpiece
legislation, Governor Palin vanished from the scene, leaving the often tedious
and thorny problems of execution to the bureaucracy. When it was all over, she
would show up at another press conference to claim victory. But during most of
the intervening time, when the heavy lifting was being done, there was little
sign that Governor Palin was actively involved. To all intents and purposes Governor
Palin simply wasn't there. My impression is that she said, "You guys go play
in the sandbox, but don't fight," and left the scene.
I
now suspect that such a call might have been answered with silence. (40)
There is no doubt that Governor Palin is a bright and engaging politician. She is a quick study and a clever strategist, with solid instincts and a keen sense of timing. But what about statecraft? In my estimation, one of the most important qualities a governor can bring to the job is the diligence to become familiar with the complex issues at hand. The materials presented here suggest that Governor Palin is seriously lacking in this regard. Instead of doing her homework, she appears to govern on the basis of personal predilections and staff recommendations that she is prone to accept with insufficient scrutiny. Governor Palin, the erstwhile reformer and maverick, often displays an unhealthy dependence on state bureaucracy. When
it comes to politics, does Governor Palin get it? You bet. But when it comes to statecraft, does Governor Palin get it right? I think not. The nation witnessed an embarrassing example Governor Palin getting it wrong when she finally granted her first national press interview nearly two weeks after being named as John McCain's running mate. In claiming her experience in energy as her principal proof that she is ready to serve, Governor Palin said she had been working on energy independence "as the governor of this state that produces nearly 20% of the U.S. domestic supply of energy." In subsequent days, various media outlets noticed that on the campaign train she had made revised her script to this effect: "My job is to oversee 20% of the nation's oil and gas." (41) The first statement was a wild exaggeration; the second was also well off the mark. (42) In light of her pronouncements on ethics and professed zeal for good government, Governor Palin's failure to ensure that her actions are not contaminated by possible conflicts of interest is surprising and disappointing. Two potential conflicts associated with the Palin administration's decision to support TransCanada's bid to build the North Slope natural gas pipeline were discussed in Part II, above: The past association of one of her natural gas team leaders with a TransCanada subsidiary and the role played by the Washington, DC law firm where disgraced lobbyist Jack Abramoff used to hang his hat before he went to jail. Neither demonstrate wrongdoing, but both raise questions of propriety. Governor Palin and her team might have laid both problems to rest - or prevented them from becoming problems -- by taking these basic steps: (1) Reviewing apparent conflicts; (2) making complete disclosure of those conflicts; and - perhaps most importantly - (3) producing a work product that is logically sound and empirically verifiable. I am of the school that says: Do not assume wrongdoing if coincidence or incompetence will explain what's going on. I would be much more comfortable with Governor Palin's natural gas proposal if she had followed rather than failed the three steps above. I would be even more comfortable - and I believe the public would be well served - if the substantive questions I raised in my July 22, 2008 report and the subsequent materials I presented to Governor Palin three weeks later had been addressed, rather than glossed over or ignored. In sum: Governor Palin claims to be a breath of fresh air who has put Alaska on a different track. But careful examination of how she has performed in office indicates otherwise. Governor Palin offers her oil and gas efforts as proof that she's the Real McCoy. She's not. ...........________________ Footnotes 26 - 42 to The Palin Papers 26.
The following three questions, synthesized from my inquiries, may help the uninitiated
reader wade into the arcane worlds of project financing and natural gas pipeline
ratemaking:
The massive stacks of documents the Palin Administration released in support of the TransCanada AGIA application did not identify or address these fundamental questions. Nor did I find answers in subsequent dialogue with Palin administration officials and consultants. (See the packet of documents linked to this report and presented to Governor Palin.) 27. Serge F. Kovaleski and Mike McIntire, "Palin's Pipeline Is Years From Being a Reality," New York Times, September 11, 2008 (http://www.nytimes.com/2008/09/11/us/politics/11pipeline.html?_r=1&ref=politics&oref=slogin). 28. Tom Kizzia, "Ex-rebel now goes for gas line - RUTHERFORD: She quit one administration, but today she spearheads state's big project," Anchorage Daily News, June 10, 2007, p. B-1. 29. I have always had the utmost respect for Ms. Rutherford's integrity. However, Ms. Rutherford has not responded to my August 6, 2008 rejoinder to her July 30, 2008 (see documents 2 and 3 in the attached packet), or to a subsequent request requesting more information on her past association with TransCanada. 30. For an extensive set of references on the activities of Greenberg Traurig LLP, see http://en.wikipedia.org/wiki/Greenberg_Traurig. 31. The nine documents - memoranda and reports prepared between 2005 and the present - are found in State of Alaska, Alaska Gasline Determination Public Forum, May 28-30, 2008, Appendix R-1 - R8 (CD). In addition, several Public Forum documents from other consultants were submitted to Greenberg Traurrig, and the firm has provided additional information to state officials that is not part of the Public Forum.
