Legislature(1993 - 1994)

03/22/1993 09:07 AM FIN

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= 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                 
  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                 
  (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                 
  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                 
  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                 
            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                 
       2.   There is no  debate over how much  of the benefits                 
            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                 
  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                 
  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."                                                  

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