Legislature(2001 - 2002)
04/03/2002 03:30 PM House L&C
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
ALASKA STATE LEGISLATURE
HOUSE LABOR AND COMMERCE STANDING COMMITTEE
April 3, 2002
3:30 p.m.
MEMBERS PRESENT
Representative Lisa Murkowski, Chair
Representative Andrew Halcro, Vice Chair
Representative Kevin Meyer
Representative Pete Kott
Representative Norman Rokeberg
Representative Harry Crawford
Representative Joe Hayes
OTHER LEGISLATORS PRESENT
Representative William K. (Bill) Williams
MEMBERS ABSENT
All members present
COMMITTEE CALENDAR
HOUSE BILL NO. 496
"An Act providing that a utility or electric operating entity
owned and operated by a political subdivision of the state
competing directly with a telecommunications utility is not
subject to the Alaska Public Utilities Regulatory Act."
- MOVED CSHB 496(L&C) OUT OF COMMITTEE
HOUSE BILL NO. 447
"An Act relating to the interest rates that may be charged on
loans by the Commercial Fishing and Agriculture Bank."
- MOVED HB 447 OUT OF COMMITTEE
HOUSE BILL NO. 429
"An Act relating to certain licenses for the sale of tobacco
products; relating to tobacco taxes and sales and cigarette tax
stamps; relating to provisions making certain cigarettes
contraband and subject to seizure and forfeiture; relating to
certain crimes, penalties, and interest concerning tobacco taxes
and sales; relating to notification regarding a cigarette
manufacturer's noncompliance with the tobacco product Master
Settlement Agreement or related statutory provisions and to
confiscation of the affected cigarettes; and providing for an
effective date."
- HEARD AND HELD
PREVIOUS ACTION
BILL: HB 496
SHORT TITLE:PUBLIC UTILITIES EXEMPT FROM REGULATION
SPONSOR(S): REPRESENTATIVE(S)WILLIAMS
Jrn-Date Jrn-Page Action
02/19/02 2321 (H) READ THE FIRST TIME -
REFERRALS
02/19/02 2321 (H) L&C
04/03/02 (H) L&C AT 3:15 PM CAPITOL 17
BILL: HB 447
SHORT TITLE:COM FISH & AGRICULTURE BANK INTEREST RATE
SPONSOR(S): REPRESENTATIVE(S)MULDER
Jrn-Date Jrn-Page Action
02/19/02 2309 (H) READ THE FIRST TIME -
REFERRALS
02/19/02 2309 (H) L&C
04/03/02 (H) L&C AT 3:15 PM CAPITOL 17
BILL: HB 429
SHORT TITLE:TOBACCO TAXATION; LICENSING
SPONSOR(S): RLS BY REQUEST OF THE GOVERNOR
Jrn-Date Jrn-Page Action
02/15/02 2282 (H) READ THE FIRST TIME -
REFERRALS
02/15/02 2282 (H) L&C, JUD, FIN
02/15/02 2282 (H) FN1: (REV)
02/15/02 2282 (H) GOVERNOR'S TRANSMITTAL LETTER
02/15/02 2282 (H) REFERRED TO LABOR & COMMERCE
04/03/02 (H) L&C AT 3:15 PM CAPITOL 17
WITNESS REGISTER
RANDY RUARO, Staff
to Representative William K. (Bill) Williams
Alaska State Legislature
Capitol Building, Room 515
Juneau, Alaska 99801
POSITION STATEMENT: Presented HB 496 on behalf of
Representative Williams, sponsor.
JIM VOETBERG, Assistant City Manager
City of Ketchikan;
Assistant General Manager
Ketchikan Public Utilities (KPU)
334 Front Street
Ketchikan, Alaska 99901
POSITION STATEMENT: Testified in support of HB 496, saying it
would provide a level playing field.
HEATHER GRAHAM
City of Ketchikan
334 Front Street
Ketchikan, Alaska 99901
POSITION STATEMENT: Testified on HB 496, saying it would take
some time for a fully rate-regulated utility to set rates.
MICHAEL GARRETT, President
AP&T Wireless
4300 B Street, Suite 303
Anchorage, Alaska
POSITION STATEMENT: Testified in opposition to HB 496.
REED STOOPS, Lobbyist
for General Communications Incorporated (GCI)
240 Main Street, Number 600
Juneau, Alaska 99801
POSITION STATEMENT: Testified on HB 496.
DALE ANDERSON, Staff
to Representative Eldon Mulder
Alaska State Legislature
Capitol Building, Room 507
Juneau, Alaska 99801
POSITION STATEMENT: Presented HB 447 on behalf of
Representative Mulder, sponsor.
ED CRANE, President
Commercial Fishing and Agriculture Bank (CFAB)
2550 Denali Street, Number 1201
Anchorage, Alaska 99507
POSITION STATEMENT: Testified in support of HB 497 and gave
specific information on the workings of CFAB.
NEIL SLOTNICK, Deputy Commissioner
Department of Revenue
PO Box 110405
Juneau, Alaska 99811-0405
POSITION STATEMENT: Presented HB 429 on behalf of the
Department of Revenue.
JOHANNA BALES, Auditor
Department of Revenue
550 West 7th Avenue, Suite 550
Anchorage, Alaska 99501
POSITION STATEMENT: Testified on behalf of the department on HB
429, as an expert on tobacco tax.
