Legislature(2017 - 2018)BARNES 124

04/24/2017 03:15 PM LABOR & COMMERCE

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Audio Topic
03:17:54 PM Start
03:18:33 PM HB229
03:55:13 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
*+ HB 229 OIL & GAS BUSINESS BOND TELECONFERENCED
Heard & Held
-- Public Testimony --
+ Bills Previously Heard/Scheduled TELECONFERENCED
                    ALASKA STATE LEGISLATURE                                                                                  
          HOUSE LABOR AND COMMERCE STANDING COMMITTEE                                                                         
                         April 24, 2017                                                                                         
                           3:17 p.m.                                                                                            
                                                                                                                                
                                                                                                                                
MEMBERS PRESENT                                                                                                               
                                                                                                                                
Representative Sam Kito, Chair                                                                                                  
Representative Adam Wool, Vice Chair                                                                                            
Representative Andy Josephson                                                                                                   
Representative Louise Stutes                                                                                                    
Representative Chris Birch                                                                                                      
Representative Gary Knopp                                                                                                       
Representative Colleen Sullivan-Leonard                                                                                         
                                                                                                                                
MEMBERS ABSENT                                                                                                                
                                                                                                                                
Representative Mike Chenault (alternate)                                                                                        
Representative Bryce Edgmon (alternate)                                                                                         
                                                                                                                                
COMMITTEE CALENDAR                                                                                                            
                                                                                                                                
HOUSE BILL NO. 229                                                                                                              
"An Act relating to a bond or cash deposit required for an oil                                                                  
or gas business; relating to claims against an oil and gas                                                                      
business; and providing for an effective date."                                                                                 
                                                                                                                                
     - HEARD & HELD                                                                                                             
                                                                                                                                
PREVIOUS COMMITTEE ACTION                                                                                                     
                                                                                                                                
BILL: HB 229                                                                                                                  
SHORT TITLE: OIL & GAS BUSINESS BOND                                                                                            
SPONSOR(s): REPRESENTATIVE(s) SEATON                                                                                            
                                                                                                                                
04/14/17       (H)       READ THE FIRST TIME - REFERRALS                                                                        
04/14/17       (H)       L&C                                                                                                    
04/24/17       (H)       L&C AT 3:15 PM BARNES 124                                                                              
                                                                                                                                
WITNESS REGISTER                                                                                                              
                                                                                                                                
REPRESENTATIVE PAUL SEATON                                                                                                      
Alaska State Legislature                                                                                                        
Juneau, Alaska                                                                                                                  
POSITION STATEMENT:  As prime sponsor, introduced HB 229.                                                                     
                                                                                                                                
FRED PARADY, Deputy Commissioner                                                                                                
Office of the Commissioner                                                                                                      
Department  of  Commerce,  Community,  and  Economic  Development                                                               
(DCCED)                                                                                                                         
Juneau, Alaska                                                                                                                  
POSITION  STATEMENT:   Testified  regarding HB  229 and  answered                                                             
questions regarding the bill.                                                                                                   
                                                                                                                                
ACTION NARRATIVE                                                                                                              
                                                                                                                                
3:17:54 PM                                                                                                                    
                                                                                                                                
CHAIR  SAM KITO  called  the House  Labor  and Commerce  Standing                                                             
Committee meeting  to order at  3:17 p.m.   Representatives Kito,                                                               
Sullivan-Leonard, Stutes, Knopp, Birch,  Josephson, and Wool were                                                               
present at the call to order.                                                                                                   
                                                                                                                                
                 HB 229-OIL & GAS BUSINESS BOND                                                                             
                                                                                                                                
3:18:33 PM                                                                                                                    
                                                                                                                                
CHAIR KITO  announced that  the only order  of business  would be                                                               
HOUSE BILL  NO. 229, "An Act  relating to a bond  or cash deposit                                                               
required for an  oil or gas business; relating  to claims against                                                               
an oil and gas business; and providing for an effective date."                                                                  
                                                                                                                                
