Legislature(2015 - 2016)BARNES 124

02/13/2015 01:00 PM RESOURCES


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Audio Topic
01:04:45 PM Start
01:05:46 PM HB87
01:56:05 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
*+ HB 87 TIMBER SALES TELECONFERENCED
Heard & Held
-- Public Testimony --
                       HB 87-TIMBER SALES                                                                                   
                                                                                                                                
1:05:46 PM                                                                                                                    
                                                                                                                                
CO-CHAIR TALERICO  announced that the  only order of  business is                                                               
HOUSE BILL  NO. 87,  "An Act  relating to the  sale of  timber on                                                               
state land; and providing for an effective date."                                                                               
                                                                                                                                
1:06:15 PM                                                                                                                    
                                                                                                                                
JOHN  "CHRIS"  MAISCH, Director  &  State  Forester, Division  of                                                               
Forestry,  Department  of  Natural  Resources  (DNR),  began  his                                                               
introduction  of HB  87 by  reviewing  the different  authorities                                                               
under  which the  Division  of Forestry  has  for selling  timber                                                               
(page 2 of  the 2/3/15 Briefing Paper for HB  87 in the committee                                                               
packet).  He  said this review will put into  context the changes                                                               
being proposed  for the  authority under AS  38.05.118.   He drew                                                               
attention  to  the  division's authority  for  competitive  sales                                                               
under AS 38.05.120 ("120"), explaining  that these sales are done                                                               
either  through sealed  bid  or  an oral  outcry  auction.   Oral                                                               
outcry auctions  are used  when there are  a number  of different                                                               
businesses  interested in  the wood.   The  sealed bid  method is                                                               
used  in the  smaller communities  where  there are  not as  many                                                               
potential purchasers.   Competitive sales are used  to obtain the                                                               
best price.                                                                                                                     
                                                                                                                                
MR. MAISCH said the next three  sales methods he will discuss are                                                               
different  variations of  negotiated timber  sales.   Even though                                                               
the  term  "negotiated"  is  in  the  title,  there  is  still  a                                                               
competitive process in two of  these three methods.  He explained                                                               
that  AS  38.05.115  ("115") provides  the  authority  for  small                                                               
negotiated sales of less than  500 thousand board feet of timber.                                                               
Drawing attention to  the map of the Alaska  Forest Resources and                                                               
Practices  Regions on  the last  page of  the briefing  paper, he                                                               
explained  that   500  thousand  board  feet   would  be  roughly                                                               
equivalent to 20 acres in  Southeast Alaska (Region I), 125 acres                                                               
in  Southcentral  (Region  II),  and 80  acres  in  the  Interior                                                               
(Region  III).   Those basically  represent the  types of  forest                                                               
that grow in  each region and their productivity.   Only one sale                                                               
a year  can be negotiated  under the 115 authority  and currently                                                               
the sale  is only  good for  one year.   The  division is  in the                                                               
process of changing  the regulation that affects  the duration so                                                               
a purchaser  would be allowed  to have that  sale type for  up to                                                               
two  years.    The  purchasers  of these  sales  are  very  small                                                               
businesses,  often described  as "mom  and pop"  operations or  a                                                               
sole proprietorship.                                                                                                            
                                                                                                                                
MR. MAISCH said  AS 38.05.123 ("123") provides  the authority for                                                               
negotiated sales  for value-added products.   These sales  can be                                                               
up to 10 years  or less than 10 years in length, can  go up to 10                                                               
million board feet per year with  a cap of 100 million board feet                                                               
over that  10-year period  of time,  and the  operator purchasing                                                               
this  type  of sale  must  be  manufacturing  a high  value  wood                                                               
product.  A high value wood  product is defined in statute and in                                                               
regulation.   The types of  products that fall under  high value-                                                               
added were recently  updated via a regulation change.   The other                                                               
type of product  in this authority is  just value-added products.                                                               
A  value-added product  would be  a mill  that cuts  a board  for                                                               
dimension use  but doesn't  dry, plane,  or grade  the board.   A                                                               
high value  added board is  one that  is kiln dried,  planed, and                                                               
graded.   Wood  pellets were  recently added  to the  high value-                                                               
added  list because  there  is  a wood  pellet  mill in  Interior                                                               
Alaska near  Fairbanks; the division  is in the process  of doing                                                               
an AS 38.05.123 sale for that facility.                                                                                         
                                                                                                                                
