Alaska is "resource rich" but too "cash poor" to buy in as part owner of a proposed pipeline to transport North Slope natural gas to the Lower 48, said the head of the state's Department of Revenue.
Even if the state could afford it, the project "could put the state at financial risk if there are construction overruns, delays in completion of the project, unbudgeted calls for additional capital, or volatile natural gas market conditions," said Wilson L. Condon, Alaska's DOR commissioner, in a recent report to Gov. Tony Knowles and other state officials.
"Unlike large corporations, the state does not maintain reserves for such risks, and it would be a difficult policy call to tell the public that key government services might be cut back to make money available for gas line expenses," Condon noted.
State legislation passed 6 months ago called for the Alaska DOR to study the merits of state ownership or financing of the proposed gas pipeline project. In submitting that report late last month, Condon pointed out, "There is no guarantee that year-in and year-out, over the entire life of the project, the market will be such that profits will flow to everyone involved in the gas line."
Moreover, he said, "It appears state financial participation would do nothing to move along the project, unless the state could find a way under federal law to issue tax-exempt debt to own and/or finance the project. The lower cost of tax-exempt debt could help tip the project toward economic feasibility, and that could be a proper role for the state to take in assisting in the development of its natural resources."
None of the industry representatives interviewed by state officials for the report "saw much, if any, benefit" in having the state as a partner in the gas pipeline.
"Many listed such state laws as open meetings, public records and procurement codes-not to mention the entire process of public policy decisions-as key reasons not to take on the state as a partner," Condon reported. "Speed and decisiveness are essential to running a multibillion-dollar construction job and company, and, unfortunately, it's highly probable that state involvement would detract, not add, to the operation."
In a cover letter to his report, Condon said, "Alaska is a little short on cash these days-unless you go into the Permanent Fund, which presents several legal and political constraints."
The permanent fund, established to ensure the best benefit for Alaskan citizens from development of its oil resources, contains roughly $19 billion that can be invested but not spent without a majority vote by state citizens. Dividends from that fund each year are paid directly to qualifying Alaskan residents.
"The state and its municipalities are looking at how to pay for several billion dollars of school construction and repairs, and deferred maintenance to public facilities," Condon pointed out in his letter. "The state, which has not issued any general obligation bonds in nearly 20 years, will go to market in the next year if legislators agree with the governor's proposal for school bonds."
That, he said, "most likely will consume all of the state's available debt capacity, unless Permanent Fund earnings are diverted from the dividend program to pay debt service."
In addition, Condon said, "Any over-ambitious reliance on debt to finance a state investment in the gas line could jeopardize Alaska's credit rating, which would have a domino effect as it raises the cost of borrowing for the state and municipalities."
In summary, he said, "We believe the state could best control the development of its resources by regulating their extraction and use and could best profit from its resources by levying reasonable taxes on the companies that profit from their development."
The 28-member Alaska Highway Natural Gas Policy Council also advised that the state should not directly invest in a gas pipeline project "unless there is clear evidence of economic benefits to Alaska that cannot be achieved through other regulatory mechanisms," in its report issued Nov. 30 after a year of hearings and discussions (OGJ Online, Dec 3, 2001).
Investing in the pipeline was one of the options Gov. Knowles had placed on the table for discussion.