3:19:01 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE PAUL  SEATON, Alaska  State Legislature,  as prime                                                               
sponsor,  introduced HB  229.   He  said the  bill would  suspend                                                               
until  January 1,  2019,  the  surety bond  or  the cash  deposit                                                               
required for  oil and  gas businesses operating  in Alaska.   The                                                               
suspension  would provide  time  to the  Department of  Commerce,                                                               
Community,  and  Economic  Development  (DCCED)  to  develop  the                                                               
regulations  needed   to  do  that,  he   explained.    Providing                                                               
background,  he  noted  that  last   year  the  surety  bond  was                                                               
incorporated into  House Bill 247.   The necessity for  the bond,                                                               
he related, is that small  companies without deep pockets come to                                                               
Alaska  and  go  bankrupt.     The  bankruptcy  code  allows  the                                                               
bankruptcy court,  whether that  court is  in Alaska  or Houston,                                                               
Texas, to go back 90 days  from the time the bankruptcy was filed                                                               
and require Alaskan  businesses to repay the  money they received                                                               
for supplying materials or labor to  the [oil or gas] company and                                                               
this money is then given to security creditors.                                                                                 
                                                                                                                                
REPRESENTATIVE SEATON  drew attention  to a newspaper  article in                                                               
the   committee   packet   regarding   [Buccaneer   Energy   Ltd.                                                               
("Buccaneer")],  a company  that came  to the  Cook Inlet  with a                                                               
jack-up  rig  that was  financed  in  large  part by  the  Alaska                                                               
Industrial Development  and Export Authority (AIDEA).   The State                                                               
of  Alaska filed  for  bankruptcy, he  said,  and the  bankruptcy                                                               
court  ordered  the businesses  that  had  supplied fuel,  water,                                                               
moorage, and  other services [to  Buccaneer] to repay  that money                                                               
so that  the [court] could  give the money to  secured creditors.                                                               
A look  was therefore  taken, he explained,  to determine  how to                                                               
prevent unsecured  creditors, suppliers in Alaska,  from being at                                                               
risk for  security creditors that  didn't do their  due diligence                                                               
on a company  and can claw back money from  Alaskan suppliers for                                                               
90 days prior to when that bankruptcy was filed.                                                                                
                                                                                                                                
REPRESENTATIVE  SEATON said  the purpose  of the  surety bond  or                                                               
cash [deposit] was  to get over this unfair  situation.  However,                                                               
he continued,  there have  been some glitches  in how  to provide                                                               
that surety  bond to oil and  gas companies and DCCED  is here to                                                               
testify in that  regard.  The bill  is simple in that  it is just                                                               
delaying the  imposition of  the surety bond  or cash  deposit so                                                               
that the department has time to get its regulations in place.                                                                   
                                                                                                                                
3:22:36 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE KNOPP offered his  appreciation to the sponsor for                                                               
bringing forth the  bill and noted that many of  his friends have                                                               
been stung.   He pointed out that that  particular bankruptcy law                                                               
is applicable to  everything, not just oil and gas.   He inquired                                                               
whether  the  bill  is  specific  to oil  and  gas  or  would  be                                                               
applicable to every industry.                                                                                                   
                                                                                                                                
REPRESENTATIVE SEATON replied  that HB 229 does  not have broader                                                               
implications and is specific to oil  and gas companies that get a                                                               
license.  The  requirement would terminate when  the company goes                                                               
into  commercial production,  he  continued, because  a lease  is                                                               
something to attach to and so  people could sue.  There are other                                                               
requirements, but at that point  in time [the legislature] wasn't                                                               
trying to  make something that  every company would have  to have                                                               
on the  books forever.  He  reiterated that new people  come into                                                               
Alaska who don't have experience  here and, in several instances,                                                               
they have  gone bankrupt while  [the state] is providing  oil and                                                               
gas tax  credits or other financing  like the AIDEA loan.   There                                                               
is no  way to circumvent the  bankruptcy court, he noted,  so the                                                               
purpose of  this was to go  to unsecured creditors.   The thought                                                               
was that  if something was  payable to just  unsecured creditors,                                                               
the bankruptcy  court might not  be able to take  that unsecured,                                                               
creditor-directed payment and give it to secured creditors.                                                                     
                                                                                                                                