1:11:12 PM                                                                                                                    
                                                                                                                                
MR. MAISCH stated the subject of  HB 87 is timber sales under the                                                               
authority of AS  38.05.118 ("118").  These sales can  be up to 25                                                               
years in length  and have three criteria that must  be met in the                                                               
region  in which  a 118  sale authority  is contemplated.   House                                                               
Bill 87  would drop these  three criteria from the  118 authority                                                               
to make  it easier to  use this  authority statewide.   The first                                                               
criteria is  a high level  of unemployment,  meaning unemployment                                                               
must be over  135 percent of the statewide  average as calculated                                                               
by the  Department of Labor  & Workforce Development  and applied                                                               
to  the state's  different  geographic regions.   The  Matanuska-                                                               
Susitna Borough, the Kenai Borough,  and the Fairbanks North Star                                                               
Borough  do not  exceed that  level of  unemployment, so  the 118                                                               
authority currently  cannot be used in  these geographic regions.                                                               
The second criteria that must be  met is that the geographic area                                                               
must have an  underutilized annual allowable cut.   In the Tanana                                                               
State Forest of  Interior Alaska, the division  only offers about                                                               
10 - 15 percent  of its annual allowable cut, so  in that part of                                                               
the state  this authority would be  usable if there were  not the                                                               
limitations  of borough  unemployment.   The  division uses  this                                                               
authority a lot  in Southern Southeast Alaska  to negotiate sales                                                               
to sawmills  and manufacturers located in  southeast communities,                                                               
as  opposed to  the  logs being  sold  competitively which  would                                                               
allow most  of that material to  go into the export  market.  The                                                               
export market in  the Pacific Rim and the Lower  48 can afford to                                                               
pay a higher  price for the log,  so if the division  were to use                                                               
its 120  authority in  Southeast Alaska the  logs would  all move                                                               
offshore  as  opposed  to  being used  for  supporting  jobs  and                                                               
manufacturing in  Alaska communities.  Mr.  Maisch explained that                                                               
AS  38.05.118 came  about because  of a  situation in  the Haines                                                               
State Forest in  the late 1970s/early 1980s when  the state tried                                                               
to regulate the  round log trade.  A purchaser  challenged one of                                                               
the  division's sales  and  that case  went all  the  way to  the                                                               
"supreme court."   The  state lost that  case because  states are                                                               
not allowed to  regulate interstate commerce.   The 118 authority                                                               
was subsequently created  by the legislature and  the governor at                                                               
the time to allow the state  to have other criteria that it could                                                               
use besides just  price or an outright restriction  on log export                                                               
to direct  logs to support  local mills.   It was referred  to as                                                               
the "Schnabel  Act" after the  Schnabel Mill that was  located in                                                               
Haines in those  days.  He said the third  criteria is that there                                                               
must  also be  an underutilized  manufacturing capability  at the                                                               
facility,  essentially meaning  that a  mill could  add a  second                                                               
shift or  operate year round.   House Bill 87 proposes  to strike                                                               
the three  criteria from being  considerations, making  it easier                                                               
for the Division of Forestry to use the 118 authority statewide.                                                                
                                                                                                                                
1:14:40 PM                                                                                                                    
                                                                                                                                
MR. MAISCH  said another example  of where the division  tried to                                                               
utilize  the 118  authority  was  in Tok  when  Alaska Power  and                                                               
Telephone  Company  was  contemplating   investment  in  a  large                                                               
facility  that would  produce electricity  with the  use of  wood                                                               
chips.   The  company approached  the division  about a  118 sale                                                               
with a 20-year  commitment to lock in a reasonable  fuel price to                                                               
ensure the  recouping of  its investment  in an  energy facility.                                                               
As  the division  went through  the best  interest finding  (BIF)                                                               
process, it  became apparent that there  was competitive interest                                                               
when a second  company expressed interest in the same  wood.  So,                                                               
the division stopped the BIF, backed  up, and offered the sale as                                                               
a competitive  120 sale.   Unfortunately, both  companies decided                                                               
not to bid and  that sale is now on the  shelf and available, and                                                               
the division  is still hopeful  one of those companies  will come                                                               
forward and purchase that timber at some point in the future.                                                                   
                                                                                                                                
MR. MAISCH maintained  that the provisions of HB 87  would not in                                                               
any  way change  the division's  public process.   Best  interest                                                               
findings are required  for these larger negotiated  sales.  Small                                                               
negotiated  sales that  fall  under  115 do  not  require a  best                                                               
interest finding.   He stated there would still be  "two bites at                                                               
the apple"  for the  public and others  interested in  the sales.                                                               
One is the best interest  finding process where the division puts                                                               
out  a preliminary  BIF,  takes comment,  and  then modifies  and                                                               
makes a final decision based on  that comment.  The division does                                                               
the on-site cruising of the timber,  laying it out on the ground,                                                               
and then puts  together a forest land use plan  that has specific                                                               
information learned  at the  time of the  sale layout,  and again                                                               
the public  and other  interested parties  get an  opportunity to                                                               
comment  on  how  the  sale  is  designed  and  actually  brought                                                               
forward.   The  division would  do notice  under the  "945 notice                                                               
clause" for  the larger timber  sales, while the small  115 sales                                                               
are exempt from the 945 notice clause.                                                                                          
                                                                                                                                
