Committee and the Transportation Task Force are but two of them. Among private consultants retained were the Brookings Institute, Stanford Research Institute and Arthur D. Little. Federal research and planning agencies, particularly the Federal Field Committee for Development Planning in Alaska, have carried out investigative studies over a wide spectrum of problems having to do with Arctic and sub-Arctic Alaska. The NORTH Commission has attempted to provide meaningful advisory assistance to the Governor and the Legislature. As of December 31, 1969, approximately $300,000 has been expended of which about one-half was to fund the Winter Reconnaissance and Artic Trail Survey. Consideration of the NORTH Commission has previously rested with protection of Federal and State wealth, and unnecessary erosion of State and Federal oil rovalties as the vast reserves of crude in the Arctic are harvested.

It is becoming increasingly obvious that the lion's share of the North Slope crude must move by pipeline to an ice-free port in Southcentral Alaska. For this reason we are becoming extremely concerned about the skyrocketing costs of the pipeline. As early as August 23, 1968, we indicated to the State government that preliminary construction of a railroad would result in lower costs of all other modes of transportation. (See Exhibit No. 1) Even at this late date we feel we must reaffirm our position of August 23, 1968. The presently planned pipeline is but the first of several pipelines for both crude oil and gas which must be built. While a railroad to the North Slope may well only partly benefit the presently planned pipeline, such a railroad would drastically reduce the cost of subsequent pipelines.

As the cost of the proposed pipeline creeps inexorably toward the two billion dollar mark, the question arises as to whether this State or, for that matter, the Federal government could properly afford to allow the government-owned oil to incur the throughput charges of the pipeline. While there is no question but that a pipeline is the most efficient mode of moving large volumes of oil, the extraordinary cost of building a pipeline through a country with the characteristics of the Arctic with no real surface transportation will make throughput charges extraordinarily high. (See Exhibit No. 2, Economic Analysis.)

The North Commission recommends the reading of "A Survey of Soviet Pipeline Construction Techniques and Related Activities in Western Siberia,' translated and prepared under the direction of the Williams Brothers Company, National Bank of Tulsa Building, Tulsa, Oklahoma, 74103.

With approximately half of the territory of the Soviet Union underlain by Permafrost, this study emphasizes the problems encountered in Construction of Gas pipelines in permafrost terrain.

At the same time an austere railroad, capable of handling much lower tonnages, could be built at a fraction of the cost of a pipeline and, because of the much lower capitalization cost, could haul small quantities of crude oil to tidewater at a rate lower than the vastly more expensive pipeline. In short, the railroad would not be a competititive threat to the pipeline for the movement of the huge quantities of crude which will ultimately come off the North Slope but would provide less erosion of the State royalty revenues by providing less costly transportation for the much smaller quantities of oil the State would ship if royalties were taken "in kind." (See Exhibition No. 3 showing cost of moving oil by rail in quantities up to 300,000 barrels a day.) It can readily be computed from the two exhibits that, when the pipeline is operating at an estimated design capacity of approximately 2.5 million barrels per day, the throughput tariff would be in the neighborhood of $1.07 per barrel.* With the North Slope producing at 2.5 million barrels per day, the State royalty "in kind" produces (a volume of about 300,000 barrels per day which could be handled to tidewater by an austere railroad at a cost of about 73 cents per barrel and produce sufficient revenue to retire the cost of building the railroad over a 30-year period funded with 6% tax-free funds. The inevitable dry cargo needed to develop the oil field would provide added revenue. Such funds could be secured by issuing bonds with the State guaranteeing the movement of State royalty "in kind" over the railroad. At the same time the wellhead value of the State-owned crude would increase by the difference of transportation costs and enhance the State income over the same 30-year period by the following formula: 34¢ x 300,000 barrels per day x 375 days x 30 years, or $1,116,900,000.00.

As a matter of fact, this formula is far too conservative and biased in favor of the pipeline throughput charge because it assumes that the pipeline will begin *Tariff ($/barrel) for Case "C", based on a two billion dollar pipeline. Tariffs for Case "A" & "B" would be $0.65 and $0.86, respectively, at the same throughput level. Break-even costs ($/barrel) for Cases "A", "B" & "C" under the same conditions are $0.42, $0.52, and $0.62 respectively.

operation with the design maximum throughput, whereas it will take years to develop the North Slope fields to production levels of 2.5 million barrels per day. Lack of economical, dependable, all-year surface transportation will only delay still further the day that the proposed pipeline will reach its most efficient operating level.