MIKE ELERDING, President
Northern Sales Company of Alaska
PO Box 8112
Ketchikan, Alaska 99801
POSITION STATEMENT: Testified against HB 429 and gave specific
suggestion for stamping.
MARK JOHNSON, Chief
Community Health & Emergency Medical Services
Division of Public Health
Department of Health & Social Services
PO Box 110616
Juneau, Alaska 99811-0616
POSITION STATEMENT: Testified in support of HB 429, saying it
might prevent youths from smoking.
ACTION NARRATIVE
TAPE 02-48, SIDE A
Number 0001
CHAIR LISA MURKOWSKI called the House Labor and Commerce
Standing Committee meeting to order at 3:30 p.m. Members
present at the call to order were Representatives Hayes,
Crawford, Halcro, and Murkowski. Representatives Rokeberg,
Kott, and Meyer arrived as the meeting was in progress.
HB 496-PUBLIC UTILITIES EXEMPT FROM REGULATION
CHAIR MURKOWSKI announced the first matter before the committee,
HOUSE BILL NO. 496, "An Act providing that a utility or electric
operating entity owned and operated by a political subdivision
of the state competing directly with a telecommunications
utility is not subject to the Alaska Public Utilities Regulatory
Act."
Number 0061
RANDY RUARO, Staff to Representative William K. (Bill) Williams,
Alaska State Legislature, presented HB 496 on behalf of
Representative Williams, sponsor. He told members HB 496 is
about fairness, and he characterized the present statute as
unfair as written. The current statute would allow an
unregulated or partially rate-regulated utility to compete with
a municipal utility and cause the municipal utility to become
fully rate-regulated by the Regulatory Commission of Alaska
(RCA); Mr. Ruaro called the resulting situation unbalanced. He
mentioned the bill's zero fiscal note. He also reported that
the RCA had submitted a letter saying it didn't oppose the bill
and that the issue is one to be decided legislatively.
MR. RUARO drew attention to the sponsor's proposed Amendment 1,
which read [original punctuation provided]:
Page 2, Line 3
Delete: "company"
Insert: "operating entity"
This is a technical change to conform the terminology
used in the legislation on page 2, line 3 to the
terminology in the existing statute on page 1, line 8.
Number 0220
CHAIR MURKOWSKI asked if there were situations in other areas of
the state similar to the one in Ketchikan.
MR. RUARO said he wasn't aware of any similar situations, but
the language would cover future municipal utilities.
Number 0271
REPRESENTATIVE HALCRO asked if the bill could be tightened to
avoid giving municipal utilities blanket immunities against
regulated competition.
MR. RUARO pointed out that a municipal utility is subject to its
own city code and to oversight regulation on rates through the
municipality, city council, and utility board. Immunity is not
preserved if the competing entity is also fully regulated. He
said the bill would keep things on a "level playing field." The
municipal utility would become fully rate-regulated only when it
was subjected to competition that was fully rate-regulated as
well.
Number 0406
CHAIR MURKOWSKI surmised that [paragraph] (2) would provide for
a municipally owned utility to be regulated if the competing
utility entering the market also were rate-regulated.
MR. RUARO added "fully rate-regulated" to Chair Murkowski's
inference and then said she was correct.
CHAIR MURKOWSKI asked if there is a distinction between "fully"
and "less-than-full."
MR. RUARO pointed out a spectrum of regulation levels from
unregulated to fully rate-regulated. Fully rate-regulated is
what a utility would become without the legislation.
Number 0523
JIM VOETBERG, Assistant City Manager, City of Ketchikan;
Assistant General Manager, Ketchikan Public Utilities (KPU),
testified before the committee. He proclaimed his support for
HB 496. Mr. Voetberg told the committee that the City of
Ketchikan owns and operates several utilities including
telecommunications, electric, water, wastewater collection and
treatment, and solid [waste] collection and disposal. The
legislation is important to Ketchikan because it allows the city
to continue operating in a similar manner to what it has for
over 50 years. It also provides local leaders with an important
tool for economic development of the community.
MR. VOETBERG warned that should the city become regulated under
the RCA, the cost to ratepayers would be an estimated $700,000
annually. This cost does not include a rate study that could be
as much as $250,000 for each utility division. He gave a
breakdown of what might contribute to the rate-study cost. Mr.
said this isn't the time to increase costs to residents and
businesses, given the economic situation of the city.
MR. VOETBERG identified AP&T [Alaska Power & Telephone Company]
as the one phone company that had opposed the legislation. He
said the city has listened to the company's arguments and
disagrees with some of its conclusions. He gave the example of
a procedure whereby a utility can seek waivers from regulatory
oversight by the RCA. However, the procedure can be very time-
consuming and expensive, particularly when a company opposes the
waiver. He said AP&T had made it known that a waiver for KPU
would be opposed; the costs of this would be passed on to
ratepayers. He noted that AP&T also had suggested [HB 496] is
special legislation, but he said the City of Ketchikan doesn't
find "creating a level playing field" is special legislation.
Number 0691
MR. VOETBERG addressed March 5, 2002, correspondence with RCA
chairperson Nan Thompson, in which Ms. Thompson said the RCA
doesn't support or oppose the legislation, which defers the
policy issues to [the legislature].