1:16:45 PM                                                                                                                    
                                                                                                                                
MR. MAISCH addressed  Section 1 of HB 87,  explaining it proposes                                                               
to  add  a  new  subsection,  (c), to  make  it  clear  that  the                                                               
commissioner would have  the authority to determine  which of the                                                               
applicable sale provisions is the  most appropriate to use in the                                                               
sale of timber "consistent with  the best interest of the state."                                                               
He pointed out  that this provision of best interest  is what the                                                               
division would  refer to as  lower case best interest  as opposed                                                               
to upper case  Best Interest.  This statement of  lower case best                                                               
interest does not  mean that best interest  findings are required                                                               
for the authorities under AS 38.05.110 - 38.05.123.                                                                             
                                                                                                                                
MR. MAISCH  explained that Section 2  would add new words  [to AS                                                               
38.05.118(a)]:  "the commissioner may  negotiate a sale of timber                                                               
to a local manufacturer of wood  products or a user of wood fiber                                                             
...."  The new words "wood fiber"  are to make it clear that wood                                                               
chips are included  and can be used for  biomass type facilities.                                                               
While the  division is comfortable  it already can do  that, this                                                               
makes it  specific that wood fiber  is an intended use.   He drew                                                               
attention to the two Alaska Energy  Authority maps at the back of                                                               
the  committee packet  that display  the number  of wood  biomass                                                               
projects  that are  currently being  considered,  or are  already                                                               
built and operating,  around the state.  He said  the red dots on                                                               
the  first  map indicate  the  communities  that are  doing  pre-                                                               
feasibility studies  to determine  whether they have  enough wood                                                               
and the  economics make sense  for heating projects, but  the Tok                                                               
project is  an electrical  project.  The  second map  shows where                                                               
there are operating facilities; the  best known one being in Tok,                                                               
which  produces both  power and  heat for  the school  and has  a                                                               
greenhouse  that  produces  food  for use  in  the  school  lunch                                                               
programs for the whole district.   This also occurs in Craig, but                                                               
the boiler  there is a solid  wood boiler that heats  the school.                                                               
Craig also has  a greenhouse for school lunch programs.   The 118                                                               
authority  is  definitely  of  interest  to  the  larger  biomass                                                               
projects, he said.                                                                                                              
                                                                                                                                
1:19:50 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON  recalled a  bill was passed  several years                                                               
ago to  make peat available as  a biomass resource.   He inquired                                                               
about a peat biomass resource as compared to wood biomass.                                                                      
                                                                                                                                
MR. MAISCH  responded that according  to the Division  of Mining,                                                               
Land and Water,  peat falls under the  negotiated materials sales                                                               
of Title 38, which is AS 38.05.550  - 565.  Peat sales fall under                                                               
AS 38.05.555(f),  which allows the  negotiation of peat  and sets                                                               
different pricing  structure points  at different levels  of sale                                                               
quantities.   Peat is treated as  a material sale product,  not a                                                               
timber product.                                                                                                                 
                                                                                                                                
1:21:15 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE TARR  understood each  state forest would  have to                                                               
have a forest  management plan and that these  plans describe the                                                               
allowable harvest.   She  further understood  that [under  HB 87]                                                               
all timber  sales would  still be  subject to  the constitutional                                                               
requirement for sustained  yield management.  She  said it sounds                                                               
like the  frequency at  which the  forest could  be cut  would be                                                               
increased.   She asked whether  this proposed change  would allow                                                               
more board feet to be cut than would have otherwise been cut.                                                                   
                                                                                                                                
MR. MAISCH replied  he thinks the discussion  being referenced is                                                               
the discussion  about using  the 118  sale authority  in Southern                                                               
Southeast Alaska  where traditionally there  has been a  lot more                                                               
wood volume available off the  Tongass National Forest, a federal                                                               
forest.  But that is not the  case any longer, it is now referred                                                               
to as a timber famine because  not enough wood is available.  The                                                               
division uses  this 118  authority to try  to direct  the limited                                                               
supply of state  wood to the local manufacturers.   Right now the                                                               
division is  in the  process of doing  a "bridge  timber program"                                                               
where the  division is offering  its surplus allowable cut.   The                                                               
allowable cut  is managed  on a  10-year average,  so in  any one                                                               
year  sales might  sell  up to  the allowable  cut,  which is  13                                                               
million feet in the southern  Southeast State Forest on Prince of                                                               
Wales Island.   In a  year where that  full allowable cut  is not                                                               
sold, that unsold  volume is essentially put in the  bank and can                                                               
be offered at some point in  the future which would result in the                                                               
allowable cut being exceeded in that given year.  For that 10-                                                                  
year period  of allowable cut, it  must average out to  be either                                                               
right on the  money or lower.  The proposed  changes do not allow                                                               
the division to  sell any more timber than what  is allowed under                                                               
sustained yield and annual allowable  cut calculations.  What the                                                               
proposal would  do is  that in  the next  two years  the division                                                               
will  have offered  all of  its surplus  allowable cut  and would                                                               
then no  longer be  able to  use the 118  provision based  on the                                                               
current requirement that  there has to be a  surplus of allowable                                                               
timber to harvest.                                                                                                              
                                                                                                                                
