Legislature(1993 - 1994)

02/19/1993 08:00 AM RES

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= 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                                                                   
  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).                                            
  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                       
  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                        
  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                 
  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                 
  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                 
  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                       
  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                 
  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                            
  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                       
  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                    
  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                 
  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.                     
  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.                           
  There being no further business to come before the House                     
  Resources Committee, Chairman Williams adjourned the meeting                 
  at 9:35 a.m.                                                                 

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