MR. VOETBERG offered that the City of Ketchikan wants to level
the playing field with [HB 496]. He gave the example of a
company like GCI [General Communications Incorporated] being
lightly regulated, while [KPU] would be fully rate-regulated.
He told the committee the legislation doesn't stifle
competition; it only makes it occur on an even basis. He
stressed the importance of the "relatively small change" to AS
42.05.711(b)(2) to the community of Ketchikan.
Number 0821
CHAIR MURKOWSKI surmised that KPU is a municipally regulated
utility and not subject to the RCA. She asked, if a wireless
company were to come in, whether KPU would be fully [rate]-
regulated. She asked the difference between fully regulated and
lightly regulated. She said currently wireless companies are
"popping up all over."
Number 0905
MR. VOETBERG replied that "fully rate-regulate" refers to a
situation in which the [RCA] will require a rate study. The
costs charged to customers would have to be justified by the
study, and the RCA would ensure that the costs and charges are
balanced. He said "lightly rate-regulated" is a situation
wherein an entity doesn't have to undergo the process, and rates
can be set at whatever rates that entity desires. Mr. Voetberg
explained that whereas the fully rate-regulated entity is
required to go through a long process to determine its rates, a
lightly regulated competitor can quickly undercut those rates by
small margins and thereby pick up customers.
Number 0966
CHAIR MURKOWSKI asked how AP&T is regulated, for example.
MR. VOETBERG answered that he isn't aware of how the company is
regulated, but it isn't fully rate-regulated.
Number 0998
HEATHER GRAHAM, City of Ketchikan, offered that sometimes it
takes longer than several months for a company that is fully
rate-regulated to change its rates, and it can be a lot longer
than that.
Number 1040
MICHAEL GARRETT, President, AP&T Wireless, testified via
teleconference. He told the committee his organization opposes
HB 496 because it could encourage the city to subsidize
competitive businesses it owns with monopolized services it
provides in other utilities. He said it removes all independent
oversight. The cities that could be affected by the new change
"have an administrative solution." He called the bill "special
legislation" to support one group.
MR. GARRETT told members that existing law gives the [RCA] the
ability to waive the regulatory requirement of the city if it
finds that doing so is [in the] public interest. He said the
proposed changes remove the burden of proof from a city that a
waiver [must be] in the public interest. He characterized the
RCA as the best qualified to make decisions on such matters.
Number 1149
MR. GARRETT pointed out that even the [federal] Securities and
Exchange Commission (SEC), in its Telecommunications Act of
1996, identified that "competitive services should not
subsidized by [noncompetitive] services." The SEC empowers the
state to make sure that "accounting or other measures" are in
place; he said the RCA is that body for Alaska. The proposed
changes would take away that authority from RCA. He posited
that the changes in the law could be considered contrary to the
Telecommunications Act of 1996.
Number 1177
MR. GARRETT referred to section 254(k) of the foregoing Act. He
said current [state law] is consistent with the federal law, but
the language in HB 496 wouldn't be. He said the bill is a
result of his company's attempt to provide competitive services
in Ketchikan. Mr. Garrett said AP&T wouldn't have a problem
with [KPU's] remaining unregulated if RCA found that to be in
the public interest. If "the city" were to file for a waiver
with the SEC, AP&T would ask to make comments on the
applications, "but that would be an issue between the city and
the RCA, not AP&T," he told members.
Number 1262
MR. GARRETT referred to previous statements that the city would
be "regulated" and AP&T "lightly regulated." He said AP&T is a
family of companies that have both competitive and
noncompetitive services; all of their noncompetitive services
are regulated by the State of Alaska. He said if KPU faced
regulation, it would be in the same position as AP&T. He asked
several questions based on different scenarios that he said
could be created by the bill.
MR. GARRETT conceded there was a risk the RCA might not approve
a waiver if the city filed for one. He said the RCA would have
to justify that decision. He claimed that this would leave no
independent organization - other than the utility - to look at
the facts.
Number 1364
CHAIR MURKOWSKI asked Mr. Garrett how long the waiver process
takes.
MR. GARRETT answered that he didn't know. He said he wasn't
sure if RCA had a set a timeline.
CHAIR MURKOWSKI requested a comment about Mr. Garrett's
assertion that the bill could be used to maintain a monopoly
situation in Ketchikan.
Number 1436
MR. VOETBERG replied that KPU has been operating the utility for
over 50 years under the control of the city council. Section
254(k) of the federal regulations prohibits cross-subsidization.
He told the committee that if there is a concern, any company
can go to the Federal Communications Commission (FCC) and file a
complaint. Mr. Voetberg said the proposed change in the state
statute has nothing to do with section 254(k) of the federal
regulation.
Number 1490
MS. GRAHAM agreed with Mr. Voetberg, saying federal law bars
cross-subsidies between competitive and noncompetitive services;
that bar remains, regardless of what the Alaska State
Legislature does.
CHAIR MURKOWSKI asked if she was correct in assuming Mr.
Voetberg's and Ms. Graham's testimonies were claiming that there
is a process in place through municipal regulations that will
prevent rates from going "willy-nilly or unchecked."
MR. VOETBERG and MS. GRAHAM concurred.
CHAIR MURKOWSKI asked if Ketchikan had considered a waiver.
MR. VOETBERG said it had not.
Number 1553
CHAIR MURKOWSKI asked Mr. Voetberg what he foresaw procedurally
if a waiver were requested.