1:24:01 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  SEATON requested  an  explanation for  why it  is                                                               
being  proposed to  repeal the  criteria that  an area  must have                                                               
underutilized manufacturing capacity.                                                                                           
                                                                                                                                
MR. MAISCH answered that that  requirement was in place to ensure                                                               
that  the wood  purchased under  this kind  of a  negotiated sale                                                               
would  actually  result  in  creating  additional  jobs  in  that                                                               
facility.  So,  if a facility theoretically was  at full capacity                                                               
operating three  shifts, more volume necessarily  wouldn't result                                                               
in the desired effect of more jobs.   So, that is where that term                                                               
"underutilized  capacity"   comes  from.     It  also   has  been                                                               
interpreted that  if a new mill  was being built, and  it existed                                                               
within  two years  of the  negotiated  sale, that  would also  be                                                               
considered as  unutilized capacity, but  there is a  provision in                                                               
the contracts that allows the  division to cancel the contract if                                                               
the mill  is indeed not  up and  running and cutting  wood within                                                               
that two-year timeframe.  The idea is to encourage job creation.                                                                
                                                                                                                                
REPRESENTATIVE   SEATON   understood  that   the   aforementioned                                                               
criteria is one of three criteria that HB 87 would remove.                                                                      
                                                                                                                                
MR. MAISCH replied correct.                                                                                                     
                                                                                                                                
REPRESENTATIVE SEATON  concluded the  proposal removes  the local                                                               
jobs portion of  this.  He further understood that  the area must                                                               
have  underutilized manufacturing  capacity,  not the  particular                                                               
bidder.   For example,  he asked, if  there is  not underutilized                                                               
capacity  in  Southeast Alaska,  "does  that  mean under  current                                                               
status [the division] couldn't have  these sales, and ... removal                                                               
of that  would allow basically  export ... of those  logs because                                                               
there wasn't underutilized capacity in the area."                                                                               
                                                                                                                                
MR. MAISCH  responded no.   By removing  these three  criteria it                                                               
still is going to be 118  authority, which allows the division to                                                               
do  that negotiation.   Section  2, subsection  (a), of  the bill                                                               
still states  "to a local  manufacturer", so those words  are not                                                               
being changed.   The bill maintains  the intent that this  is for                                                               
manufacture,  that  it  is  for  use  in  local  facilities,  and                                                               
striking  the three  subsections  would make  it  easier for  the                                                               
division  to  use   this  authority  statewide  and   to  use  it                                                               
consistently,  should the  division choose  to use  it through  a                                                               
best interest finding  process.  This will still  be a relatively                                                               
rare authority  that the division  would use, except  in Southern                                                               
Southeast Alaska, as per the  earlier discussion on the allowable                                                               
cut piece of it.                                                                                                                
                                                                                                                                
REPRESENTATIVE  SEATON  understood,  then,  that  the  negotiated                                                               
terms are still  going to be for local  or regional manufacturing                                                               
of  the  product   and  that  elimination  of   the  section  for                                                               
underutilized capacity  will not allow  these timber sales  to be                                                               
used for export lumber.                                                                                                         
                                                                                                                                
MR.  MAISCH confirmed  that Representative  Seaton has  stated it                                                               
correctly and said that would  also be his interpretation of this                                                               
proposed change.                                                                                                                
                                                                                                                                
1:28:17 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  TARR addressed  Mr.  Maisch's previous  statement                                                               
about  violating the  interstate commerce  clause.   She surmised                                                               
that, given  the conversation taking  place now and  the response                                                               
from one particular  mill, this public discussion is  for this to                                                               
be  a  policy  that  would  advantage  a  local  company  at  the                                                               
disadvantage of this  export company, and that  the Department of                                                               
Law has  said there is no  interstate commerce issue there  if it                                                               
is being done with that specific intent.                                                                                        
                                                                                                                                
MR. MAISCH  answered yes, this  statute was  created specifically                                                               
because of the  "supreme court" case on  interstate commerce that                                                               
specifically said states  do not have the power to  regulate.  He                                                               
expressed his confidence that  this is constitutionally allowable                                                               
under  the state's  constitution.   Potentially,  it is  choosing                                                               
winners  and losers,  he allowed,  a position  that the  division                                                               
does not like to be in, so that  is why the division uses the 120                                                               
authority for the majority of its  timber sales.  It has been the                                                               
policy of many past administrations,  including this current one,                                                               
to  try to  use the  state's resources  to create  as many  jobs,                                                               
especially manufacturing  jobs, in  the state  as possible.   The                                                               
lack of  wood supply in  the Tongass National Forest  has reduced                                                               
the  forest  products  sector  in  Southeast  Alaska  from  5,000                                                               
employees to  200 -  250.  The  industry that is  left is  on the                                                               
brink  of failing  because of  a lack  of wood  supply.   So, the                                                               
small amount of wood that the  division can bring to the table is                                                               
very important  to the continued  existence of  these businesses.                                                               
It is  not that the division  will not do 120  sales in Southeast                                                               
Alaska:  the  division still does that on occasion  when the sale                                                               
is located too far  away from the mills that could  use it, or it                                                               
might  be right  next  to  a bigger  sale  of  either federal  or                                                               
private timber  and so it makes  sense to offer that  sale at the                                                               
same time under  a 120 authority.  It is  not a complete "un-use"                                                               
of  that other  authority, but  it  would give  the division  the                                                               
ability to direct as much wood as possible to manufacturing.                                                                    
                                                                                                                                
