Legislature(1993 - 1994)
02/19/1993 08:00 AM RES
* first hearing in first committee of referral
= bill was previously heard/scheduled
= bill was previously heard/scheduled
HB 116: STATE SHARE OF FEDERAL GAS ROYALTIES CHAIRMAN WILLIAMS reconvened the meeting at 8:45 a.m, and announced there would be testimony by teleconference on HB 116. He explained that the bill's sponsor would make a presentation, and added that this meeting would be for initial testimony on the bill, which he did not plan to move from the committee at this meeting. Number 562 REPRESENTATIVE MARK HANLEY, PRIME SPONSOR of HB 116, described the background behind the bill. In the 1960's he said, there were fields developed in Cook Inlet that had both federal and state leases for natural gas. He explained that at that time there was no market for natural gas. He said Chugach Electric signed a long-term contract as a basis for investments for the future. They built gas-powered turbines near the fields and ran transmission lines. Over time, he explained, other markets developed and other contracts were signed for higher prices. REPRESENTATIVE HANLEY said the state came in and issued a notice to lessees in 1985, saying after that point they would no longer accept the contract price as the basis for state royalties. He continued his explanation, and said in response to the state's action, the utility felt they had signed an "arm's length deal." He said after 25 years, the utility got a good deal on its lease. The legislature in 1985 introduced legislation that said on state leases to utilities, the "arm's length" contract price would be accepted by the state for royalty valuations. However, that law did not address federal leases, from which the state got 90% royalties. REPRESENTATIVE HANLEY noted the Mineral Management Service had accepted the contract price of the gas as their value. The state appealed that decision, Representative Hanley said, claiming the federal government was not collecting enough money. He noted the time frame went back to 1984 to 1987. He explained that this situation created a problem for utilities, who would have to charge current and future customers to make up for royalties owed from 1984 to 1987. He explained that HB 116 made state and federal leases the same as far as the lease price. If the federal government decided to go with something other than the contract price, this law would not affect that. This kept the state from going to the federal government and saying they should collect more, he added. REPRESENTATIVE HANLEY told the committee he worked with the Department of Natural Resources' (DNR's) Division of Oil and Gas, on HB 116. He said an amendment had been suggested, which was before the committee. The main purpose was to establish the same standards for federal leases that were established for the state in 1985. Number 670 REPRESENTATIVE PAT CARNEY asked the state's position on HB 116. REPRESENTATIVE HANLEY responded that the state had someone available to testify by teleconference. He added that he had been trying to get a fiscal note and position paper on HB 116 from the state. Number 675 KENT BOYD, DEPUTY DIRECTOR, DIVISION OF OIL AND GAS, DNR, testified by teleconference from Anchorage. He told the committee that with him was Bill Van Dyke, Petroleum Manager for the Division. Regarding a position paper and fiscal note, Mr. Boyd said they had been sent to Juneau the previous day (February 18, 1993). BILL VAN DYKE, PETROLEUM MANAGER, DIVISION OF OIL AND GAS, DNR, said the fiscal note was difficult to pin down to an exact number. Anticipated principal and interest from royalties could be $10.4 million, but he cautioned there was no way to tell if that was the amount that would be agreed upon by the parties. Number 696 CHAIRMAN WILLIAMS said the committee would continue hearing testimony from Representative Hanley, with an opportunity for committee members to ask questions. Number 701 REPRESENTATIVE CARNEY asked if the amount of anticipated income was retroactive. TAPE 93-21, SIDE B Number 000 REPRESENTATIVE HANLEY answered that the problem right now was that the federal government believed the contract price was the price on which royalties were based and, therefore, no monies were owed. He said the state was appealing that decision. On the question of whether there was any subsidy, he said he did not see it as one. Number 018 CHAIRMAN WILLIAMS announced the fiscal note to HB 116 had been received by the DNR, and would be delivered to the committee shortly. Number 050 REPRESENTATIVE GREEN said he had been employed in the past both as a seller of gas from the Beluga Field, and as a member of the board of Chugach Electric. When dealing with a commodity, he said contracts were negotiated at arms length, and adhered to. He said for the state to come in at a subsequent date, asking to negate a contract that was established as a way to help the fledgling state get revenue, would impact current utility rate payers and was absolutely unfair. He described a process in utilities where at the end of a twenty year period, there was a credit to rate payers if there had been a profit. He also pointed out any money the utility ended up owing to the state would come out of the pocket of current rate payers, so it would in fact penalize a few Alaskans for the benefit of the state. Number 114 REPRESENTATIVE BUNDE raised the hypothetical