MR. VOETBERG estimated it would take several months. There
would be a "back and forth" of filings in the case of an
opposition. He said the [RCA] is very busy, and decisions can
take one to two years.
Number 1596
REPRESENTATIVE HALCRO suggested there needs to be a more
balanced way to tie the locally owned utility's exemption to the
level of exemption that a new entrant into the market enjoys.
The concern is that if one is lightly regulated, there should be
consideration of adjusting the exemption to what type of
competition comes in. Representative Halcro expressed his
concern that if a blanket grant of immunity is bestowed upon a
locally owned utility that is unregulated by the RCA, and a new
entrant to the market that is regulated wants to enter, a
competitor might be bogged down in rate-filing requirements and
other regulations.
Number 1677
CHAIR MURKOWSKI pointed out that the only way it would equalize
itself is if a fully regulated utility were to enter the market;
then the two would be put on par. She asked if Representative
Halcro's concern [arises] if KPU, for example, were unregulated
and the entrant were regulated.
REPRESENTATIVE HALCRO said he was trying to think of how the
playing field could be kept level.
CHAIR MURKOWSKI offered that it would be quite confusing if
several entrants came into the market at six-month intervals at
different levels of regulation.
Number 1733
REPRESENTATIVE MEYER asked how it would pertain to cooperatives.
He gave examples from Anchorage.
CHAIR MURKOWSKI said she wasn't sure it would apply because [the
examples] weren't municipally owned public utilities.
REPRESENTATIVE ROKEBERG said they are different. He stated his
belief that GCI and Alaska Communications Systems (ACS) are
regulated utilities in the state, and that if they were to enter
the Ketchikan market and compete with the local utility, they
would be regulated and the Ketchikan utility would not be, under
[HB 496]. He expressed doubt that GCI or ACS would readily
accept the "lightly regulated" moniker.
Number 1789
CHAIR MURKOWSKI said she didn't know where everybody fit in that
lightly-versus-fully-regulated spectrum, including GCI and ACS.
REPRESENTATIVE HALCRO asked if anyone available from the RCA
could assist the committee in understanding the issue.
Number 1814
REED STOOPS, Lobbyist for General Communications Incorporated
(GCI), testified before the committee. He told the committee
GCI wasn't taking a position on the bill, but said he would like
to explain the status of the regulations on ACS and GCI. If
Ketchikan didn't get the legislation and would be regulated by
the RCA, it would be regulated as a monopoly in the same way
that the Anchorage Telephone Utility (ATU) was regulated when
GCI began to compete [with ATU].
MR. STOOPS said the reason for a different set of regulations
for a monopoly than for a competitor is that a competitor comes
in with no protection. The in situ utility's urge to compete
will likely force it to lower costs against the entrant and
shift the costs to those operations where the utility holds a
monopoly. When a new competitor gets its foot in the door and
becomes established, it loses its "lightly regulated" status and
is placed on an equal footing with the its fully regulated
rival. Mr. Stoops characterized the premise of the federal
Telecommunications Act as encouraging competition by allowing a
competitor to enter a market and then be subject to full
regulation if it has gained enough of a market share and has
become established.
Number 1933
MR. STOOPS, in response to Representative Halcro, explained that
"lightly regulated" companies are required to get a certificate
of authority, subject to consumer complaints and a variety of
regulations that fall short of rate regulations; there is no
need to regulate their rates because they are entering with no
market share. He offered that the regulatory process makes sure
the market competes fairly. Mr. Stoops said at a point at which
an entrant achieves a 40- to 50-percent market share, the RCA
might deregulate the former monopoly carrier. The RCA looks out
for the interests of the consumer, he added.
REPRESENTATIVE HALCRO suggested that adoption of the legislation
would continue all of KPU's protections as a monopoly without
having to allow the potential for competition.
MR. STOOPS replied that the legislation would entrust the
Ketchikan municipal government with the same function as the
RCA. He posited that [AP&T] would be faced with the choice of
having the RCA be the judge or having the municipality that owns
the utility be the judge.
Number 2033
REPRESENTATIVE ROKEBERG mentioned case law. He said the
"incumbent elect" would be in an unregulated situation "in this
case." He asked if there is automatic assertion of authority by
the RCA, even though there is no economic regulation to set
tariffs or terms of the transmission-line uses and so forth.
Number 2065
MR. STOOPS answered that under current law, all regulation is
municipal. If AP&T came in [to the Ketchikan market], KPU would
have to go under RCA regulation for the first time, and would
have to justify and make filings regarding its rate structure in
the future. He pointed out that if the bill were passed, the
authority would remain with the City of Ketchikan. If AP&T were
concerned, it would have to appeal to the FCC and file a federal
action, rather than [appealing to] the RCA.
REPRESENTATIVE ROKEBERG surmised, then, that [the City of
Ketchikan] could keep any other entity from competing with it
unless an entrant wanted to install its own transmission grid.
MR. STOOPS responded that AP&T is thinking of providing wireless
service and would put in its own equipment. He said there needs
to be some oversight because the incumbent carrier has all the
business. When people are being switched from one carrier to
another, there needs to be somebody to make sure that happens or
to file a complaint with, if it doesn't happen. Mr. Reed said
the key issue at hand is the question of who will be the
recipient of those complaints when they inevitably happen. He
cited the RCA, the City of Ketchikan, and the FCC as possible
entities that could fulfill that adjudicative role. The policy
decision is the appropriate forum for resolving disputes that
would result from an entrant's offering competitive service.
