Legislature(1993 - 1994)
03/22/1993 09:07 AM FIN
* first hearing in first committee of referral
= bill was previously heard/scheduled
= bill was previously heard/scheduled
CS FOR HOUSE BILL NO. 116(FIN)(title am) An Act amending the manner of determining the royalty received by the state on gas production, and directing the commissioner of natural resources to accept, under certain circumstances, the contract price agreed to between a lessee of federal land and a gas or electric utility as the value of the federal government's royalty share from natural gas production on federal land from which the state is entitled under applicable federal law to receive a share of the royalty on gas production; and providing for an effective date. Co-chair Pearce directed that CSHB 116 (Fin)(title am) be brought on for discussion and pointed to the fact that the Senate version, SB 104, is also in committee. She then invited the sponsor, Representative Hanley, to join members at the committee table. (Senator Rieger arrived at this time.) As background information, REPRESENTATIVE HANLEY explained that when oil was discovered in Cook Inlet in the 1960, it was accompanied by "a fair amount of natural gas." At that time there were no markets for that gas. Chugach Electric signed a long-term, twenty-five year contract in 1965 to purchase the gas at 21 cents a thousand cubic feet. There were no other contracts at that time, and Chugach made its decision to build a gas-powered electric generation plant based on that contract. The contract price for the gas was not disputed for approximately twenty years. In 1985, however, the state filed intent stating that it did not feel the contract price was a fair price for royalties paid to the state and that the price should be raised. In response, the legislature introduced legislation that specified that for sales to utilities (as long as it is an arms-length deal between the two contractors), the contract price is the price the state will use for its royalty share. The bill passed, and that has been prevailing law for state leases and subsequent sales of natural gas to utilities. Last year, the mineral management service of the federal government conducted an audit of its leases in this area. Contracts had also been signed by Chugach to purchase natural gas from federal fields. The federal audit determined that the contract price was a fair price for "their royalties . . . ." The state has appealed that decision, claiming the federal government did not receive enough royalties for its gas. The reason behind the appeal is that the state receives 90% of the royalties the federal government collects. While the state is required by state law to use the contract price on state leases, it has appealed the federal decision to use the contract price as well. Representative Hanley acknowledged that the federal government has the ability to determine what it feels is a fair royalty on federal gas leases. In 1988, the federal agency passed a regulation that made clear that it is required to use a contract price similar to state law on federal leases as long the contracts represent "arms-length deals." (Senator Jacko arrived at this time.) In his closing remarks, Representative Hanley reiterated that, in terms of state participation, the proposed bill applies the same standards to federal leases as current law governing state leases. Senator Kerttula asked if representatives from the Dept. of Natural Resources had testified regarding what the cost will be in terms of state royalties. Representative Hanley observed that cost is determined by the difference between the contract price and the true value. The Dept. of Natural Resources provided a zero fiscal note for the bill. The Representative pointed to backup information on the note indicating a total of "$12 million." Approximately half of that amount is interest while the remaining half is actual royalties based on value. Further comments followed by Representative Hanley concerning department use of $1.50 per thousand cubic feet, the Chugach lawsuit following 1985 state intent to raise the royalty, and the subsequent settlement of the lawsuit at 76 cents per thousand cubic feet. He reiterated that the federal government has ruled the contract price fair for federal royalties. It is unclear whether the state will win its appeal. If it does not. There will be no money owed to the state. Discussion followed between Senator Sharp and Representative Hanley regarding 1965 contract provisions for future value of the gas. Representative Hanley noted the retrospective nature of the state charge (1984-87) and problems associated with attempts to apply a surcharge to those who used power during a past time period. JON TILLINGHAST, representing Chugach Electric, next came before committee. He explained that when leases were originally executed, federal regulations applying at the time were clear that the contract prices would be the basis for valuing royalties. The federal government subsequently issued notice to lessees indicating that it would accept the contract price "but in extraordinary circumstance we'll deviate from that contract price." That is the basis of the current dispute. Speaking to fiscal implications of the bill, Mr. Tillinghast said that in 1988, the federal government changed its regulations to accept the contract price in every circumstance. Prospectively, the proposed bill should have no fiscal impact since it merely conforms to current federal law. Fiscal consequences are thus confined to state claims for the audit period 1984-87. Mr. Tillinghast noted that the federal minerals management service has already ruled against DNR at the staff level. DNR has appealed. Senator Rieger directed attention to page 4, lines 2 and 3, and requested an explanation of provisions relating to "an affiliated interest." Mr. Tillinghast said that the language was inserted at Representative Brown's