question of whether the state would be acting to return $10.4 million if it felt royalties had been overpaid over the years since the original contract. REPRESENTATIVE BUNDE made a MOTION to ADOPT the DNR's amendment. Number 154 CHAIRMAN WILLIAMS asked if there was any opposition to adopting the amendment. Hearing none, the MOTION CARRIED and the amendment was adopted. Number 157 VICE CHAIR HUDSON commented that the federal government was not asking for any back-payment on the lease royalties. Number 162 REPRESENTATIVE HANLEY responded that the way HB 116 was written, the federal government would have to determine that back-payments were due, and would have to ask for it, then the state would be entitled to its 90% share. Number 176 REPRESENTATIVE HUDSON echoed the comments of Representative Green, and noted the position paper showed the administration recognized that the courts might not see the wisdom of collecting back payments from people who were not utility customers during the time period in question. Regarding the position paper, he did not see the administration's position clearly stated. Specifically, he referred to a portion of the fiscal note in support of the area pricing theory on median value pricing theory, and said the amount might or might not be sustained. He questioned the ambiguity of the language. Number 204 CHAIRMAN WILLIAMS announced the administration's perspective would be presented when Kent Boyd and Bill Van Dyke testified after the questions for Representative Hanley were complete. Number 212 REPRESENTATIVE MULDER asked when the current contract would expire, and regarding the tentative $10.4 million windfall, he asked if that had been included in the state's budget for 1993. REPRESENTATIVE HANLEY responded that the money had not been budgeted, largely because the federal government had already ruled they would accept the contract price. Representative Hanley deferred the question about contract dates to Mr. John Tillinghast. Number 233 REPRESENTATIVE JAMES was concerned with the state's methods of doing business. Number 244 JOHN TILLINGHAST, an ATTORNEY representing CHUGACH ELECTRIC ASSOCIATION, said HB 116 was intended to plug a loophole in a 1986 law that was supposed to have resolved this controversy. When the DNR announced in 1985 that they would no longer accept the contract price, Chugach and the Beluga producers went to the legislature and said the state was proposing a plan that would result in taking money from individual Alaskans, and also that this was not a royalty assessment, but a tax. The utilities need financial certainty, he said, to engage in planning and to set rates. Chugach had entered into the Beluga venture on the assumption that they would be paying under the long-term price, he added. MR. TILLINGHAST added the DNR had been strong supporters of the 1986 legislation. The only place the issue came up in 1986, was in reference to the state leases. No one thought about the federal leases at that time, and about a year and a half ago, he said, the federal government audited the Beluga leases for the 1980's. Assuming the Alaska Public Utilities Commission allowed Chugach to make a retroactive assessment, he said, the consumers who use Chugach directly and also the consumers of its wholesale customers, would suffer a surcharge of approximately $50 per household. MR. TILLINGHAST said commercial customers were likely to see an average of $300 to $400 per business surcharge, although some would have more. One of the larger customers he mentioned was the State of Alaska's Department of Transportation and Public Facilities, who would have a surcharge of over $100,000. He then returned to the question about the expiration dates of contracts. He said the long- term contracts were re-negotiated in 1988, and provided for prices that graduated over the coming years. In 1993, he said prices were generally 75 cents per thousand cubic feet, rising to $1.32 to $1.65 per thousand cubic feet by 1998. The differential between the contract price and the market price would shrink as the years go by, he said, which was why the controversy centered on the retroactive period that Representative Hanley mentioned, he explained. Number 315 REPRESENTATIVE MULDER asked about the current market price for natural gas. MR. TILLINGHAST answered that Representative Mulder would have to ask the state that question, because the state's methodology for computing the "market price" was by finding the price at or below which a majority of Cook Inlet gas was sold. The problem with the methodology, he explained, was that Cook Inlet gas was sold under many different circumstances. Chugach's methodology, he added, was that the market price was the price a willing buyer would pay to a willing seller under the particular circumstances of their positions. Number 335 REPRESENTATIVE GREEN referred to contracts between two utilities, and the difference in the contracts seemed to be in the aggressiveness of the negotiator. He said that could sometimes be misleading in looking at the market as a whole. MR. TILLINGHAST asked Representative Green if he had been referring to ENSTAR. REPRESENTATIVE GREEN confirmed that he had. MR. TILLINGHAST said when Chugach entered into its long-term contract in the 1960's, there was no alternative market. The state at that time had the choice of getting royalties on the Chugach price or