When one considers that the outer continental shelf of the North Slope is unique in comparison with all of the other states combined, the same mathematics should prompt the Federal government to regard The Alaska Railroad as a tool to produce wealth for the Federal government and the State of Alaska rather than an entity to be sold at a fraction of its true worth if the present proposed legislation prevails. Additionally, the NORTH Commission regards recent news releases and talks regarding the use of the MacKenzie River Valley route with considerable concern. Even if the problems of crossing the Arctic wildlife range were resolved, the distance to Edmonton from Prudhoe is about twice the distance from Prudhoe to Valdez. In addition, the fact that the pipeline would intersect an oil-producing district in Alberta with common carriage to market could well create a precedent of a Canadian-posted price setting a wellhead price in Alaska.

Up to this point in time, North Slope crude and the efforts to bring it to an energy-hungry market have received prime attention, and not without just cause. However, of equal or, perhaps, even greater importance to Alaska are its natural gas reserves. A Staff Report of the Federal Power Commission issued last September states that the Prudhoe Bay field by itself could contain five to ten trillion cubic feet of dissolved gas in addition to large undetermined amounts of associated and nonassociated gas reserves.

To go one step further, the Potential Gas Supply Committee sponsored by the Gas Industry Committee in conjunction with the Colorado School of Mines reported in September of 1969 that there is a speculative 394 trillion cubic feet of ultimately discoverable gas reserves in Alaska.

Alaskan natural gas will have increasing demand on the "world" and "lower 48 domestic" markets. (The attached AGA charts place the United States supply/ demand picture in proper focus. Exhibits 6A, B, C and D.) However, as important as the above markets are, we should not lose sight of the social and economic benefits its rational development and utilization can produce within the state itself. Natural gas can be the building block around which a petrochemical industry can develop with all the benefits accruing to the people of Alaska. Natural gas can be liquefied as "LNG" for transport by rail, truck, or barge to remote villages and towns to bring "total energy" benefits of Alaska's resources within reach of all its citizens. In addition, LNG can help protect Alaska's environment by providing a pollution-free motor fuel. These internal uses, coupled with the sale of Alaskan natural gas outside its borders, are the goal to which the NORTH Commission wishes to direct special attention.

The route to the North Slope will provide an already-built transport route to Alatna, the natural point where a surface transport route should swing westward toward Kobuk, skirting the mineral-rich South Slope of the Brooks Range. To successfully harvest the ores of the grades presently being discovered in that area, transportation costs of less than 3e per ton mile must be provided, a freight rate level that virtually dictates a railraod. As stated by Secretary Volpe in his address before the NORTH Commission on Monday, April 28, 1969: “There are many things a railroad can do better than any other kind of transportation, and this is especially obvious when you consider the problems of the area to the north and west of our present terminus, as your Commission has been diligently doing for two years now. It should be clear from recent mineral discoveries that this part of your State, the largest section of our country without surface transportation, will not forever remain outside the economic mainstream".

However, to achieve these goals requires a rational systems approach to Alaska's basic transportation needs as long advocated by the NORTH Commission. In addition, Alaska's natural gas development must be "Alaskan oriented", unencumbered by external transportation or marketing restrictions.

The presently announced proposed legislation to authorize sale of The Alaska Railroad has caused the Commission concern. At present about 98 percent of Alaska is owned by either the Federal or State government. Even after Alaska selections are completed, as much as 80 percent of Alaska will still be Federallyowned. With such ownership go certain responsibilities. We do not think the State of Alaska at the present time is ready to stand the impact of the sale to private industry. While The Alaska Railroad is self-sustaining, it does not pay interest on capitalization. The present proprietary interest of the United States Government in The Alaska Railroad is about 128 million dollars, excluding real

estate. Funding costs of private capital on an investment of that size would result in increased cost of operation of 8 to 10 million dollars per year, which must be obtained from freight revenues borne not only by the private sector but by Federal and State governments. The proposed legislation grants a preferential right of purchase by the State of Alaska at a price of "80 percentum of the value of the Railroad". We feel this is unfair to Alaska. In view of the legislative intent as expressed in the Omnibus Act (Exhibit No. 4), the NORTH Commission regards the proposal in the proposed legislation as untimely. Because of the developmental nature of The Alaska Railroad, any disposition of the railroad should have occurred before the statute ran out July 1, 1964, which would have given the State of Alaska a clearcut case for acquisition of The Alaska Railroad without any exchange of funds. Certainly no difficulty was encountered in transferring other Federal properties to the State of Alaska before the statutory authority expired.

