Legislature(1993 - 1994)
02/24/1993 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 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 concluded. 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 sort. Number 400 VICE CHAIR HUDSON made a MOTION to ADOPT CSHB 116, and asked for unanimous consent. Without objections, IT WAS SO ORDERED. 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 state. 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.