3:24:46 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE JOSEPHSON  asked whether the regulations  could be                                                               
written  in  a way  that  would  allow for  [Alaska's]  unsecured                                                               
creditors to trump  secured creditors and be  acceptable with the                                                               
bankruptcy code.                                                                                                                
                                                                                                                                
REPRESENTATIVE  SEATON responded  that  that was  the purpose  of                                                               
directing  it through  a surety  bond  that was  directed to  pay                                                               
unsecured creditors.   While  legislation sometimes  gets changed                                                               
around, he continued,  the order of payment from  the surety bond                                                               
[is first  to] material equipment  and supplies delivered  in the                                                               
state.   The company wouldn't  own [the surety bond].   Secondary                                                               
after  that is  labor including  employee benefits  and third  is                                                               
taxes and such.                                                                                                                 
                                                                                                                                
3:26:16 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE JOSEPHSON  recalled that  there are ways  of using                                                               
the Uniform  Commercial Code (UCC).   Two chapters  in particular                                                               
are  Article 2  on sales  and Article  9 on  secured transactions                                                               
where someone could try to perfect  a security interest.  He said                                                               
he  doesn't know  if that  is even  necessary if  this gets  done                                                               
right.   He  inquired  whether  the sponsor  is  saying that  the                                                               
impetus for [HB 229] is that  the department just needs more time                                                               
to promulgate regulations.                                                                                                      
                                                                                                                                
REPRESENTATIVE SEATON  answered yes, that is  what the department                                                               
has told him.  Work was  being done through Legislative Legal and                                                               
Research Services  to figure out  how to  do this and  the surety                                                               
bond or cash bond payable to  certain businesses was the only way                                                               
that came  up as a  possibility.  He  said he doesn't  think this                                                               
has been tested in court and so  it is not known 100 percent that                                                               
it will  work, but  if it  is not  payable to  secured creditors,                                                               
then  the thought  is  that  there is  more  likelihood that  the                                                               
unsecured creditors wouldn't have to  repay those amounts.  There                                                               
would be some  hurdles that would have to be  jumped over for the                                                               
bankruptcy lawyers instead  of just issuing a letter  that says a                                                               
business owes  a certain  amount of  money that  it was  paid for                                                               
fuel or  water that that  business had  supplied to the  [oil and                                                               
gas company]  and that the  [oil and  gas company] had  used, but                                                               
now  that business  must  pay  back the  money  because there  is                                                               
somebody else wanting the money.                                                                                                
                                                                                                                                
3:27:57 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE BIRCH  asked whether the  oil and gas  industry is                                                               
the  only industry  required to  provide  a surety  bond or  cash                                                               
deposit.  He  further asked whether this would  be done uniformly                                                               
across  other businesses,  such  as fish  processors or  aviation                                                               
businesses.                                                                                                                     
                                                                                                                                
REPRESENTATIVE SEATON replied that  this was targeting a specific                                                               
problem.    Buccaneer was  the  first  instance where  it  became                                                               
evident that  there wasn't a way  for suppliers to know  that the                                                               
company was getting ready to  file bankruptcy.  Due diligence for                                                               
a fuel supplier,  he said, is not the same  kind of due diligence                                                               
that   secured  creditors   should   be  applying.     This   was                                                               
specifically  targeted  at  small   companies  coming  to  Alaska                                                               
without  deep pockets  and relying  on state  credits to  finance                                                               
their business and then when  something went wrong, they went out                                                               
of business and small suppliers in  Alaska were left on the hook.                                                               
Therefore, this isn't generally  applicable across all businesses                                                               
in Alaska.   It was specifically  targeted at oil and  gas and it                                                               
is required  before the company gets  an oil and gas  license and                                                               
so would be attached to that business.                                                                                          
                                                                                                                                
3:30:10 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE BIRCH inquired whether  the sponsor sees any merit                                                               
in applying  a uniform approach  to other enterprises  that might                                                               
be similarly situated that are outside the oil and gas business.                                                                
                                                                                                                                
