Wednesday, July 19, 2006

Does The Proposed Alaska Natural Gas Pipeline Contract Violate Alaska's Constitution?

The constitutionality of the proposed Alaska natural gas pipeline contract is an issue discussed in a Compass column in the Anchorage Daily News on July 19th. Unlike many who've opined about this issue, these two critics, Jack Coghill and Vic Fischer, are particularly well-qualified to answer this question. Both were elected to serve as delegates to Alaska's Constitutional Convention from 1955-56. Both subsequently served in the Territorial House of Representatives and, after statehood, in the State Senate. Coghill further served the state for four years as Lieutenant Governor under Governor Walter Hickel from 1990-94. Click here for the original column in full.

Synopsis: First, they remind us that Alaska became a state in order to gain greater control over its resources after decades of outside exploitation. They assert that no delegate at the Constitutional Convention envisioned reversing that process and subjecting our state and its resources to corporate economic colonialism. They believe the governor's proposals are one-sided; a fabulous deal for the producers, but a bad deal for Alaskans.

They cite four reasons. First, the producers get excessive control over major Alaska oil and gas resources, they obtain tremendous fiscal benefits, and they provide little in return. Second, the deal violates Alaska's Constitution and provides only limited benefits to Alaska's people. Third, it does not guarantee there will be a gas pipeline. And finally, the deal may not deliver the billions of dollars that are being dangled before us, while imposing great risk upon Alaska notwithstanding.

Alaska's Constitution clearly states: "The power of taxation shall never be surrendered." But giving up the power to tax oil and gas is exactly what Exxon, BP and Conoco Phillips demand, and what Murkowski supports in the proposed gas line contract. Here are four reasons why their contract approach fails the taxation provisions of the constitution:

1. Giving up the right to tax oil and gas is clearly a "surrender," and that is patently unconstitutional.

2. The constitution authorizes temporary tax exemptions. The governor's proposals are not "temporary."

3. Only tax exemptions are authorized, not whole new tax regimes.

4. A tax exemption can only be "granted by general law." However, the governor's proposed Stranded Gas Act amendments would result in special legislation, which is prohibited by the constitution.

But Attorney General David Marquez said some parts allow for long-term tax freezes, if lawmakers so choose. He pointed to a section that defines a list of allowable tax exemptions that includes the phrase, "other exemptions of like or different kind may be granted by general law." However, John Havelock, who was attorney general under Gov. William Egan, said a fatal flaw in Marquez's argument is that the tax freeze would be part of a contract, not a general law. Click here for an account of KTUU's roundtable discussion on the tax freeze.

Alaska's Constitution also directs the Legislature to provide for the utilization and development of the state's resources -- including oil and gas -- for the "maximum benefit" of Alaska's people. Does the governor's deal meet the "maximum benefit" test? No. Here are six of the more egregious aspects of the proposed contract:

1. There is no commitment to build a gas line. There are no timelines, no benchmarks, no enforcement provisions, and no realistic penalties for nonperformance.

2. There is no commitment to provide gas for Southcentral and other parts of Alaska. While four take-off points are provided for, the contract states that "gas does not have to be sold in Alaska."

3. The state agrees to indemnify producers for a variety of obligations and losses not of the state's making and agrees to subvert the voter initiative process.

4. The contract repeatedly surrenders state management, regulatory authority, court jurisdiction and other aspects of state sovereignty to the producers.

5. The state gives up too much jurisdiction over existing and future North Slope oil and gas fields, including Point Thomson.

6. Beyond all that, the state accepts oil and gas production tax provisions that, with credits and deductions, will provide a heyday for oil company accountants and attorneys, ensuring minimal state revenues no matter how high oil prices may be or how much the companies earn.

Coghill (pictured at left, courtesy of and Fischer do not believe the governor's proposals will result in a gas line in the near future. Consequently, they advise legislators to reject the governor's petroleum production tax proposal. They further suggest that lawmakers should adopt a gross production tax for oil, separate from gas taxes during this special session. They should also reject the gas line contract and Stranded Gas Act amendments. And finally, they should proceed toward a contract that assuredly builds a gas pipeline, deals with gas only, and preserves Alaska's sovereignty.
is is not a matter of politics. It's what's right for Alaska.

Analysis: Many state lawmakers and other politicians are beginning to pick up on this. Democratic legislators like Les Gara were the first to lead the shift from a petroleum profits tax to a gross production tax. But now, even Republicans like John Harris and Tom Wagoner are beginning to discuss such a shift. The concern is that the producers could manipulate profts to escape increased taxes from tripping any "escalator" clauses.

Two of the leading Republican gubernatorial candidates, Sarah Palin and John Binkley, have decried the failure of the proposed gas pipeline contract to provide for natural gas needs in South Central Alaska. Democratic gubernatorial candidate Eric Croft has expressed similar concerns.

The proposal by Jack Coghill and Vic Fischer to legislate oil taxation and gas taxation separately is a new element in this debate. If the State Legislature finds it necessary to split the two in order to move forward, then they should do so.

The producers have legitimate concerns. Their need for a certain amount of baseline financial certainty through tax stability is valid, as the project entails significant risk. However, the producers must understand that 30 years of fixed-rate taxation for oil and 45 years for gas is simply too long and won't fly with the people. This period must be shortened.

In addition, a contract that does not provide for Alaska energy needs is unacceptable. The contract must provide for a spur into South Central Alaska; this should be non-negotiable. Whether the spur terminates at Valdez or Kenai is negotiable; Kenai is preferable because it will spread the wealth around.

There must be a loose timeline constructed, with penalties for wilful failure to meet the objectives. The timeline can be expressed in years rather than specific days or months. But there must be a timeline of sorts to promote some degree of public accountability on the part of the producers. Faith-based religion is O.K.; faith-based natural gas is not O.K.

Since both Coghill and Fischer were "present at the creation", we should give their informed counsel serious consideration.

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