Legislature(1993 - 1994)

02/24/1993 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                                
  Number 068                                                                   
  REPRESENTATIVE MARK HANLEY, PRIME SPONSOR of HB 116,                         
  directed the members' attention to a letter from the                         
  Commissioner of the Department of Natural Resources (DNR).                   
  He explained the fiscal note was based on a price of $1.50                   
  per thousand cubic feet, which was the basis for the claim                   
  that $10.4 million was owed the state.  That figure was on                   
  the upper end of the range of what might be received if the                  
  federal government changed its mind and required a higher                    
  royalty.  The letter also discussed precedent, he explained.                 
  When the action was taken last time, he said, it was a                       
  prospective action, with notice given in 1985, and things                    
  being changed from then forward.  This time the action was                   
  retrospective, going back to negotiate a higher price after                  
  rates had been set and contracts signed.                                     
  CHAIRMAN WILLIAMS noted Representatives Finkelstein and                      
  Green had joined the meeting, and that Representative Gail                   
  Phillips was in attendance.  He also recognized former                       
  Senator John Sackett in the audience.                                        
  Number 126                                                                   
  REPRESENTATIVE JEANNETTE JAMES asked why the $10.4 million                   
  tentative royalty receipts would not qualify for the budget                  
  reserve account.                                                             
  Number 136                                                                   
  REPRESENTATIVE HANLEY responded that he was not sure it                      
  would not, since he had not looked into that question.                       
  Number 145                                                                   
  VICE CHAIRMAN BILL HUDSON raised the question of whether the                 
  state had the legal authority to not collect royalties for                   
  the permanent fund, which had a constitutionally established                 
  contribution.  Also, he asked if someone could provide a                     
  legal opinion on the question of collecting royalties today                  
  for something that was owned by someone else in the past.                    
  He expressed concern that the liability incurred in the past                 
  would be charged to present utility customers.                               
  Number 177                                                                   
  REPRESENTATIVE HANLEY was not sure where the money would go                  
  if it was collected.  He assumed there would be legal                        
  opinions if and when the money was collected.  Regarding the                 
  retroactive aspect of the collection, he remarked that the                   
  subject had not been decided, and he anticipated some legal                  
  action on the part of the utilities if the federal                           
  government changed its opinion and did not accept the                        
  contract price.  Whether it would be legal to place a                        
  surcharge on people who were not customers at the time in                    
  question was one of the legal issues yet to be addressed, he                 
  Number 207                                                                   
  REPRESENTATIVE JOHN DAVIES was troubled by the 1985/86                       
  change in the law.  He mentioned he would be affected by any                 
  potential surcharge, as he got power from Golden Valley                      
  Electric Association.  He noted the issue of benefitting one                 
  segment of the state at the expense of others around the                     
  state.  He called the issue a troubling moral question,                      
  although it was probably legal.  He was also troubled by the                 
  fiscal note.                                                                 
  Number 245                                                                   
  REPRESENTATIVE HANLEY remarked that if someone signed a                      
  contract, the state had the option of taking its royalties                   
  in-kind and doing what they wanted with it, whether selling                  
  it separately or doing a one-eighth charge on the value as                   
  it was sold.  With a 25-year contract, he explained, the                     
  state had the choice of either not getting any royalties, or                 
  waiting and signing a contract that had a higher value.  He                  
  also pointed out the difference in prices paid by ENSTAR                     
  compared to those paid by Chugach.  He commented on the                      
  concept of long-term contracts that were fairly priced at                    
  the time they were signed, and believed if a contract was                    
  signed with no coercion involved, then it should be honored                  
  at the agreed upon price.                                                    
  Number 295                                                                   
  REPRESENTATIVE DAVIES perceived the issue as whether the                     
  federal government should be tied to the same rules and                      
  regulations as the state.  He noted there had been cases in                  
  the past where the state had gone back and suggested the                     
  federal government had short-changed Alaska, and asked them                  
  to pay up the disputed revenues.                                             
  Number 313                                                                   
  REPRESENTATIVE JOE GREEN repeated his previous concerns                      
  about going back and saying an arm's length agreement was                    
  not good enough.  He emphasized one of the major goals of                    
  the 18th Legislature was to show the state's reliability in                  
  its business dealings.  He suggested by requesting                           
  retrospective payments, the state would be sending out a                     
  message that a deal was not a deal; that the state would not                 
  keep its word if something better came along.  He called                     
  such an approach "gouging."                                                  
  Number 340                                                                   
  REPRESENTATIVE JAMES concurred and added the state had to                    
  have a business attitude, not a gouging attitude.                            
  Number 350                                                                   
  REPRESENTATIVE CON BUNDE supported HB 116, but questioned                    
  the legal ramifications of the state's obligations to put a                  
  percentage of royalty revenues into the permanent fund.  He                  
  asked whether it was wise to proceed with HB 116 without                     
  seeking a legal opinion on the permanent fund aspect.                        