REPRESENTATIVE SEATON  responded that whether or  not there would                                                               
be merit,  it is very complex  to target something that  is broad                                                               
across  the entire  business spectrum  of  Alaska.   This was  an                                                               
attempt  to solve  a problem  that  required a  state license  to                                                               
perform, he  explained, and there  was some due diligence  by the                                                               
state that wasn't adequate because  the state gave them a license                                                               
to start  drilling.   This was  targeted at  a certain  aspect of                                                               
what was proceeding  and seen in several cases in  Alaska and not                                                               
in  general businesses.   He  said  he thinks  that someone  else                                                               
expanding something  to general  businesses would  have a  lot of                                                               
impact if it were talking about every business in the state.                                                                    
                                                                                                                                
REPRESENTATIVE BIRCH said he thinks  there are various mechanisms                                                               
that can be applied.   As an example, he shared  a story about an                                                               
airplane that  was attached  for money in  the amount  of $60,000                                                               
that was owed.  However, he  stated, he is not familiar with this                                                               
particular [mechanism].                                                                                                         
                                                                                                                                
3:31:55 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SULLIVAN-LEONARD recalled  that when Buccaneer had                                                               
problems with  the jack-up rig,  it stored  the rig in  the Homer                                                               
port.  She asked whether Buccaneer paid the City of Homer.                                                                      
                                                                                                                                
REPRESENTATIVE  SEATON confirmed  that Buccaneer  had a  business                                                               
relationship with the Port of Homer  and said he thinks there was                                                               
about $20,000  in port fees  due.   But, he continued,  more than                                                               
anything,  the  proposal  would   target  small  businesses  that                                                               
supplied materials and so [the Port  of Homer] would be the third                                                               
tier.  He reiterated that the  surety bond would be applied first                                                               
to  material  equipment  and supplies  delivered  in  the  state.                                                               
Second, any remaining  money would be applied  to labor including                                                               
employee  benefits.   Third, it  would  be applied  to taxes  and                                                               
other  amounts due  a  city or  borough in  that  order and  then                                                               
repair of public facilities, and  finally taxes and other amounts                                                               
due to  the state.   This was targeting small  business suppliers                                                               
that had  provided supplies within 90  days of the [oil  and gas]                                                               
company  filing bankruptcy  and being  ordered by  the bankruptcy                                                               
court  to pay  back the  money received  for those  supplies that                                                               
were used  up by  the company.   It was  trying to  protect small                                                               
businesses because small businesses don't  have any way to do due                                                               
diligence on these companies, he added.                                                                                         
                                                                                                                                
3:34:20 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SULLIVAN-LEONARD inquired  whether [the bankruptcy                                                               
court] was  going after the  City of Homer  to get back  the fees                                                               
that had  been paid,  like what [the  bankruptcy court]  is doing                                                               
with the small businesses here.                                                                                                 
                                                                                                                                
REPRESENTATIVE SEATON replied  that the City of Homer  had to pay                                                               
back  the port  fees that  had been  collected, which  were about                                                               
$8,000 or $20,000.                                                                                                              
                                                                                                                                
3:34:59 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  WOOL inquired  whether in  the sponsor's  opinion                                                               
$250,000 is  enough, given  that several  of the  Buccaneer debts                                                               
were $70,000.                                                                                                                   
                                                                                                                                
REPRESENTATIVE SEATON  responded, "No,  ? it  depends on  how far                                                               
down the  scale you are trying  to go.   If you are going  to the                                                               
first  one    material equipment  and supplies  delivered in  the                                                               
state    that is mostly  the small  businesses."  There  could be                                                               
some on the second criterion,  he noted, which is labor including                                                               
employee benefits.  He said the  intent was not to get in between                                                               
the relationship  between a prime  contractor and an  oil company                                                               
but to [address]  "the small, unsecured people"  who are actually                                                               
delivering a product that is used  up and now they not only don't                                                               
have the  product but they have  to pay back the  amount of money                                                               
"that product was used for."   So, he continued, it was trying to                                                               
cover a  specific range of  small businesses that don't  have the                                                               
ability in  their normal  operations to do  the due  diligence to                                                               
determine whether an oil company  has too thin a financial backup                                                               
and would go bankrupt.                                                                                                          
                                                                                                                                