The proposed bill (H.R. 16651) presents certain restrictions which would inhibit the sale of the Railroad. While we do not know at this time whether the bill, as presented, will in fact represent final condition of sale, we must assume for our present purposes that the restraints contained therein may well be the conditions. The House bill as proposed severely limits the current earnings base as well as the future growth potential of The Alaska Railroad by removing certain revenue, tax, property and right-of-way provisions previously provided in the Alaska Railroad Enabling Act. The pertinent features are these: Under Section IV, the stipulation that a purchaser will operate the facility as a common carrier by railroad in both intrastate commerce and interstate and foreign commerce. These are the authorities that would be expected. The comments about fair and equitable arrangements for the protection of employees are also as expected. Under Section V, however, there is a very explicit exclusion concerning the properties of the present Alaska Railroad. We note that the purchaser will receive all lands, buildings, facilities, equipment and other assets necessary for the operation of the Railroad, but that the purchaser shall not receive the other property administered by the Bureau of The Alaska Railroad. These properties include all other lands, buildings, facilities, equipment, and other assets presently owned by The Alaska Railroad, but which are not used in connection with the operation of the said Railroad.

What is being presented, then, is the sale of the operating properties of The Alaska Railroad, stripped of any assets outside the straight operation of the Railroad and also stripped of any rights that had accrued to The Alaska Railroad from the Act of 1914. This, then, is the framework in which the analysis of The Alaska Railroad must first be viewed to determine an answer to the question as to whether or not a purchase under the provisions of H.R. 16651 would be attractive to any commercial operator.

Since the Alaska Railroad Enabling Act (Exhibit No. 5) spelled out with exceptional clarity that the Federal government recognized, if the vast area of Alaska was to be developed, it would have to be done by other than a private operator, it seems inappropriate that, in the few short years the statute of the Omnibus Act has run, the policy should so change that the State would be required to purchase the Federal entity conceived to develop the area and to do this in face of the fact that the prudent choosing of the land areas of Alaska will leave approximately 80 percent under Federal ownership.

One of the primary purposes the Congress of the United States had in passing the Act of March 12, 1914, popularly known as The Alaska Railroad Act, was to best aid in the development of the agricultural and mineral or other resources of Alaska and the settlement of public lands therein. Another purpose was to provide a transportation system for defense purposes and for mail and other governmental

uses.

By the Alaska Statehood Act, the duty of development in Alaska, generally, has been turned over to the State and the Federal government has curtailed such activity. However, no action was taken to transfer to the State one of the very means it must have to carry out the trust of development.

Public Law 86-70, The Alaska Omnibus Act, permitted the Federal government, until July 1, 1964, to convery to the State of Alaska, without reimbursement, any property or interest in property belonging to an activity which the Federal government had either terminated or curtailed in Alaska.

So Congress provided the legislation for the means and machinery for the State to accomplish this essential task contemplated by The Alaska Railroad Act. But rigor mortis on this aspect had set in; probably because the task ahead of becoming a state was so overwhelming to the new, inexperienced fledgling of a state that no

one thought of the extreme importance of such a transfer at the time; and probably because no one dreamed at that time that the Federal government would be disposing of the Railroad in such a short period of time thereafter. However, there is no question but that with a few negotiations the State of Alaska could have, and should have, acquired The Alaska Railroad in 1964 with no outlay of money.

It would seem wrong now for the Federal government in carrying out it announced plan to dispose of The Alaska Railroad to deprive the State of Alaska of this necessary means of development of its resources by selling the Railroad to private interests which, in turn, might use this valuable investment of the people of the United States in a manner not at all intended, in addition to greatly increasing transportation costs to both the State and the Federal government. It is not unique for a state to set up an operating authority devoid of politics and authorized to issue bonds, the interest on which is tax-free. A sample bill of such a State corporation is attached. (See Exhibit No. 7.) However, this is merely a suggestion. There are many other forms of operating authority, such as BART in San Francisco. As a matter of fact, the legislation which authorized the NORTH Commission authorizes the NORTH Commission as a transportation operating authority. (Sec. 44.19.712(5) Exhibit A in preamble) According to the Council of State Governments, the distinguishing characteristics of authorities are two: "First is the power to issue revenue bonds payable solely from charges against consumer use of the agency's facilities, and the lack of dependence on taxes or power to levy them. . . The second criterion is that the reliance on revenue funds, not taxes, is a basic pattern of the agency in question, not a characteristic only of certain of its secondary activities." (Source: Council of State Governments, "Public Authorities in the States", Chicago, 1953, p. 5.)

Since there appears to have been a lack of foresight on the part of both State and Federal officials in the early days of the State, it would also seem that the Federal government, in disposing of The Alaska Railroad, is morally obligated to make this vital means of development available to the State on exactly the same basis as it would have done prior to July 1, 1964 so that the State may use the money which would otherwise be required for purchase of the Railroad for development of the Railroad northward.

Such a decision would operate not only to the benefit of the State of Alaska by developing Alaska's resources, but would operate to the distinct advantage ofthe United States Government since, in addition to the defense need aspect, roughly 80 percent of the benefit would accrue to the Federal government since roughly 80 percent of the land through which the Railroad would run in a northward extension still remains in the hands of the Federal government.