  Number 370                                                                   
  REPRESENTATIVE HANLEY referred to the 1985 legislation that                  
  established the contract price as the accepted price on                      
  state leases, and said he would seek a legal opinion since                   
  the question had been raised.  He added, however, that HB
  116 related to the leases between the federal government and                 
  the lessees, and the state's only involvement would be if                    
  there was a settlement, and the state's share would then be                  
  subject to provisions already established for distribution                   
  to the permanent fund.                                                       
  REPRESENTATIVE DAVID FINKELSTEIN agreed, saying the funds                    
  deposited in the permanent fund were just a matter of                        
  allocation.  He believed HB 116 related to the question of                   
  valuation for lease pricing, and suggested the only reason                   
  the permanent fund was mentioned in the DNR letter was                       
  because any valuation affected what went into the permanent                  
  fund.  He did not believe this was a legal issue of any                      
  Number 400                                                                   
  VICE CHAIR HUDSON made a MOTION to ADOPT CSHB 116, and asked                 
  for unanimous consent.  Without objections, IT WAS SO                        
  Number 418                                                                   
  REPRESENTATIVE PAT CARNEY concurred with the comments made                   
  by Representative Finkelstein.                                               
  Number 425                                                                   
  RAGA ELIM, SPECIAL ASSISTANT, DNR, clarified comments made                   
  regarding the commissioner's letter.  As noted in the                        
  letter, he referred to the precedent setting effect of HB
  116.  The first point in that regard, he said, had to do                     
  with the applicability of HB 116 to the federal government.                  
  Hypothetically, he explained, if the state accepted the                      
  contract price and subsequently the federal government                       
  sought a higher royalty based on the area pricing method, it                 
  was not clear to the DNR whether or not HB 116 would allow                   
  the state to accept that higher royalty if the federal                       
  government prevailed.                                                        
  MR. ELIM also raised the issue, regarding the precedent-                     
  setting nature of HB 116, of the retroactive application of                  
  the bill.  The $10.4 million the state claims it has a right                 
  to, was from the contract period from 1984 to 1987.  The                     
  state did not go back further, he said, because it would                     
  have required a very extensive audit to go back to 1959.                     
  Number 463                                                                   
  MR. ELIM addressed the question of the allocation of                         
  royalties and clarified the permanent fund allocation was                    
  now 50% of the revenues for any leases entered into since                    
  December 1, 1979.  Regarding the equity issue raised by                      
  Representative Hudson, Mr. Elim concurred with                               
  Representative Davies in saying it was not an uncommon                       
  practice to require payment today for expenses incurred in                   
  the past.  He said this was a question that the Alaska                       
  Public Utilities Commission had probably addressed, and                      
  there was likely a body of law on the subject.                               
  MR. ELIM then spoke in regards to the fiscal note                            
  accompanying HB 116, in response to a previous question by                   
  Representative Davies.  Mr. Elim commented that the DNR's                    
  initial response was to have a $10.4 million positive fiscal                 
  note.  They decided that would not be appropriate, since                     
  that figure was based on a claim that the state could not be                 
  certain it would ever realize.  He said the DNR had,                         
  therefore, submitted a zero fiscal note with descriptive                     
  narrative attached regarding the $10.4 million claim.                        
  MR. ELIM concluded his testimony with comments addressing                    
  concerns raised by Representatives Hanley, Green and James,                  
  regarding certainty for the business community.  Regarding                   
  the sentiment that if a deal was made, Mr. Elim noted                        
  everyone knew the rules at the time the deal was made, that                  
  the federal government had the ability to seek a higher                      
  royalty than the contract price.  He did not see the                         
  situation as one in which the rules were changed, and did                    
  not necessarily regard the circumstances as "bad business."                  
  The state, as part owner, was not negotiating in the deal,                   
  which created an odd dynamic where the state relied on the                   
  agreement reached between two other parties.                                 
  Number 511                                                                   
  VICE CHAIR HUDSON expanded on Mr. Elim's comments regarding                  
  the state's authority to collect the 90% share of federal                    
  lease royalties, and raised the question of whether the                      
  state might deny taking that 90%.                                            
  MR. ELIM responded that he had recently raised that                          
  hypothetical question with the Director of the Division of                   
  Oil and Gas.  He said that director had called and said he                   
  had given the question more thought and saw it as a good                     
  point.  Mr. Elim said he did not have any judgment on                        
  whether that could be clarified.                                             
  Number 520                                                                   
  REPRESENTATIVE HANLEY added the state's constitution                         
  provided that the state gets 90% of federal lease royalties,                 
  and he did not believe there was any question the state                      
  would take the money.  If the contract was re-negotiated, he                 
  said, this issue should not be a problem, but he offered to                  
  get a legal opinion since this was a unique situation.                       
  Number 535                                                                   
  REPRESENTATIVE JAMES expressed concern about Alaska's                        
  efforts to foster a good business climate, where business                    
  was based on identified, foreseen costs, and said the state                  
  needed to plug loopholes so that a deal was a deal.  Another                 
  concern she expressed, was that the state made a deal to                     
  accept the contract price on its leases, and the federal                     
  government had agreed to do the same; yet the state had                      
  taken action against the federal government for not                          
  collecting a royalty of which we got 90%.  She suggested the                 
  state might not even need this legislative direction, since                  
  it was unlikely the federal government would reverse its                     
  previous decision on the leases.                                             
  CHAIRMAN WILLIAMS asked whether there were any further                       
  comments or testimony on HB 116.  Hearing no response, he                    
  asked how the committee wished to proceed.                                   
  Number 565                                                                   
  REPRESENTATIVE BUNDE made a MOTION to MOVE CSHB 116 (RES)                    
  from committee with individual recommendations and ADOPT the                 
  DNR zero fiscal note.                                                        
  CHAIRMAN WILLIAMS, prior to asking for a vote on CSHB 116                    
  (RES), offered his comment in favor of moving the bill, but                  
  had personal reservations that the bill would benefit the                    
  railbelt at the possible expense of the permanent fund and                   
  the school fund, which both benefitted all the people of the                 
  Number 575                                                                   
  CHAIRMAN WILLIAMS asked for an indication of those in favor                  
  of the motion to move CSHB 116 (RES) from committee.                         
  Without opposition, the MOTION CARRIED.                                      

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