3:36:56 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  KNOPP said  he  agrees  with Representative  Wool                                                               
that  given all  the claims,  $2 million  to $3  million is  more                                                               
appropriate.  He asked why $250,000  was chosen for the bond.  He                                                               
recalled the  sponsor stating  that the bond  would be  in effect                                                               
until  the company  came  into production.    However, he  noted,                                                               
Buccaneer was in  production with the Kenai Loop  gas fields that                                                               
were producing a fair amount of  gas in good contracts.  He asked                                                               
what the sponsor  thinks is the point at which  a company can get                                                               
rid of that bond.                                                                                                               
                                                                                                                                
REPRESENTATIVE SEATON  answered it  is a  question of  whether to                                                               
"leave it on forever."   He said it was his call  early on to say                                                               
that  once  someone  goes   into  commercial  production  there's                                                               
probably something that  can be attached, something  of value, so                                                               
there could be  lawsuits the other way as well.   The problem, he                                                               
continued,  is that  small operators  can't hire  a lawyer  to go                                                               
after somebody for  $20,000.  He pointed  out that Representative                                                               
Birch's example  of $60,000 owed in  fuel, and for which  a plane                                                               
was attached,  was not a  situation of  bankruptcy.  Had  it been                                                               
bankruptcy,   the   plane   could   not   have   been   attached.                                                               
Representative Seaton  stated it  comes down  to finding  a point                                                               
where operations have  been going on long enough  and the company                                                               
is now  having actual production  or commercial production.   So,                                                               
he reiterated,  it was a call.   He further noted  that having it                                                               
go for  forever was objected  to.  Should ConocoPhillips,  BP, or                                                               
folks  coming into  production  in  Cook Inlet  have  to carry  a                                                               
surety bond on the books forever?   The intent here, he said, was                                                               
to get to small [oil and  gas] companies that were coming in with                                                               
thin financial resources.                                                                                                       
                                                                                                                                
3:39:41 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  BIRCH inquired  whether the  sponsor has  a sense                                                               
for  the cost  of a  surety bond.   For  example, he  asked, what                                                               
would be  the incremental  cost or  additional cost  of providing                                                               
that level of assurance.                                                                                                        
                                                                                                                                
REPRESENTATIVE  SEATON replied  that  if  he remembers  correctly                                                               
from when this was done, a  construction bond, which is a kind of                                                               
surety bond, was about 2.3 percent  per year.  But, he continued,                                                               
he doesn't  know what it is  now and hopefully that  is something                                                               
the department knows from having moved forward.                                                                                 
                                                                                                                                
3:40:45 PM                                                                                                                    
                                                                                                                                
FRED  PARADY, Deputy  Commissioner, Office  of the  Commissioner,                                                               
Department  of  Commerce,  Community,  and  Economic  Development                                                               
(DCCED), began  his testimony  by thanking  Representative Seaton                                                               
for bringing this  legislation forward last session.   He related                                                               
that Representative Seaton has spent  the last six months working                                                               
with the  department as  it tries  to implement  these provisions                                                               
that are going to be delayed by  HB 229 should it pass.  Speaking                                                               
candidly,  he stated  that  the department  did  not foresee  the                                                               
complexities  that are  involved  in  implementing these  bonding                                                               
requirements as outlined in Alaska  Statute (AS) 43.70.25.  Since                                                               
the passage of House Bill 247  last year, the department has been                                                               
working  to   find  the  least   burdensome  way  to   put  these                                                               
requirements into action  and that is AS 43.70.025,  which is the                                                               
bond itself,  and AS  43.70.028, which is  the pecking  order for                                                               
release  of  those  funds.    Those  statutes  provide  important                                                               
protections for small  businesses that contract with  oil and gas                                                               
companies, he said, and DCCED  is fully committed to implementing                                                               
them.                                                                                                                           
                                                                                                                                