1:30:38 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE TARR  expressed her concern that  it is old-growth                                                               
forest  with salmon  streams  that will  be cut.    She said  the                                                               
duration  of  time   makes  [this  proposal]  stand   out:    the                                                               
competitive sales have no duration limit,  but these are up to 25                                                               
years.  She  surmised that because it would be  a negotiated sale                                                               
there  would still  be  public notice  so  people could  comment.                                                               
Given the appraisal would be  every five years, she asked whether                                                               
there would be an allowable cut  over the length of that contract                                                               
that  specifies in  what years  that  will happen.   She  further                                                               
asked  whether  the  potential  exists  for  things  to  be  done                                                               
haphazardly between time zero and  five years when a re-appraisal                                                               
takes place.                                                                                                                    
                                                                                                                                
MR.  MAISCH replied  the division  has  not done  a 25-year  sale                                                               
because a lot can happen in  that long amount of time, especially                                                               
in Interior  Alaska where wildland  fire is a  common occurrence.                                                               
Once  terms of  the  sale  are negotiated,  the  division uses  a                                                               
standard timber sale contract  that requires bonding, reappraisal                                                               
every  five  years under  the  118  authority, and  [reappraisal]                                                               
every three  years under the  123 authority.  In  reappraisal the                                                               
division looks  at the base  rates and the fair  market appraisal                                                               
of   the  material   being  sold   and  can   adjust  the   rates                                                               
contractually.    At  that  time the  division  would  take  into                                                               
account any major  changes to its ownership of timber,  such as a                                                               
large wildland  fire.   The longest term  sales the  division has                                                               
contemplated  were  the 20-year  sales  in  Tok.   Currently  the                                                               
division is doing two five-year  sales back-to-back under the 123                                                               
authority in  Fairbanks.  The  length of  time is critical  for a                                                               
business entity  that is going  to seek financing in  the private                                                               
sector to  build a facility, in  which case the business  needs a                                                               
minimum  10-year  commitment of  raw  material  to amortize  that                                                               
investment  in  the private  equity  sector.   The  division  not                                                               
exceed its  allowable cuts and  the re-calculated  allowable cuts                                                               
that  are  based  on  changing  conditions;  there  is  always  a                                                               
constant adjustment as the division moves forward in time.                                                                      
                                                                                                                                
1:33:41 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE JOSEPHSON addressed  Mr. Maisch's statements about                                                               
present lack of  available timber.  He  offered his understanding                                                               
that in  a competitive sale, timber  is cut as logs  in the round                                                               
and  shipped   overseas,  generally,   or  the  timber   is  used                                                               
domestically in a local mill  and then perhaps shipped elsewhere.                                                               
He asked what in that duality  speaks to a lack of timber supply.                                                               
In  other words,  he continued,  if someone  failed to  bid in  a                                                               
competitive bid to  cut and ship as logs in  the round, wouldn't,                                                               
for example,  Viking Lumber Company,  as the only  bidder perhaps                                                               
in one scenario, receive the timber sale.                                                                                       
                                                                                                                                
MR. MAISCH responded there are  more than just two companies that                                                               
are potentially in play in  Southern Southeast Alaska and that is                                                               
primarily what is  being talked about with  this proposed change.                                                               
Two bigger  companies are involved  in round log export:   Viking                                                               
Lumber Company  [of Craig on  Prince of  Wales Island] is  a mid-                                                               
size mill, and Icy Straits Lumber  & Milling, Inc., of Hoonah [on                                                               
Chichagof Island],  which is not near  as large and cuts  about 5                                                               
million board  feet a year.   Plus there are a  number of smaller                                                               
mills  around Southern  Southeast Alaska/Prince  of Wales.   Most                                                               
state  timber  is not  larger  blocks  of  wood.   Sometimes  the                                                               
division sells  only 2 or 3  million board feet and  sometimes as                                                               
much as  10 or  15 million board  feet in a  sale.   Depending on                                                               
where  the mill  is located,  there can  often be  more than  one                                                               
bidder.   It is not just  a simple matter of  whether an exporter                                                               
doesn't bid  on a  sale that  it would by  default go  to Viking.                                                               
There is  actual competitive interest  in the wood  because there                                                               
is simply  not enough wood  available for the capacity  that both                                                               
the  round log  exporters  have  and the  milling  sector has  in                                                               
Southern Southeast Alaska.  About  100 million board feet of wood                                                               
could probably  be utilized in  Southern Southeast Alaska  in the                                                               
industries  currently located  there.   In a  good year  the U.S.                                                               
Forest  Service sells  maybe  30-35 million  board  feet and  the                                                               
division sells a little bit  in addition, so the available volume                                                               
is very short for the current industry.                                                                                         
                                                                                                                                