Number 2141
CHAIR MURKOWSKI referred to Representative Halcro's earlier
suggestion about leveling the playing field; he said that with
the premise of the federal Telecommunications Act [of 1996], it
makes no sense to "try to have everybody travel up at the same
level." [Utilities] in a monopoly position are saddled with a
high level of regulation until another company can "even out"
the market shares and until positions change enough that there
is additional regulation oversight [for the new entrant].
Number 2176
MR. STOOPS said that situation already exists in the RCA process
whereby it orchestrates a balance. He said in the present case
[of KPU], a municipal entity owns and regulates a utility. He
added that he couldn't think of a fair way to balance that
situation.
CHAIR MURKOWSKI remarked that the RCA has an overwhelming number
of cases in the area of telecommunications and cannot keep up.
She said she'd like to know the RCA's perspective on the matter.
Number 2285
REPRESENTATIVE ROKEBERG referred to AS 42.05.221 and commented,
"It seems to me that this is just economic regulation and there
is still some jurisdiction from the RCA or some other matters."
MR. VOETBERG responded that there must still be a certificate of
public convenience for the serving area for the "rate-regulation
portion."
REPRESENTATIVE ROKEBERG offered his opinion that if independent
competitors were to enter the market, they would be subject to
the same RCA restrictions and a sorting out of those issues that
were not economic- or tariff-related. He stated his assumption
that KPU is not entirely exempt.
Number 2350
MR. VOETBERG mentioned the FCC and pointed out that KPU has a
rule exemption for its area; a competitor who wanted to compete
using KPU's facilities would have to go to the RCA in order to
get the exemption lifted. He said there is a process in place
for that.
TAPE 02-48, SIDE B
Number 2356
REPRESENTATIVE HAYES moved to adopt Amendment 1, which read
[original punctuation provided]:
Page 2, Line 3
Delete: "company"
Insert: "operating entity".
This is a technical change to conform the terminology
used in the legislation on page 2, line 3 to the
terminology in the existing statute on page 1, line 8.
There being no objection, Amendment 1 was adopted.
Number 2345
REPRESENTATIVE ROKEBERG moved to report HB 496, as amended, out
of committee with individual recommendations and the
accompanying fiscal notes. There being no objection, CSHB
496(L&C) was moved out of the House Labor and Commerce Standing
Committee.
HB 447-COM FISH & AGRICULTURE BANK INTEREST RATE
CHAIR MURKOWSKI announced the next matter before the committee,
HOUSE BILL NO. 447, "An Act relating to the interest rates that
may be charged on loans by the Commercial Fishing and
Agriculture Bank."
Number 2305
DALE ANDERSON, Staff to Representative Eldon Mulder, Alaska
State Legislature, presented HB 447 on behalf of Representative
Mulder, sponsor. He explained that HB 447 addresses an inequity
in AS 45.45 that inhibits the ability of the Alaska Commercial
Fishing and Agriculture Bank (CFAB) to serve its mandated
purpose of granting loans for small businesses and business
enterprises. Alaska has a usury law that limits the rates of
interest for certain types of loans - usually small loans. He
said AS 45.45.010 defines a small loan as one under $25,000 and
establishes a maximum annual fixed-interest rate for such loans
at 5 percent above the 12th Federal Reserve District discount
rate. In Alaska, conventional lending institutions, including
commercial banks and credit unions, are exempt from state
statutes because of federal preemption provisions.
MR. ANDERSON told the committee CFAB is the only Alaskan
institutional lender subject to this statute, because of its
organizational structure as a cooperative bank. By law, it
cannot charge "too much interest." Any interest collected in
excess of its needs is credited back to its member-borrowers.
He said the commercial fishing community had not generated
significant demand for small loans in the past, but since
limited entry fishing permits began being traded in the $20,000-
to-$40,000 range, there is a much greater need for small loans.
MR. ANDERSON told the committee that CFAB's [being subject] to
the existing statute, along with the period of the lowest market
rates in the last 20 years, renders it unable to make
significant numbers of small loans to Alaskan residents. This
opens the potential for a drastic demographic shift of permit
ownership. Mr. Anderson said the basic purpose of HB 447 is to
ensure that CFAB is able to continue serving its Alaskan member-
borrowers in an efficient manner, and to equitably compete with
other lender institutions servicing this unique market.
Number 2219
MR. ANDERSON pointed out that the fiscal note from the director
of [the Division of Banking, Securities & Corporations] states
that there is no fiscal impact on the operation of the division
[as a result of HB 447]. He said the legislation comes at the
request of both the members of CFAB and the bank examiners. The
examiners filed a report that said the cap, if it remains, would
have an adverse effect on the institution.
Number 2177
ED CRANE, President, Commercial Fishing and Agriculture Bank
(CFAB), testified before the committee. He said the sponsor
statement summed up his sentiments well. He offered to answer
questions.
Number 2147
CHAIR MURKOWSKI requested confirmation that CFAB is the only
entity subject to the usury law.
