After months of meetings, a municipal board formed to give Gov. Sean Parnell input on the proposed Alaska LNG Project has been inundated with information on the project and is working toward a recommendation on the controversial move from the current property tax model to a payment in lieu of taxes, or PILT model.
At least one member of the board, Kenai Peninsula Borough Mayor Mike Navarre, said he has become more comfortable with the idea of a PILT as the meetings progress.
The Alaska LNG Project includes an 800-mile pipeline to move liquefied natural gas from the North Slope to Southcentral, an LNG plant at Nikiski and a major gas processing plant on the North Slope.
When considering changes to the existing tax structure, Navarre said he had to take a statewide perspective rather than one that only considered the needs of the Kenai Peninsula Borough.
“For (the Kenai Peninsula Borough) it would probably be better if we just did it under the existing tax structure as we have the (majority of the taxable portions of the project) sited here. We’re getting a good portion of the tax value,” he said. “But, currently under the statutes, the state doesn’t get any revenues off of LNG facilities … So, for the rest of the state, I think a PILT works better because there are impacts all over the state because of this project, and those impacts need to be compensated.”
The Municipal Advisory Gas Project Review Board was formed in March of 2014 after mayors from municipalities across the state, which stand to be affected by the pipeline, voiced concerns that the state would change the tax structure without weighing the concerns of those who would be directly affected by the change. The existing oil and gas pipeline tax structure is a major source of revenue for the state, but the structure for taxing a liquefied natural gas pipeline does not exist, and must be developed.
The 12-member board includes the mayors of the North Slope, Fairbanks North Star, Denali, Matanuska-Susitna and Kenai Peninsula boroughs, in addition to the commissioners of the Department of Revenue, the Department of Natural Resources and the Department of Commerce, Community and Economic Development.
The pipeline project proposal has generated a lot of interest in the state, with BP, ConocoPhillips, ExxonMobil and TransCanada signing on as partners. The state is also a partner in the project through its Alaska Gasline Development Corp., but the state’s role as a partner has also put it in conflict with its role as a negotiator on behalf of municipalities that will be affected by the pipeline.
“One of the things that (the municipalities) were arguing for was, wait a minute, if the state has an equity interest in this pipeline, it creates a conflict between them and the municipalities … if you’re an equity owner, you want the expenses as low as you can get them,” Navarre said. “We didn’t want them negotiating our share to the state’s side of the ledger, without at least having some involvement and I think that’s legitimate.”
In addition to concerns about the state’s role as a negotiator, Navarre said borough mayors, specifically North Slope, Valdez and Fairbanks which tax at a much higher rate than the Kenai Peninsula Borough, did not want to see a new tax structure applied to existing infrastructure and projects as it could represent a significant loss of revenue.
“The state has told us that’s not the case, they’re not going to go in that direction and that they don’t need to because the economics of oil are different,” Navarre said.
During the board’s Nov. 12 meeting, members were given a complex model of what municipal revenues could be if the project were to succeed and continue under the current tax structure.
It’s the first step in a process that should allow board members to compare potential revenues between the current structure and a proposed PILT, Navarre said.
“In terms of the project, what happens in the normal tax structure is you get, let’s say $23 billion and that’s the start. So you tax it. Then, over time, if throughput drops or through just natural depreciation of value, this income starts going down and, also, because the taxes are so heavily loaded on the front end, revenues are dropping year after year,” he said.
The PILT, depending on its structure, could allow project managers to spread that cost out of over time, resulting in consistent revenues for municipalities and the state.
“So it may make sense to try to equalize this project out,” he said. “There’s a lot of calculations that go into that in terms of time, value of money and things like that, but for a project, it makes sense because they are going to be going into 25-30 year contracts and they’re based on pricing.”
Navarre said board members had been discussing a PILT based on a throughput model, which could benefit municipalities because the LNG project’s long-term contracts would guarantee throughput.
“So, if we get a valuation based on throughput, that sort of gives you an equal amount every year, then you’re not messing around with battles on ‘OK, what’s this pipeline really worth,’” Navarre said.
Boardmembers have not yet seen a model of a PILT, Navarre said.
The board is also working to prepare its first report, due annually by Dec. 15 according to the administrative order that established the group.
Ultimately, Navarre said he hoped to see the state follow a municipal advisory board recommendation that would be beneficial to all involved.
“It really boils down to dollars and cents and how they’re allocated. The state’s going to get a share, municipalities are going to get a share and right now, my concern was not that a PILT is bad, but that a PILT that goes to the state and the state then allocates would be bad for us,” he said. “That was my biggest concern because I’ve seen fights over a big pile of money before.”
Rashah McChesney can be reached at email@example.com.