1:36:25 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE JOSEPHSON  asked what  the state  is giving  up in                                                               
revenue when a decision is  made to sell domestically rather than                                                               
for  the  overseas  market, setting  aside  the  economic  impact                                                               
created by spinoff in places like Thorne Bay and Craig.                                                                         
                                                                                                                                
MR. MAISCH  replied the  state would  receive a  30 -  50 percent                                                               
higher price  for that  log as a  stumpage value,  depending upon                                                               
the sale's location and size, quality  of wood, and amount of the                                                               
wood.  However, the key point  here is that only about 13 million                                                               
[board] feet  of wood are  being talked about as  being available                                                               
annually on a  sustained yield basis [from state  forests].  This                                                               
doesn't  translate to  a large  number:   a few  hundred thousand                                                               
dollars difference in  the very best case scenario  and just tens                                                               
of  thousands of  dollars difference  in a  worst case  scenario.                                                               
So, the  state is  forsaking a  higher price  for the  concept of                                                               
creating jobs and supporting communities.                                                                                       
                                                                                                                                
REPRESENTATIVE  JOSEPHSON observed  that  the sectional  analysis                                                               
for Section  3 states that  the [repeal of AS  3.05.118(c)] would                                                               
enable  DNR  to negotiate  timber  sales  in  all areas  [of  the                                                               
state].   He offered  his understanding  that the  current three-                                                               
pronged  test of  the 118  authority  was designed  such that  if                                                               
there is  economic hardship a  negotiated sale can occur,  but if                                                               
there  is not  economic  hardship the  assumption  is that  there                                                               
should  be  some  competitiveness.    He  surmised  that  if  the                                                               
Interior   and   Matanuska-Susitna   areas   are   doing   better                                                               
economically, the result would be a competitive bid.                                                                            
                                                                                                                                
MR.  MAISCH answered  yes, the  120  sale is  the default  method                                                               
under which  the division sells  the vast majority of  its timber                                                               
sales.   The division only  uses these other authorities  when it                                                               
finds that it is  in the best interest of the  state to use those                                                               
authorities.  The  division offers a fair number of  115 sales in                                                               
the Interior,  but those are  the small negotiated sales  that go                                                               
to very small  operators and do not cost the  division as much to                                                               
lay  out  and administer.    Instead  of  going through  all  the                                                               
process of  what a larger  sale would require, it  actually saves                                                               
the state  money to be able  to offer those small  sales to those                                                               
small operators; as  well, it saves the small operators  a lot of                                                               
the red tape of the larger sale authorities.                                                                                    
                                                                                                                                
1:39:33 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE TARR, regarding  the talk about lack  of wood from                                                               
federal  forests, related  that timber  sales on  federal forests                                                               
have been  criticized as  money losing  operations because  it is                                                               
the federal government that pays  for replanting and the building                                                               
and ripping  of roads.   She asked  who the responsible  party is                                                               
under  state  timber sales  for  road  building and  ripping  and                                                               
reclamation and replanting.                                                                                                     
                                                                                                                                
MR.  MAISCH replied  it is  done differently  on the  state side,                                                               
with  the  vast  majority  of  the  roads  built  by  the  timber                                                               
purchaser.  The division appraises  the value of the improvement,                                                               
be it  a bridge  or a  primary or secondary  road, into  the sale                                                               
price.  The timber sale  contract requires the purchaser to build                                                               
that piece of  infrastructure.  If the  infrastructure is already                                                               
in existence,  the division appraises  in a maintenance  cost for                                                               
the road while the purchaser is using  it.  Where there is not an                                                               
active  timber sale  on segments  of  roads, it  defaults to  the                                                               
state to  continue to  maintain those roads.   The  division must                                                               
maintain  them  to  meet forest  practices  standards  which  are                                                               
focused on fish  habitat and water quality  issues.  Occasionally                                                               
the  division has  received capital  appropriations for  a larger                                                               
piece of infrastructure, such as a  bridge that would not be easy                                                               
to carry on a timber sale.   So, there have been some cases where                                                               
capital money  has been  invested in  infrastructure, just  as is                                                               
done on  all other  types of  infrastructure in  the state.   The                                                               
division is  very proud that  it has over  500 miles of  roads in                                                               
Alaska, mostly in the Interior.   Some of those are winter roads,                                                               
but  those roads  are very  much multiple-use  roads and  are how                                                               
people get out  to recreate, hunt, and do subsistence.   They are                                                               
an important piece of life in  many of the places where there are                                                               
state forests  or state  lands that  are classified  for forestry                                                               
use.   In  regard  to reforestation,  those  costs are  sometimes                                                               
appraised  into the  sales and  other times  the division  simply                                                               
uses  natural regeneration,  which is  usually very  effective in                                                               
Southeast  Alaska.   However, natural  regeneration is  sometimes                                                               
not as effective in the  Interior and Southcentral Alaska, so the                                                               
division will  supplement that with planting  if the regeneration                                                               
surveys show that that needs to  be done.  Sometimes the division                                                               
does  receive capital  monies, but  more often  the division  has                                                               
some timber sale  receipt authority, about $850,000  a year, that                                                               
can  be  used for  infrastructure  or  reforestation work.    The                                                               
division actually supports some of  its timber sale foresters off                                                               
of  the funds  that are  earned through  the timber  sale receipt                                                               
program.  Most  years, though, the division returns  money to the                                                               
treasury once that cap is hit.                                                                                                  
                                                                                                                                