MR. CRANE answered in the affirmative, adding that the usury law
goes back to before 1949. He said it has applied to many
institutions, but since the federal Financial Institutions
Reorganization Act of 1986, credit unions and financial banks
"slid out from under" [the usury law]. He said since CFAB does
not fit any conventional definition of financial institutions,
it is [still] subject to the usury law. Mr. Crane said the
higher demand for small loans and the low lending rates have
created a problem with the usury law for CFAB.
Number 2046
CHAIR MURKOWSKI asked how CFAB's structure prevents it from
collecting too much interest. She underlined how the public
might perceive that CFAB's exemption from the usury law would
allow it to charge very high rates.
MR. CRANE answered that CFAB is mandated by its statute to be
structured and operated as a cooperative. The customers are the
owners. The only revenues come from the customers. In each
fiscal year, profits are shared with the cooperative's members.
He said those profits - or margins - are prorated back to the
customer. He gave examples of similar cooperatives.
Number 1945
CHAIR MURKOWSKI asked what CFAB's current interest rate is.
MR. CRANE replied that CFAB's rates range between 8.5 and 11
percent. The past 11 years have seen a patronage refund to
members in the range of 18 to 19 percent.
REPRESENTATIVE ROKEBERG asked what the [federal discount rate
for District 12] is.
MR. CRANE said it is 1.75 percent.
Number 1907
REPRESENTATIVE ROKEBERG asked how the "new mandate" to broaden
the scope of the bank is going.
MR. CRANE replied that it is going slowly because of recent
economic events. He explained that Representative Rokeberg was
referring to a move by the bank to expand its business into the
realm of tourism and resource-based enterprises. He said CFAB
has been cautious and slow in its approach, but he estimated
that the bank has made $6 million in loans to tourism
enterprises.
REPRESENTATIVE ROKEBERG asked if CFAB would be forced to charge
no more than 6.5 percent on those loans.
MR. CRANE clarified that the figure would be 6.75 percent. He
explained that part of the problem is that the statute mandates
a fixed rate of interest. He said federal tax law demands that
CFAB treat members alike concerning patronage refunds.
Number 1822
REPRESENTATIVE CRAWFORD expressed concerns he had heard from
constituents that the bill might compete with the Division of
Investments. He asked if there was anything to [the belief
that] CFAB and the Division of Investments would be competing
for the same market.
MR. CRANE underlined that CFAB is a private lending institution.
He said it lends money borrowed from outside the state. There
are no public funds involved, nor is there any public risk. At
the end of the year, CFAB pays state corporate income tax. He
asked Representative Crawford if he was really concerned with
CFAB competing with the Division of Investments.
REPRESENTATIVE CRAWFORD said he didn't know.
Number 1725
MR. CRANE said he didn't see any impact on the Division of
Investment's loan program.
Number 1664
REPRESENTATIVE HALCRO moved to report HB 447 out of committee
with individual recommendations and the accompanying fiscal
notes. There being no objection, HB 447 was moved out of House
Labor and Commerce Standing Committee.
HB 429-TOBACCO TAXATION; LICENSING
Number 1623
CHAIR MURKOWSKI announced the final matter before the committee,
HOUSE BILL NO. 429, "An Act relating to certain licenses for the
sale of tobacco products; relating to tobacco taxes and sales
and cigarette tax stamps; relating to provisions making certain
cigarettes contraband and subject to seizure and forfeiture;
relating to certain crimes, penalties, and interest concerning
tobacco taxes and sales; relating to notification regarding a
cigarette manufacturer's noncompliance with the tobacco product
Master Settlement Agreement or related statutory provisions and
to confiscation of the affected cigarettes; and providing for an
effective date."
Number 1601
NEIL SLOTNICK, Deputy Commissioner, Department of Revenue,
testified before the committee. He said HB 429 was not a
tobacco tax bill but a "tobacco tax stamp bill." Alaska has a
tobacco tax - one of the highest in the nation - but it is one
of only four states without the requirement of a stamp to be
placed on [cigarettes] when the tax is paid. [Mr. Slotnick
passed around a pack of cigarettes from California as an example
of what a stamped pack of cigarettes looks like.]
Number 1564
MR. SLOTNICK told the committee the reason to have a tax stamp
is to ensure that state inspectors can determine whether a store
has paid the tax on cigarettes in stock. He said there have
been some successful enforcement measures regarding the tax
since it was imposed four years prior, but they are incredibly
time-consuming and difficult, and "require a little bit of
luck." He said for the state to enforce the tax statute, the
stamp is needed. He also mentioned that there are some federal
benefits for the imposition of a tax stamp.
MR. SLOTNICK posed the question, "Does Alaska have a smuggling
problem?" He answered that there is smuggling, but the
magnitude isn't known. He gave examples of how other states'
tax stamps have increased their tobacco tax revenues, and he
expressed the department's feeling that the stamp would do the
same for Alaska's revenues. It would provide easy detection and
a deterrent to untaxed tobacco in Alaska.
Number 1391
MR. SLOTNICK addressed the fiscal note. The department is
requesting two positions: an administrative position to sell
the stamps, and an enforcement position to take appropriate
action against entities that have violated the tax laws. If it
is found that the department underestimated the level of
smuggling, the department may request another position.
MR. SLOTNICK referred to a charts in members' packets that
outline the decline in taxable cigarette sales since the
imposition of the tax increase. He pointed out a 22-percent
decrease, part of which was the result of cessation [of tobacco
use].