MR.  PARADY  outlined  some  of  the  obstacles  that  DCCED  has                                                               
encountered.   He said the  first stumbling block  the department                                                               
came  across is  seemingly innocuous,  but it  is the  process of                                                               
identifying  which businesses  to which  the bond  applies.   All                                                               
business licenses are associated with  one or more North American                                                               
Industry  Classification  System  codes  (NAICS),  he  explained.                                                               
When  Director  Fagerstrom,  the state's  lead  business  license                                                               
person, dug  into the details of  it she found there  are some 23                                                               
different codes  that could  be considered,  having petrochemical                                                               
in the  title.  The  department narrowed  it down to  applying to                                                               
four.  An example of the  kind of problem that is encountered, he                                                               
related,  is  that  NAICS  code 211111  is  crude  petroleum  and                                                               
natural gas  extraction.   It was  a surprise  to find  this code                                                               
attached as a secondary code  to the business license of Usibelli                                                               
Coal.  While  no one anticipates this applying  to Usibelli Coal,                                                               
he continued, this  is what is encountered when  looking at those                                                               
classification systems and sorting out  where it applies and when                                                               
it doesn't.                                                                                                                     
                                                                                                                                
MR.  PARADY said  it is  important the  department get  right the                                                               
application  of  the  proper  code and  to  which  businesses  it                                                               
applies  because  other  surety  bonds  in  DCCED's  Division  of                                                               
Corporations,  Business and  Professional Licensing  are attached                                                               
to a professional license rather than  to a business license.  He                                                               
stated that the  department doesn't currently have  a process for                                                               
attaching  bonding  requirements  to  business  licenses  without                                                               
unnecessarily delaying  business licenses  for those who  are not                                                               
doing work  that is subject  to the bonding requirements  for the                                                               
specific NAICS code.                                                                                                            
                                                                                                                                
3:43:57 PM                                                                                                                    
                                                                                                                                
MR. PARADY  pointed out that  the regulatory framework  for these                                                               
statutes must include  a simple way to  identify which businesses                                                               
are required  to post  bond, and  then a  mechanism is  needed to                                                               
release the  bond when a company  begins producing oil or  gas in                                                               
commercially viable quantities.   That takes coordination between                                                               
DCCED, the Department  of Revenue, and the  Department of Natural                                                               
Resources, which  DCCED has been  actively working  on.  It  is a                                                               
matter of trying  to not impose an undue burden  and of trying to                                                               
make that process  clear.  There are many questions  to be sorted                                                               
out.    For  example,  in  releasing a  surety  bond  based  upon                                                               
commercial  production,   what  if   a  company   has  commercial                                                               
production in  the North Slope but  the bond is applicable  to an                                                               
activity  in  Cook  Inlet?     There  are  also  questions  about                                                               
subsidiaries  and hierarchy  and which  level of  the company  to                                                               
attach the requirement to.                                                                                                      
                                                                                                                                
MR.  PARADY said  DCCED  has put  forth a  good  faith effort  to                                                               
develop  these regulations.   The  department put  out a  scoping                                                               
notice to solicit public comment  and industry input and received                                                               
two comments,  of which one  was a response  from ConocoPhillips.                                                               
He stated  that the department  believes a  constructive solution                                                               
can be  found.  However,  he continued, implementing  the statute                                                               
without  a  sound regulatory  framework  is  impractical for  all                                                               
parties  involved and  therefore DCCED  approached Representative                                                               
Seaton to seek the delay that is before the committee in HB 229.                                                                
                                                                                                                                
3:45:28 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE BIRCH  remarked that it  seems to him there  is an                                                               
inching towards  a "nanny state"  of babysitting  businesses that                                                               
don't have  the wherewithal to  research who their  customers are                                                               
and basically  getting stiffed  by a  customer.   Regarding small                                                               
business, he  asked whether there is  a size of business  that is                                                               
big enough that  it doesn't stand an opportunity to  collect on a                                                               
bill  through the  claims court,  whereas a  business doing  less                                                               
than $1 million a year in  revenues does have an opportunity.  He                                                               
further  asked whether  there is  a mechanism  for distinguishing                                                               
between a supply  that is a big  company and one that  is a small                                                               
business.                                                                                                                       
                                                                                                                                