1:42:44 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE   SEATON  observed   that   the   115  sales   are                                                               
approximately  125 acres  in size  in Southcentral  and about  80                                                               
acres in the Interior.  He  asked whether Interior sales are that                                                               
much more productive than Southcentral sales.                                                                                   
                                                                                                                                
MR. MAISCH  confirmed they are, primarily  because [the Interior]                                                               
tends  to have  better soil  types,  temperatures, and  a lot  of                                                               
spruce stands.  Based on  the division's inventories, the average                                                               
volume  per acre  in  the  Interior is  about  8,000 board  feet,                                                               
whereas in  Southcentral it  is about 4,800  - 6,000  board feet.                                                               
Southcentral  has much  more mixed  forest -  spruce and  usually                                                               
birch.  Interior has some mixed  stands, but often the stands are                                                               
pure spruce, pure  birch, or pure aspen, which tend  to grow much                                                               
denser than in Southcentral.   Some of the Interior forests rival                                                               
about 35,000  board feet to the  acre, which is equal  to some of                                                               
the average stands in Southeast Alaska.                                                                                         
                                                                                                                                
REPRESENTATIVE SEATON  drew attention to  page 1, line 6,  of the                                                               
bill  which states  "offer the  timber consistent  with the  best                                                               
interest of the  state."  He then drew attention  to page 1, line                                                               
9,  which would  add "the  sale is  in the  best interest  of the                                                               
state".   He queried whether  these could  be read such  that the                                                               
state  gets  itself  into  a lawsuit  that  the  commissioner  is                                                               
required to  have a best interest  finding before there can  be a                                                               
sale in Section  1 under AS 38.05.110 - 38.05.123,  given some of                                                               
those don't require  a best interest finding.  He  said if no one                                                               
is  present from  the Department  of Law  to answer  his question                                                               
then he would  like to get a written opinion  verifying that that                                                               
does not require a best interest finding in Section 1.                                                                          
                                                                                                                                
MR. MAISCH reiterated  that he has spoken with  the Department of                                                               
Law, but  will get a  written finding for  Representative Seaton.                                                               
He said, "The  way I read that  one in Section 6,  as I mentioned                                                               
we would call that the  lower case best interest finding, whereas                                                               
in Section 9 it's prefaced up there  in (a) where it says 'upon a                                                               
finding that a best [interest of  the state]', so that is kind of                                                               
the big b, for lack of a better  word to describe it, and it is a                                                               
fine  legal  definition  or  understanding."     He  offered  his                                                               
agreement with Representative Seaton that  it would be good to be                                                               
as clear as possible and will get back with an opinion.                                                                         
                                                                                                                                
1:46:04 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  JOSEPHSON inquired  whether  the "supreme  court"                                                               
decision regarding the commerce clause was from 1983.                                                                           
                                                                                                                                
MR. MAISCH responded it was in  the late 1970s or early 1980s and                                                               
that he will get back to the  committee with the actual case.  He                                                               
said the  parties were the  State of  Alaska and an  attorney who                                                               
had purchased timber.                                                                                                           
                                                                                                                                
1:46:51 PM                                                                                                                    
                                                                                                                                
MR. MAISCH,  responding to Co-Chair Talerico,  explained that one                                                               
board foot is 12 inches by 12 inches  by 1 inch, and a cubic foot                                                               
is 12 inches by 12 inches by 12 inches.                                                                                         
                                                                                                                                
CO-CHAIR TALERICO asked whether  timber sales can be transferred.                                                               
For  example,  he is  aware  of  some  lumber operations  in  his                                                               
district that have changed hands on a regular basis.                                                                            
                                                                                                                                
MR. MAISCH  answered that through  the contract process  there is                                                               
the ability  to reassign  contracts.  In  some cases  an operator                                                               
can actually re-sell a contract if  the operator feels that is in                                                               
its economic  best interest.   However, generally, it  is through                                                               
re-assignment  and the  division does  due diligence  because the                                                               
bonds must be reposted and the  new party must have the financial                                                               
ability.                                                                                                                        
                                                                                                                                
1:49:07 PM                                                                                                                    
                                                                                                                                
CO-CHAIR TALERICO opened public testimony on HB 87.                                                                             
                                                                                                                                