Number 1302
MR. SLOTNICK noted that there would be some costs associated
with the stamp. A discount would give some money back to
distributors to offset some of the costs they will be required
to bear. He said the stamp would also partially benefit
distributors, since smuggling and black-market sales would be
discouraged. Mr. Slotnick pointed out that some states give
distributors no discount, while others are more generous. He
said smaller distributors would be given a 2-percent discount
[under HB 429], and larger ones would receive a 1-percent
discount.
Number 1229
REPRESENTATIVE MEYER asked why the stamp is to be placed only on
cigarettes and not all tobacco products.
Number 1202
JOHANNA BALES, Auditor, Department of Revenue, testified via
teleconference. She informed the committee that the stamps are
much easier to apply to cigarette packages than to the packaging
used for snuff, cigars, and leaf tobacco. She said she didn't
know of other states that stamp other tobacco products. There
has not been the same decline in the use of other tobacco
products and, therefore, the department does not have the same
compliance issues with them.
REPRESENTATIVE MEYER asked how the dollar-per-pack tax applied
to the other forms of tobacco.
MS. BALES said the tax went from 25 percent of the wholesale
cost to 75 percent of the wholesale cost.
REPRESENTATIVE MEYER asked how [the stamp] works. He gave the
example of the Anchorage city tax on tobacco. He asked if the
stamp would show that the tax had been paid on the state tax, or
would show that the state and city tax had been paid.
MS. BALES answered that it would only indicate that the state
tax had been paid.
Number 1098
REPRESENTATIVE MEYER asked if tobacco could be purchased over
the Internet.
MS. BALES replied that the state law levies a tax on importation
for resale and personal consumption of cigarettes only. Other
tobacco products can be purchased through the mail, and as long
as they are only for personal consumption, there is no tax.
REPRESENTATIVE MEYER asked who would affix the stamp.
MS. BALES replied that the distributor is the one required to
attach the stamp.
REPRESENTATIVE MEYER asked if the distributor would be given a
discount to attach the stamps.
MS. BALES answered in the affirmative.
REPRESENTATIVE MEYER asked why a discount should be given. He
reasoned that if it is the law, [distributors] should
automatically do it.
Number 1048
MS. BALES told Representative Meyer that it would be up to the
legislature to decide that matter. She said the department has
proposed the discount because most states do. The average
discount is 3 percent.
REPRESENTATIVE MEYER said he just wanted to zero out the fiscal
note, perhaps by passing the charges on to someone else.
Number 0994
CHAIR MURKOWSKI asked Mr. Slotnick why the stamp was not
proposed in 1997 when the tobacco-tax increase was passed.
MR. SLOTNICK responded that he believed it was considered and
that he didn't know why the stamp was not adopted. He offered
that the tax was controversial enough that [legislators] didn't
want to impede it with the stamp.
CHAIR MURKOWSKI asked, in reference to Internet sales, what
constitutes personal consumption. She used an example of five
pallets of cigarettes in her garage for "personal use."
Number 0894
MR. SLOTNICK told the committee that under the bill, being in
possession of unstamped cigarettes is not allowed.
MS. BALES pointed out the distinction that is made is between
cigarettes brought into the state and other tobacco products.
No determination must be made regarding cigarettes for personal
use or resale, because any cigarettes imported into the state
must be taxed according to the law.
CHAIR MURKOWSKI asked how it would be known whether the
cigarettes were imported.
MS. BALES said federal law would be called into play. She
referred to the Jenkins Act, which requires distributors to
report the sale of cigarettes to state departments of revenue
when shipping them across state lines. She then referred to the
Cigarette Contraband Tax Act, which says it is illegal to ship
via interstate commerce more than 60,000 cigarettes to someone
unlicensed. The law only applies in states that require a tax
stamp. She said the Jenkins Act carries a misdemeanor penalty
for violation, and the Cigarette Contraband Tax Act carries a
felony penalty.
Number 0724
CHAIR MURKOWSKI mentioned that the distributors would be
responsible for applying the stamps. She asked how many
distributors are in Alaska.
MS. BALES estimated 55 to 60 distributors.
CHAIR MURKOWSKI asked if small distributors would be able to
contract the stamping out to some other entity to save on costs.
Number 0665
MS. BALES replied that smaller distributors would be able to
contract that work out. There are different license types in
the state: distributors and direct-buying retailers. Of the 55
distributors, 15 to 20 are in-state businesses; 4 of those are
large distributors, and the rest are direct-buying retailers.
Most of those companies buy their products from distributors in
the Lower 48 that are equipped to stamp in all the other states.
Ms. Bales said the large distributors she'd talked to had told
her they could stamp for the smaller smoke shops in Alaska.
Number 0548
MS. BALES, in reply to a question from Chair Murkowski,
explained that the product would have to be stamped as soon as
the shipping containers were opened. Sealed shipping containers
could remain unstamped. She characterized the system as similar
to the one in existence. Under the bill, the stamps would have
to be purchased upfront so they would be available when the
product was unpacked.
Number 0450
CHAIR MURKOWSKI raised a scenario involving Costco, with the
stamping taking place outside of Alaska. She asked what would
happen if the stamped cigarettes were not selling in Alaska and
the product became stale on the shelf. What could the store do,
since the stamped cigarettes could not be shipped to another
state because of the Alaska stamp?