behest. She was concerned that the utility not be related to the lessee or any purchaser of gas or electricity. It is intended to prevent situations whereby a large industrial buyer might establish a dummy utility to take advantage of the law. It seeks to ensure an arms-length distance between the utility and those who buy gas or electricity from the utility. Mr. Tillinghast noted that the term "affiliated interest" as defined in the public utility code is so broad that it would include "almost everybody." He next cited examples of broad application. In response to concerns raised by Senator Rieger that major utilities might trigger "affiliated interest" provisions under the APUC code, Mr. Tillinghast answered: Well, I think they're going to have to structure their affairs to make sure that they're not. For example, they have to make sure that they don't have any directors or officers in common with any of the producers that they buy gas from. If they do, then they are an affiliated interest, and they lose the protections of this bill. They must also ensure that they do not have any service or management contracts with the producers. The fact that they simply buy gas from them is not a service or management contract. Mr. Tillinghast concurred in the legitimate nature of Senator Rieger's concern and reiterated that utilities would have to ensure that they do not become affiliated. End, SFC-93, #41, Side 2 Begin, SFC-93, #43, Side 1 Further discussion followed between Mr. Tillinghast and Senator Sharp regarding situations which might give rise to affiliated status. Senator Kerttula asked if the proposed bill would impact Chugach Electric drilling and production if the utility chose to undertake that effort. Mr. Tillinghast voiced his understanding that neither the law nor the proposed bill would apply to the utility since both deal only with arms- length contracts between two entities. If the producer and the utility are one and the same, the law does not apply. In response to a further question from Senator Kerttula asking if there were similarities between the proposed bill and legislation Mr. Tillinghast might seek on behalf of MAPCO. Mr. Tillinghast explained that peculiarities associated with HB 116 result from the fact that: 1. No precedent is being set. The issue was settled in 1986. Legislative history of 1986 law indicates that lack of application to federal leases was simply an oversight. HB 116 does not break new ground as does proposed TESORO legislation. 2. There is no debate over how much of the benefits will be passed on to Alaskan consumers. Increased royalties will be passed directly to Chugach and in turn to consumers on a dollar per dollar basis. Discussion followed between Mr. Tillinghast and Senator Rieger regarding the sale of power by one utility to another. Mr. Tillinghast assured that there should be no problem as long as the utilities do not have interlocking directors or service management contracts. Co-chair Pearce asked what was added to the bill to effect a title change on the floor of the House of Representatives. Representative Hanley explained that new language relates to changes requested by Representative Brown. Title language was tightened to ensure that the legislation did not become a vehicle to change "a lot of different oil and gas contracts." Referring to page 3, Sec. 4, Co-chair Pearce asked where the section would fit within existing statutes. Mr. Tillinghast explained that it would be placed in temporary and special acts. Senator Jacko asked what would happen should the legislation not pass. He noted other proposals that would raise the cost of power for Alaskans covered by power cost equalization. He then asked who the proposed bill would impact. Representative Hanley again noted uncertainty associated with the fact that federal leases are involved. He again pointed to the fact that the federal government has determined that the contract price is the price upon which royalties are based, and no additional royalties are due. There is thus no 90% additional flow-through to the state. If additional royalties were charged by the federal government, and the state received 90%, consumers in the railbelt would be charged. Representative Hanley advised that when power cost equalization was established, the average price of Fairbanks, Anchorage, and Juneau power costs was used to establish the base rate of 8.5 cents. He acknowledged that a hypothetical argument could be made that retroactive royalty charges would raise rates in the railbelt and subsequently lead to a higher average for power cost equalization as well. That would be a political decision. Discussion followed between Senator Kerttula and Mr. Tillinghast regarding North Slope gas and application of the bill to gas-fired utilities should they be established. Mr. Tillinghast advised that discussion in House Finance led to a determination that the bill should apply to both existing and new fields. Co-chair Pearce called for additional testimony on the bill. None was forthcoming. She then queried members regarding disposition. Senator Kerttula inquired concerning testimony from the administration. The Co-chair said that representatives of the Dept. of Natural Resources were aware of the present hearing. The department has issued no adverse comments. She further advised that the bill was placed in a subcommittee in House Finance, and the subcommittee and Representative Hanley worked closely with department staff in incorporating amendments. Senator Kelly MOVED that CSHB 116 (Fin)(title am) pass from committee with individual recommendations. No objection having been raised, CSHB 116 (Fin)(title am) was REPORTED OUT of committee with a zero fiscal note from the Dept. of Natural Resources. Co-chairs Frank and Pearce and Senators Kelly, Rieger, and Sharp signed the committee report with a "do pass" recommendation. Senators Jacko and Kerttula signed "no recommendation."