MR.  PARADY  deferred  to  Representative  Seaton,  the  original                                                               
sponsor, for  an answer.   He noted,  however, that  AS 43.70.028                                                               
lists  the pecking  order  of  who gets  paid  and  the first  is                                                               
material  equipment  and supplies  delivered  in  the state,  the                                                               
second is labor including employee  benefits, and then it goes to                                                               
taxes and repair  public facilities.  There is an  effort in that                                                               
identification to target the  smaller [businesses], he continued,                                                               
but to his knowledge there is  not a definition of small business                                                               
that is applicable.                                                                                                             
                                                                                                                                
3:47:03 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE BIRCH offered his  understanding, then, that there                                                               
is no distinguishing  between a large national  supplier versus a                                                               
local supplier in Homer as far  as recovering against the bond or                                                               
the party that has gone bankrupt.                                                                                               
                                                                                                                                
MR. PARADY again deferred to  Representative Seaton but said that                                                               
to  his best  understanding the  hierarchy that  is there  was an                                                               
effort to  address that.   However, he cautioned, as  was alluded                                                               
to  by   Representative  Josephson,  care  must   be  taken  when                                                               
considering bankruptcy  laws and  what is  applicable in  that an                                                               
Alaska-only distinction cannot be easily  drawn, and care must be                                                               
taken  in how  creditors  are  dealt with  in  that  regard.   Of                                                               
course,  he  continued, this  is  intended  to address  unsecured                                                               
creditors as opposed to secured creditors.                                                                                      
                                                                                                                                
3:47:58 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  BIRCH asked  whether  this applies  to any  other                                                               
businesses or  any other  enterprises in Alaska  or in  any other                                                               
state that Mr. Parady is familiar  with where the State of Alaska                                                               
intercedes to  require a backstop on  a contract.  He  said he is                                                               
not familiar with  the state intervening to  protect suppliers in                                                               
this manner.                                                                                                                    
                                                                                                                                
MR. PARADY replied he is not  familiar with the research that was                                                               
done to bring this concept forward  and is not aware of a similar                                                               
provision in another  oil and gas state.  But,  he noted, this is                                                               
statute  that is  applicable within  the  state of  Alaska.   The                                                               
challenge is in finding out how  to make it work, and DCCED needs                                                               
more time to do so.                                                                                                             
                                                                                                                                
3:48:46 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE KNOPP  addressed the complexities  of implementing                                                               
the  surety bond  and  said  it is  a  small business  protection                                                               
measure to  try to  protect the small  businessperson from  a bad                                                               
deal.  He  said he questions the actual need  for the surety bond                                                               
now that  House Bill 247 has  been repealed.  There  is no longer                                                               
that incentive to reinvigorate Cook  Inlet, he continued, so most                                                               
focus will be on the North Slope.   He opined that if it was a $2                                                               
million to $3  million bond, he would  be all  over it,  but time                                                               
is being spent trying to figure  this out for too little benefit.                                                               
The department  has put effort into  this over the past  year and                                                               
more will  be required  going forward  for a  $250,000 bond.   He                                                               
noted that the  bond would be divisible by  multiple claims, some                                                               
in the range  of $70,000, and questioned whether  the effort that                                                               
will  be put  into solving  the  complexities will  be worth  the                                                               
gain.  He  asked whether there is  still a need for  it after the                                                               
repeal of House Bill 247.  He also  asked who is going to have to                                                               
post  the bond  and whether  it  is somebody  who is  financially                                                               
dependent on  borrowing money from  the state or  looking forward                                                               
to the generous  credits offered by the state.   He further asked                                                               
who is  going to determine when  the bond needs to  be posted and                                                               
what the requirements are going to be for that.                                                                                 
                                                                                                                                
3:51:06 PM                                                                                                                    
                                                                                                                                
MR. PARADY responded that the  aforementioned are broad questions                                                               
about equity and fairness in small  business and he would like to                                                               
narrow them.  He offered  his belief that Representative Knopp is                                                               
referring not to the repeal of  House Bill 247, but to the repeal                                                               
of oil and  gas tax credits in  general.  He said  House Bill 247                                                               
is current  statute that DCCED  is tasked with implementing.   He                                                               
said the path  the department is trying to find  going forward is                                                               
how to implement it effectively, and  DCCED is seeking a delay so                                                               
it can do so.                                                                                                                   
                                                                                                                                
