Jul. 10--Roger Marks, a recently retired senior economist in the state Department of Revenue, has raised significant questions about the validity of the Palin administration's analysis of the Alaska Gasline Inducement Act, or AGIA, a state incentive law intended to spur development of a natural gas pipeline.

The pipeline and AGIA have been in the news lately after the announcement that pipeline company TransCanada Corp. and North Slope producer ExxonMobil Corp. partnered to conduct preliminary engineering and studies on a gas pipeline.

TransCanada, based in Calgary, Alberta, is the holder of a license issued under AGIA, which entitles it to a $500 million state subsidy.

ExxonMobil is not yet formally a part of the venture and is not obligated under the terms of AGIA. The Houston-based company has said it still opposes the stipulations in AGIA, but hopes to work with the state through its partnership with TransCanada to modify those stipulations while still achieving the state's goals.

ExxonMobil officials won't be working with Gov. Sarah Palin, since she resigned and is due to leave office July 26.

It's relatively unclear what direction incoming-Gov. Sean Parnell will take. Parnell said he plans to keep the current commissioners.

In a technical paper to be published in the September issue of the Journal of Economic Issues a shorter version has already printed in the Oil and Gas Financial Journal Marks lays out his opinion on problems created by the state law in achieving the goal of gas pipeline construction.

Many of the issues already have been discussed in legislative hearings. But Marks, who played a key role in the previous Murkowski administration's effort to negotiate a pipeline contract, raises new questions on several points, including the wisdom of granting an exclusive license to TransCanada with the company's intent to channel Alaska gas through its Alberta gas distribution hub and pipelines.

The state would be better off, he argues, leaving arrangements as to how Alaska gas can be transported and sold to private commercial firms to work out among themselves.

State Revenue Commissioner Pat Galvin and Deputy Natural Resources Commissioner Marty Rutherford, architects of the state's AGIA law, disagreed with Marks on several key points.

"The AGIA findings and determination addressed the issues raised by Mr. Marks and has never been presented with any substantive challenge" said Rutherford.

Marks: State's analysis is flawed

As an economist, Marks is critical of the state's economic analysis on the profitability of a North Slope gas pipeline because it underestimates risk and overstates profits, he says.

He argues this has led the state to the conclusion that it can impose a set of conditions on private commercial firms -- gas-producing companies -- that must bear the risks through the AGIA requirements.

"A flawed financial analysis of the project overstated the economic vitality of the project, and therefore understated the severity of the commercial issues," created by the AGIA requirements, Marks said in an interview with the Alaska Journal.

Marks laid out five basic problems in AGIA:

1. A basic misalignment of interests, including a sacrifice of the state's own interest in revenues.

This is raised because of the state's goal for a pipeline to be built and owned by a pipeline company rather than producers. If there are construction cost overruns, the pipeline company makes more profit because its returns are based on the regulated tariff, which includes cost recovery.

"Gas shippers lose money on cost overruns. The pipeline makes money through the return on equity investment. That is why the producers want to build it," so that costs can be controlled, Marks said.

Rutherford said the concern over a pipeline company earning more if there were higher costs would be valid if there was additional equity invested to pay the higher cost, because the pipeline's return is paid in the equity.

TransCanada has proposed that federal loan guarantees be used to finance overruns, so that the equity in the project would be unchanged, she said. However, this has not yet been agreed to by the federal government.

Marks said the producers' interests, as well as the state's, are to rigidly control pipeline construction costs to keep the tariff as low as possible. By granting the AGIA license to a pipeline company, the state has encouraged an arrangement where cost management is more difficult.

TransCanada, in its proposal to the state, agreed to reduce its return if cost overruns occur, but Marks questions the value of this.