1:49:48 PM                                                                                                                    
                                                                                                                                
RICK  ROGERS, Executive  Director,  Resource Development  Council                                                               
for  Alaska (RDC),  stated that  RDC is  a statewide,  membership                                                               
funded,  trade  association  representing oil  and  gas,  mining,                                                               
tourism, fisheries, and forestry.  He  said RDC is in favor of HB                                                               
87  and has  submitted  a  letter for  the  record.   The  timber                                                               
industry  is a  shadow of  its  former self,  with timber  supply                                                               
being the biggest  issue restricting the industry in  Alaska.  In                                                               
a small way, HB  87 helps the state adjust the  tools that it has                                                               
to be  as effective  as possible  in providing  meaningful timber                                                               
supply,  particularly for  manufacturing  facilities like  Viking                                                               
Lumber  and  others  in  Southeast  Alaska  that  are  struggling                                                               
because of the  lack of federal timber.  He  said RDC agrees with                                                               
the  administration that  the 120  sales, the  competitive sales,                                                               
are the  first choice and, all  things being equal, the  best way                                                               
to sell  timber.   However, there  are unique  circumstances with                                                               
the competition  between exports  and the need  for the  state to                                                               
help mills  struggling with the  lack of adequate supply.   Given                                                               
this different climate  of timber supply, this  is an appropriate                                                               
adjustment to  the statutes since  they haven't been  changed for                                                               
several decades.   He clarified that  wood chips are part  of the                                                               
market basket  that can  be considered,  which makes  sense given                                                               
there  is now  a  biomass energy  industry,  particularly in  the                                                               
Interior.    While the  biomass  industry  is  small, it  is  one                                                               
additional  way to  address  the  high cost  of  energy in  rural                                                               
Alaska as well  as some of the air quality  issues that come from                                                               
burning wood with less advanced technology.                                                                                     
                                                                                                                                
1:52:59 PM                                                                                                                    
                                                                                                                                
JASON  HOKE,   Executive  Director,  Copper   Valley  Development                                                               
Association,  stated the  Copper Valley  is an  ocean of  biomass                                                               
with over  a million acres  of beetle-killed timber, of  which 67                                                               
percent is  on state  land.   He explained that  a board  foot is                                                               
applicable towards timber,  whereas tonnage is what  is used when                                                               
discussing biomass.   In  his area  there is  a lot  more biomass                                                               
than timber.   This biomass needs "to be ground  up and processed                                                               
as chips into  what is defined as a  higher value-added product."                                                               
He  said the  Copper Valley  Development Association  is in  full                                                               
favor  of HB  87  and  hopes the  committee  will  push the  bill                                                               
forward.   However, he  continued, he  has two  caveats.   One is                                                               
that under  the 123 authority,  sales to supply a  chip operation                                                               
would not qualify for high value-added.   He explained that he is                                                               
currently working  on a deal  with a processor and  a value-added                                                               
bio-brick maker and the only way to  get a lot of this timber out                                                               
is to chip it  in the woods and haul it to  the facility where it                                                               
will be  pressed into bricks.   While it is mostly  black spruce,                                                               
which  is very  small diameter,  it still  has value  if chipped.                                                               
So, his first  caveat is to take  a look at AS  38.05.123 in this                                                               
regard.   Further,  he  noted,  under an  AS  38.05.123 sale  the                                                               
processing  facilities must  be operational  prior to  harvesting                                                               
timber  sold under  this authority.    But, he  pointed out,  the                                                               
aforementioned operation is going  to go hand-in-hand because the                                                               
facility is also going to be the  processor - to get the wood out                                                               
it has to be chipped before it can be made into bio-bricks.                                                                     
                                                                                                                                
1:55:42 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  TALERICO  held   over  HB  87  and   kept  open  public                                                               
testimony.                                                                                                                      

Document Name Date/Time Subjects
HB 87 Ver A.pdf HRES 2/13/2015 1:00:00 PM
HB 87
HB 87 Negotiated Timber Sales Briefing Paper.pdf HRES 2/13/2015 1:00:00 PM
HB 87
HB 87 Fiscal Note.pdf HRES 2/13/2015 1:00:00 PM
HB 87
HB 87 RDC support letter.pdf HRES 2/13/2015 1:00:00 PM
HB 87
HB 87 Governor Transmittal Letter.pdf HRES 2/13/2015 1:00:00 PM
HB 87
HB 87 LOS Viking.pdf HRES 2/13/2015 1:00:00 PM
HB 87
HB 87 AEA Map.pdf HRES 2/13/2015 1:00:00 PM
HB 87
HB 87 Biomass Projects Map.pdf HRES 2/13/2015 1:00:00 PM
HB 87
HB 87 FRPA REGION MAP.jpg HRES 2/13/2015 1:00:00 PM
HB 87
HB 87 Sectional Analysis 3.pdf HRES 2/13/2015 1:00:00 PM
HB 87
2.13.15 HRES HB 87 Southeast Conference LOS.pdf HRES 2/13/2015 1:00:00 PM
HB 87