MR.  PARADY said  that regarding  the larger  questions asked  by                                                               
Representative Knopp, he  would punt those back to  the wisdom of                                                               
the legislature because the legislature  gave the department this                                                               
statute.   As the legislature works  its way forward with  it, he                                                               
continued, tweaks might  be needed.  He stated he  can't speak to                                                               
the size  of the bond,  but he can speak  to the reality  of what                                                               
brought Representative  Seaton's measure forward because  he sits                                                               
on the board of AIDEA.  There  was a situation where the place of                                                               
secured creditors  was firmly established  in the  pecking order,                                                               
but  unsecured small  Alaska businessmen  were  left holding  the                                                               
bag.   The amount that  was set upon  at $250,000 was  a judgment                                                               
call, he continued.  While he is  not aware as to the cost of the                                                               
bond,  he  recalled  that Representative  Seaton  referenced  2.3                                                               
percent  when  asked about  this  by  Representative Birch.    He                                                               
related  that  in  earlier  parts  of  his  career  he  did  mine                                                               
reclamation  bonding that  ran 2.5  percent.   At that  level, he                                                               
calculated, a  $250,000 bond could  cost on the order  of $6,500-                                                               
$7,000 and  so it isn't  insignificant.  If  the bond were  to be                                                               
increased  to  $2 or  $3  million,  the  business cost  would  be                                                               
increased accordingly.   Therefore, he said in  closing, he would                                                               
leave the  aforementioned questions  to the  future and  seek the                                                               
delay that DCCED is  requesting so it can try to  do a decent job                                                               
with this.                                                                                                                      
                                                                                                                                
3:53:12 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE KNOPP  agreed he misspoke  and that it  was repeal                                                               
of some  of the  credits and not  repeal of House  Bill 247.   He                                                               
said the  question that  haunts him  is solving  the complexities                                                               
versus the  gain and whether it  would be better to  rethink this                                                               
or whether  the thought  is that  it can  be reasonably  done for                                                               
what little guarantee is going to be offered.                                                                                   
                                                                                                                                
MR.  PARADY  answered  that  the  little  guarantee  of  $60,000,                                                               
$100,000, or $250,000  that is being offered  to small businesses                                                               
is a substantive  contribution to their future  liability, and he                                                               
said he thinks there  is value in it.  But,  he continued, a path                                                               
forward  through the  details of  who it  applies to,  what NAICS                                                               
code, how it's released,  what constitutes commercial production,                                                               
and what level of subsidiary is  required to carry it needs to be                                                               
found.  If DCCED fails to find a  path it will be back before the                                                               
committee  with  additional  information  and back  in  front  of                                                               
Representative   Seaton   trying   to  match   the   department's                                                               
regulatory framework to the direction  that's being given in this                                                               
bill.                                                                                                                           
                                                                                                                                
3:54:37 PM                                                                                                                    
                                                                                                                                
CHAIR KITO  opened public testimony  on HB  229.  There  being no                                                               
one  wishing to  testify, Chair  Kito announced  that HB  229 was                                                               
held over.                                                                                                                      
                                                                                                                                
3:55:13 PM                                                                                                                    
                                                                                                                                
ADJOURNMENT                                                                                                                   
                                                                                                                                
There being no further business before the committee, the House                                                                 
Labor and Commerce Standing Committee meeting was adjourned at                                                                  
3:55 p.m.                                                                                                                       
                                                                                                                                

Document Name Date/Time Subjects
HB229 Sectional Analysis ver D 4.14.17.pdf HL&C 4/24/2017 3:15:00 PM
HB 229
HB229 Sponsor Statement ver D 4.14.17.pdf HL&C 4/24/2017 3:15:00 PM
HB 229
HB229 Supporting Document- Article ADN 4.14.17.pdf HL&C 4/24/2017 3:15:00 PM
HB 229
HB229 ver D 4.14.17.pdf HL&C 4/24/2017 3:15:00 PM
HB 229
HB229 Fiscal Note DCCED-DCBPL 4.21.17.pdf HL&C 4/24/2017 3:15:00 PM
HB 229