MS. BALES answered that the bill would provide for a credit.
The product could be sold out of state if the other state's
stamp were placed on the product. She said the current law does
not allow the credit for selling out of state. Ms. Bales said
Costco had told her it wasn't sure if it would stamp within the
state or elsewhere.
Number 0300
CHAIR MURKOWSKI referred to page 7 and its mention of sale of
the stamps. She inquired about the imagined result behind
allowing the department to enter into agreements with financial
institutions to permit the sale of stamps. Chair Murkowski said
she thought this was to be run throughout the Department of
Revenue.
Number 0268
MS. BALES responded that some states contract with financial
institutions that sell all of their stamps. The department has
made a provision to do that if, at some time, it is a more cost-
effective approach.
CHAIR MURKOWSKI invited Ms. Bales to deliver her prepared
testimony.
Number 0188
MS. BALES pointed out that the state has seen a 22-percent
decrease in taxable cigarettes [since the elevation of the
tobacco tax]. The decrease as a result of cessation [of tobacco
use] was projected to be about 13 percent. Ms. Bales referred
to a study conducted by the Department of Health and Social
Services Study - "The Impact of the 1997 Tobacco Tax Rate
Increase in Alaska" - that found its data was inconclusive. She
said there is no conclusive evidence that people have quit
smoking as a result of the tax increase, but there is evidence
of smuggling. She said the department had undertaken several
investigations of smuggling; she gave some examples.
TAPE 02-49, SIDE A
Number 0001
CHAIR MURKOWSKI asked if Metlakatla - the only recognized
reservation in the state - could ignore the tax stamp and become
the "Mecca of cigarette sales."
Number 0168
MS. BALES said the department did not perceive a problem with
Metlakatla. Tobacco sellers in that community are not required
to stamp. She said the community is allowed to purchase a
certain number of untaxed cigarettes based on a formula that
takes the community's population into account. Ms. Bales
pointed out that the community has agreed to tax any cigarettes
that exceed the annual allocation.
Number 0215
REPRESENTATIVE MEYER asked how the tax applies to military
bases.
MS. BALES indicated all of the product on military bases must be
sold at a price no less than 90 percent of the retail value of
that product off the base. In further response, she said the
bases are exempt from the tax.
Number 0298
MIKE ELERDING, President, Northern Sales Company of Alaska
("Northern Sales"), testified via teleconference. He gave
background information on his company. In 2001, Northern Sales
collected and paid $3,669,000 for the excise tax. He said his
warehouses are presently holding $1.3 million [of inventory],
and the tax on that is $380,000 - 29 percent of the cost of
goods.
MR. ELERDING said Alaska has one of the highest state excise
taxes in the nation, and it is only one of six with a tax of $10
a carton or greater. He said the stated reason for the tax
increase was to discourage the habit of smoking cigarettes. In
fiscal year 1997, the state collected $15 million in excise tax.
In fiscal year 2001, Alaska collected $41 million in excise tax.
He said the state has achieved its goal of decreasing the amount
of cigarettes consumed in Alaska.
Number 0465
MR. ELERDING said the rationale behind HB 429 is to discourage
bootlegging of cigarettes in the state. However, it places the
burden of tax collection and stamping on the distributors. Mr.
Elerding said the logistics of supplying the company's
geographic locations would require four separate tax-stamping
operations; the costs generated by these redundancies would be
greater than the proposed discount from the state. The
company's profit margin is so small that it wouldn't be able to
operate as a result of the bill.
MR. ELERDING told members that if his company goes out of the
cigarette business, large out-of-state companies will fill its
niche. He warned that this will result in a loss of jobs for
the state. He also said he believes the majority of bootlegging
is the result of Internet sales of tobacco products to
individuals. Tax stamping would not impact these sales.
Number 0768
CHAIR MURKOWSKI noted that Mr. Elerding had raised an
interesting dilemma. Large distributing companies will become
more successful at amortizing the tax costs because of their
large sales volume, while smaller Alaskan companies will find it
harder and harder to do business. She raised the issue of
giving additional discounts to Alaska-based operations. She
asked Mr. Elerding if he had contemplated any solutions to those
types of problems.
Number 0858
MR. ELERDING agreed with Chair Murkowski's insight on the larger
entities' being more competitive because of their economies of
scale. He suggested the state could require stamping to take
place within Alaska's borders, and require that all cigarette
sales be made in cash, "on the spot," to help reduce risk
exposure when collecting the state excise tax.
Number 1102
MARK JOHNSON, Chief, Community Health & Emergency Medical
Services, Division of Public Health, Department of Health &
Social Services, testified before the committee. He said the
department supports the intent of the bill; he noted that one of
its goals is to reduce tobacco products. He said studies show
youth to be more price-sensitive, so limiting access to nontaxed
tobacco would help.
Number 1163
CHAIR MURKOWSKI stated her intent to hold the bill over in order
to further explore the issue with the Department of Revenue and
try to address the concerns of local businesses.
Number 1203
MS. BALES expressed concern that many of the smaller smoke
shops' distributors exist outside of the state. She said Mr.
Elerding's suggestion would hurt the smaller distributors. [HB
429 was held over.]
ADJOURNMENT
There being no further business before the committee, the House
Labor and Commerce Standing Committee meeting was adjourned at
5:30 p.m.
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