We contemplate that permitting the State of Alaska to thus have the means of successfully carrying out its trust to the people of Alaska and to the United States, by aiding in the development of Alaska and strengthening the defense of the United States, will mean that a vast number of other benefits, financial and tangible as well as intangible, will flow to the people of the United States. Alaska, on the other hand, will be assuming both a responsibility and a burden which, in the last analysis, belongs to all the people of the United States.

It is a matter of concern to the NORTH Commission that a popular opinion exists in the minds of the public that Alaska is receiving preferential treatment in the division of oil revenues by the Federal and the State governments. In all states on public domain that is Federally-owned, the Federal government retains 10 percent of the lease royalties. This same ratio applies in Alaska. However, in other states the remaining 90 percent is divided between direct transfer to the state in question and towards funding in reclamation projects. Since Alaska is denied the benefits of reclamation projects, the entire 90 percent accrues to the State of Alaska direct. It is difficult to present an argument against this formula that is unassailable.

It is the opinion of the NORTH Commission that no interested railroad could make any serious move to individually purchase The Alaska Railroad without the immediate entry of several other railroads demanding an opportunity for equal participation. Such joint participation or joint operation would virtually guarantee the lack of growth or development of The Alaska Railroad since none of the participating partners would agree to any expansion that would favor any individual railroad. In other words, Alaskan development would be subservient to the properties and customers of any consortium of railroads which would buy a portion of the Railroad.

We have endeavored to keep this so-called "white paper" short, and it is difficult because of the complexity of the problem. We are sympathetic with the burden you are bearing under the present circumstances. If we are conflicting with any of

Boards or Commissions outlined in the preamble, we would like to suggest that the NORTH Commission be dissolved to avoid conflict.

Conclusions: The following are the recommendations of the NORTH Com

mission:

1. That the Governor advise the Federal government that, inasmuch as some 80% of Alaska will still be Federally owned after Alaska land selections are completed, the State of Alaska firmly believes that the principal responsibility for the development of Alaskan resources continues to rest with the Federal government. Therefore, the Federal government not only should retain The Alaska Railroad but also should extend The Alaska Railroad north across the Brooks Range to the oil and gas fields and west to the hard mineral areas on the south side of the Brooks Range.

2. That the Governor's office approach the Federal government with the argument that the sale of The Alaska Railroad to a private operator would not be in the best interest of the State or Federal governments for reasons touched on earlier. It will not be difficult to prepare an argument showing what the increased freight costs will do to the cost of operating State and Federal governments and to the development of the State.

3. Should the arguments as outlined in 1 and 2 above fail to prevail, the Office of the Governor should pursue with diligence the argument earlier stated that the Railroad in its present form, together with all rights, properties and perogatives, be transferred without exchange of funds to the State of Alaska because of the Congressional intent in the Omnibus Act. If the Governor is successful in this action, the authorities presently contained in The Alaska Railroad Enabling Act and presently administered by the Secretary of Transportation should be transferred to the Office of the Governor of Alaska.

4. In addition to the above recommendations which are directly related to the Alaska Railroad, the NORTH Commission further recommends that a transportation authority be established as soon as possible. This authority should have broad powers enabling it to develop and operate all modes of transportation and related facilities.

EPILOGUE

It is hoped that this presentation helps crystallize the urgent need for immediate and positive action to enable the rational development and intelligent harvesting of Northern Alaska's natural resources. The continuing revenues from a harvest so garnered are essential to the compassionate development and improvement of the residents, native and non-native, of that vast area. Only by the continuous and regular injection of tremendous amounts of capital over many years can the quality of life in Northern Alaska be sufficiently enhanced. Social programs anywhere are costly. In Alaska they will be almost astronomically so. By enabling the peoples of the remote areas to become healthy, educated and skilled participants in the lifestream of the "seventies", the results will benefit not only Alaska and its residents, but all the taxpayers of the United States.

A timetable to achieve these results is sorely needed and its exact scheduling will require deep and intelligent study. The starting point, however, should be readily apparent-early completion of a reliable, economical, all-weather, yearround surface transportation mode from tidewater to Northern and Northwestern Alaska. Once that problem is solved, all other problems become more manageable. Alaska must prepare itself to be an aggressive competitor in world markets. The blueprint to achieve this is drawn. Immediate action is mandatory.

Exhibit A

THE NORTH COMMISSION

The NORTH Commission was created by the Alaska Legislature in 1967. The act creating it is as follows:

LAWS OF ALASKA, 1967

(Source SB 108 am H. Chapter No. 90)

AN ACT Relating to the creation of the commission for northern operations of rail transportation and highways; defining the commission's powers and duties; and providing for an effective date

Be it enacted by the Legislature of the State of Alaska:

Section 1. AS 44.19 is amended by adding new sections to read: