Legislature(1997 - 1998)

03/10/1998 10:06 AM O&G

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
       HOUSE SPECIAL COMMITTEE ON OIL AND GAS                                  
                   March 10, 1998                                              
                     10:06 a.m.                                                
MEMBERS PRESENT                                                                
Representative Mark Hodgins, Chairman                                          
Representative Scott Ogan                                                      
Representative Norman Rokeberg                                                 
Representative Joe Ryan                                                        
Representative Con Bunde                                                       
Representative Tom Brice                                                       
Representative J. Allen Kemplen                                                
MEMBERS ABSENT                                                                 
All members present                                                            
COMMITTEE CALENDAR                                                             
HOUSE BILL NO. 393                                                             
"An Act relating to contracts with the state establishing payments             
in lieu of other taxes by a qualified sponsor or qualified sponsor             
group for projects to develop stranded gas resources in the state;             
providing for the inclusion in such contracts of terms making                  
certain adjustments regarding royalty value and the timing and                 
notice of the state's right to take royalty in kind or in value                
from such projects; relating to the effect of such contracts on                
municipal taxation; and providing for an effective date."                      
     - HEARD AND HELD                                                          
(* First public hearing)                                                       
PREVIOUS ACTION                                                                
BILL: HB 393                                                                   
SHORT TITLE: DEVELOP STRANDED GAS RESOURCES                                    
SPONSOR(S): RULES BY REQUEST OF THE GOVERNOR                                   
Jrn-Date    Jrn-Page           Action                                          
 2/11/98      2280     (H)  READ THE FIRST TIME - REFERRAL(S)                  
 2/11/98      2281     (H)  OIL & GAS, FINANCE                                 
 2/11/98      2281     (H)  2 FISCAL NOTES (DNR, REV)                          
 2/11/98      2281     (H)  GOVERNOR'S TRANSMITTAL LETTER                      
 2/19/98               (H)  O&G AT 11:00 AM CAPITOL 124                        
 2/19/98               (H)  MINUTE(O&G)                                        
 2/24/98               (H)  O&G AT 10:00 AM CAPITOL 124                        
 2/24/98               (H)  MINUTE(O&G)                                        
 2/26/98               (H)  O&G AT 10:00 AM CAPITOL 124                        
 2/26/98               (H)  MINUTE(O&G)                                        
 3/03/98               (H)  O&G AT 10:00 AM CAPITOL 124                        
 3/03/98               (H)  MINUTE(O&G)                                        
 3/05/98               (H)  MINUTE(O&G)                                        
 3/09/98      2578     (H)  RES REFERRAL ADDED                                 
 3/10/98               (H)  O&G AT 10:00 AM CAPITOL 124                        
WITNESS REGISTER                                                               
HANK HOVE, Mayor of Fairbanks                                                  
1253 Chena Hot Springs Road                                                    
Fairbanks, Alaska 99712                                                        
Telephone:  (907) 459-1000                                                     
POSITION STATEMENT:  Testified on HB 393.                                      
DAVID COBB, Mayor of Valdez                                                    
P.O. Box 1858                                                                  
Valdez, Alaska 99686-1858                                                      
Telephone:  NOT PROVIDED                                                       
POSITION STATEMENT:  Testified on HB 393.                                      
BENJAMIN NAGEAK, Mayor of North Slope Borough                                  
P.O. Box 69                                                                    
Barrow, Alaska 99723                                                           
Telephone:  (907) 852-0200                                                     
POSITION STATEMENT:  Testified on HB 393.                                      
DAVE HIRE, North Slope Borough                                                 
Department of Administration                                                   
ADDRESS and TELEPHONE NOT PROVIDED                                             
POSITION STATEMENT:  Testified on HB 393.                                      
LARRY OSTROVSKY, Assistant Attorney General                                    
Oil, Gas & Mining Section                                                      
Civil Division, Department of Law                                              
1031 West 4th Avenue, Suite 200                                                
Anchorage, Alaska 99501                                                        
Telephone:  (907) 269-5100                                                     
POSITION STATEMENT:  Testified on HB 393.                                      
ED FLANAGAN, Deputy Commissioner                                               
Office of the Commissioner                                                     
Department of Labor                                                            
P.O. Box 21149                                                                 
Juneau, Alaska 99802                                                           
Telephone:  (907) 465-2700                                                     
POSITION STATEMENT:  Testified on HB 393.                                      
ACTION NARRATIVE                                                               
TAPE 98-20, SIDE A                                                             
Number 0001                                                                    
CHAIRMAN MARK HODGINS called the House Special Committee on Oil and            
Gas meeting to order at 10:06 a.m.  Members present at the call to             
order were Representatives Hodgins, Ogan, Rokeberg, Brice and                  
Kemplen.  Representative Bunde arrived at 10:08 a.m. and                       
Representative Ryan arrived at 10:15 a.m.                                      