32. AS 43.55.150 was amended by Section 53, SCS CSHB 2001(FIN) am S (Ch. 1, SSSLA
2007). 33. When a pipeline owner is shipping its own oil, an excessive tariff charge is merely a bookkeeping transfer from the production arm of the company to the transportation arm. But the elevated transportation charge is subtracted from the market price to determine the tax and royalty base, thereby reducing the company's production tax and royalty payments to the state, as well as state and federal income taxes. The higher tariff also handicaps the independent producer, who must actually cover that charge with a cash payment. 34. For background material on the administrative and legal findings regarding TAPS tariff overcharges, see: Richard A. Fineberg, "Federal Energy Regulatory Commission (FERC) and State Supreme Court Confirm TAPS Overcharges, Hand Pipeline Owners Their Sixth Successive Defeat Since 2002," July 1, 2008 (on this web site). 35. See: Palin-Parnell Administration, "Transportation Deductions," Nov. 2, 2007, slide #8 (accessed Sept. 25, 2008 at http://www.gov.state.ak.us/aces/pdf/11-02-07%20Transportation%20Issues.pdf). 36. I participated in the initial meeting on regulations in January 2008 but was not involved in subsequent drafting meetings. Before my contract expired June 1, 2008, I expressed written objections to the draft work product in two subsequent memoranda. 37. Robin O. Brena, "Comments of Anadarko Petroleum Corporation," In the Matter of Draft Transportation Regulations for Title 15-Revenue, of the Alaska Administrative Code, and Chapter 55-Oil and Gas Properties Production Tax," June 11, 2008. 38. On September 19, 2008, the department announced its intent to hold a hearing on a batch of production tax regulations on October 9, 2008. However, revised transportation cost regulations are not included in that package and as of September 25, 2008, new implementing regulations for AS 43.55.150 have yet to be posted. I have been told that the department plans to hold another workshop on transportation cost regulations later in October. 39. For discussion of the importance to gas pipeline analysis of model data that are comprehensive and transparent, see Unaddressed Questions at pp. 7-10, 24 and 27. 40. I leave it to others to ascertain and evaluate what Governor Palin was (or was not) doing on other fronts during her first 20 tumultuous months in office; the purpose of this analysis is to describe and document, from a policy perspective, what I have observed regarding Governor Palin's conduct of oil and gas issues with which I am conversant. However, it bears mentioning that a press review of state documents indicates that during her first 20 months in office Governor Palin was absent from her main office on the third floor of the state capitol in Juneau (one floor above the legislative chambers), but instead worked much of the time from the Anchorage office of the governor (James V. Grimaldi and Karl Vick, "Palin Billed State for Nights Spent at Home: Taxpayers Also Funded Family's Travel," Washington Post, September 9, 2008, p. A01). 41. [N]early 20% of the U.S. domestic energy supply" - see Footnote 1 above; "20% of this nation's oil and gas" - Wyatt Andrews, "Reality Check" (CBS Evening News with Katie Couric), Sept. 15, 2008 (similar statements have reportedly been aired on NBC and MSNBC).
42. According to the U.S. Energy Information Administration, Alaska produces approximately
3.5% of the U.S. domestic energy production. EIA also estimates that Alaska possesses
approximately 4.9% of the nation's natural gas reserves and 13.2% of the nation's
oil reserves. (U.S. Energy Information Agency, "State Energy Profiles: Alaska,"
accessed Sept. 25, 2008 at http://tonto.eia.doe.gov/state/state_energy_profiles.cfm?sid=AK;
and "World Proved (1) Reserves of Oil and Natural Gas,
Most Recent Estimates," August 27, 2008, accessed Sept. 25, 2008 at http://www.eia.doe.gov/emeu/international/reserves.html.) * Minor revisions posted Oct. 1 and Oct. 3, 2008. |
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