getting no royalties at all. Number 362 MR. BOYD of the Division of Oil and Gas again testified by teleconference regarding the state's position on HB 116. He said the DNR wanted to carry out the wishes of the legislature. They have pursued the course of collecting what they believed were royalties due to the state, he added. MR. VAN DYKE told the committee that with respect to the state leases, HB 116 did not follow the same approach that was taken in 1986. As written today, he said the federal leases would be treated differently than some of the state leases were treated from 1985 forward. He said the state collected about 75 cents per thousand cubic feet from 1985 forward. The contract price during that period was from 21 cents. Even though the statutes were amended in 1986, the statutes were not exercised by Chugach until 1989, when their contract was renegotiated. The state, he said, did not accept the 21 cent contract value during that time period. The contract price might not always represent value, he explained, and mentioned the collection of royalties for oil was based on valuation. Number 427 VICE CHAIR HUDSON left the meeting at 9:22 a.m. Number 430 REPRESENTATIVE GREEN took exception to the analogy to oil costs and negotiation of value. He said with the oil royalties, the cost of transportation and cleaning was considered, and that was not at issue with the gas situation. He said it was not customary with gas contracts, to base a contract on the actual sales price per mcf (thousand cubic feet) at the time of sale. Federal leases have always maintained the sale price was based on contract price, he said, not on a renegotiated price. He asked what delta was used to determine the differential when the state got the utility to change the price for the 1985/86 gas, and as a basis for the $10.4 million figure. MR. BOYD explained the methodology used, which was an average price calculated each month, and said that averaged about $1.50 during the months that served as a basis for the calculation. Number 463 REPRESENTATIVE GREEN commended the zealousness of the DNR in trying to generate some revenue for the state, but suggested some of that be curtailed when the money came out of one pocket and went into another. Number 474 REPRESENTATIVE HANLEY clarified HB 116 did not set a new precedent. The higher price referred to earlier was a negotiated settlement, he said, and Chugach settled the lawsuit for 75 cents a thousand cubic feet because they did not know if the law was going to pass. He commented that the legislature made a policy call back in 1986, that the contract price, as long as it was an arm's length deal, was the value that would be used for that particular type of resource sales to the utilities. The federal government has generally been using the contract price, and might not be receiving the same price the state got on similar leases. He concluded by saying he hoped HB 116 did not go retrospective. Number 520 CHAIRMAN WILLIAMS asked if there more questions or discussions on the issue. REPRESENTATIVE GREEN commented that if the fair price to be paid for the gas was the average price, then he presumed there would soon be a recommendation by the DNR to reimburse ENSTAR because they have paid considerably higher than average. Number 529 RAGA ELIM, SPECIAL ASSISTANT, DNR, understood the federal government at one time, in 1985, did not accept the contract price in a sale on the Kenai. He commented that in that case, another way to determine fair value had been sought. It was the DNR's position that the situation in the Beluga field paralleled that. He agreed there was an odd dynamic at work, with the state going to the federal government and telling them they did not get the right value. Their motivations might be different because they only got 10% and the state got 90%, he added. Number 553 REPRESENTATIVE GREEN asked if there was an adjustment in the 10-90 split in 1985. MR. ELIM confirmed the same percentages prevailed at that time. Number 602 REPRESENTATIVE GREEN said he had asked to emphasize that the 10% share had not been the justification in the past for the federal government to fail to aggressively pursue royalties owed them. MR. ELIM said the DNR's position was that the federal government ought to be consistent; since they pursued the royalties aggressively in the past, they should do so now as well. Number 666 CHAIRMAN WILLIAMS asked whether anyone else wanted to comment on HB 116. No one came forward, and he concluded with the comment that it was not the intention of the chair to move the bill today. He thanked those who testified. ANNOUNCEMENTS CHAIRMAN WILLIAMS announced the tour of the A-J Mine planned for Saturday, February 20, 1993, had been preempted by a majority caucus meeting. He announced further that the next meeting, on Monday, February 22, would be for the purpose of confirming appointees to the Big Game Commercial Services Board and the Alaska Oil and Gas Conservation Commission. In response to a question from Representative Green on when HB 116 would be moved, Chairman Williams responded that it would probably be the following week. REPRESENTATIVE CARNEY suggested the committee would like to have a time certain for reconsideration of HB 116. ADJOURNMENT There being no further business to come before the House Resources Committee, Chairman Williams adjourned the meeting at 9:35 a.m.