HB 393 - DEVELOP STRANDED GAS RESOURCES                                        
Number 0068                                                                    
CHAIRMAN HODGINS announced the committee would hear HB 393, "An Act            
relating to contracts with the state establishing payments in lieu             
of other taxes by a qualified sponsor or qualified sponsor group               
for projects to develop stranded gas resources in the state;                   
providing for the inclusion in such contracts of terms making                  
certain adjustments regarding royalty value and the timing and                 
notice of the state's right to take royalty in kind or in value                
from such projects; relating to the effect of such contracts on                
municipal taxation; and providing for an effective date."  He                  
stated that the pipeline mayors, Mayor Hank Hove of Fairbanks,                 
Mayor Dave Cobb of Valdez and Mayor Benjamin Nageak of North Slope             
Borough, would be testifying.                                                  
Number 0319                                                                    
HANK HOVE, Mayor of Fairbanks, stated that they are prepared to                
offer their bottom line.  He stated that they have operated under              
the premise that the commissioner of revenue has by statute the                
power to defer municipal taxes, but not necessarily to (INDISC.--              
coughing) pipeline owners from ad valorem taxes.  They have                    
discussed this matter and have concluded that although they had                
previously expressed an interest to take an equity position in the             
pipeline equal to the amount of taxes deferred for the five years,             
they have reconsidered.  The conclusion is that perhaps there are              
elements to that concept that may be troubling.  He stated that one            
problem is that their equity share would be exceedingly small and              
in order to guarantee the constituents interest they would have to             
have access to the financial records of the operating company.  He             
stated that the department of revenue is troubled by this, as it               
would require disclosure of confidential financial records.                    
Number 0630                                                                    
MAYOR HOVE stated that this problem also arises if the state took              
an equity position, as there is the problem of                                 
shareholder/regulator.  He gave the example of an environmental                
problem that would cause a conflict of interest in that                        
circumstance as the decision might represent the business interest             
but be bad for the state of Alaska.  They have come up with a                  
better plan which would be to defer the taxes on the pipeline for              
the first five years and would have those taxes repaid by the                  
consumer price index and recalculated on January 1 of each year.               
He stated that it would be repaid on a level basis and after year              
ten it would just be the ad valorem taxes, which would be                      
applicable to the value of the pipeline that year.  He stated that             
at the end of year 10, the deferred taxes and all currently due                
taxes would have been paid.  He stated this would satisfy the                  
necessity to create an economic circumstance.                                  
Number 1055                                                                    
MAYOR HOVE stated that they have concluded that there might be a               
significant social impact for communities as a result of the                   
construction.  The most likely impact would be the construction of             
school to accommodate the students that the construction workers               
would be bringing with them. He stated that as a rule the                      
communities issue up to 30 year bonds for the construction of                  
schools and they are general obligation bonds repaid (INDISC.) the             
general fund as tax revenues.  He stated that in this circumstance             
they feel, they need to be protected because of the possible                   
situation of, if they build schools to accommodate the influx of               
residents into the communities and then for some reason the                    
pipeline construction stopped or did not deliver gas.  They would              
ask that for the first five years the state would hold them                    
harmless and guarantee the bonds so they will not be left holding              
the bag should construction not occur.  He stated that until                   
revenue is produced they are asking that the state guarantee any               
bonds for that five-year-period.  He stated that they also feel                
that any petroleum related property that is presently subject to an            
ad valorem tax should not be deferred.  He stated that any property            
tax on an ad valorem basis that may be converted from oil or an oil            
related function and used as part of the gas project, should not               
have the taxes deferred on them.  The (INDISC.) of the taxes should            
only apply to projects that require construction of the Trans-                 
Alaskan Natural Gas Pipeline and the facilities in existence before            
should not have their taxes deferred.                                          
Number 2055                                                                    
MAYOR HOVE stated that communities that have an economic proximity             
to the pipeline should have guaranteed access to sufficient                    
quantities of gas and have  prices that are equal to the well head             
value of gas plus the allocated transportation cost of the pipeline            
connection for that community.  He urged that the legislature                  
specify that a sponsor contract needs to be entered into by the                
June 30, 2000.                                                                 
TAPE 98-20, SIDE B                                                             
Number 0012                                                                    
REPRESENTATIVE JOE RYAN asked if the gas, that he is talking about             
for transportation is state royalty gas because otherwise, the                 
people that handle the gas in the interim or the people that                   
producing it would probably want to make a profit.  He asked how it            
would be differentiated.                                                       
Number 0030                                                                    
MAYOR HOVE replied that they are not prepared to get involved in               
the "nuts and bolts" matters and can not make those determinations.            
He stated that they need this because it is time that Alaskans                 
participate and have access to a program and a product that is                 
fairly priced.  Cheap energy, whether it comes from state royalty              
gas or from other gas is of little importance to them.  He stated              
that Fairbanks has an oil pipeline that goes through the community             
and has two refineries but the community is paying up to 7 cents               
more per gallon for the product that they refine then what is                  
shipped to Anchorage.  The transportation component is not                     
reflected in the price, the Fairbanks price should be less because             
Anchorage requires it to be transported 350 miles.  He stated that             
they want to create a circumstance where that does not happen                  
again.  He stated that there are all sorts of esoteric markets                 
reasons why this is so.  He reiterated that they want to create the            
circumstance where it is in statute that they will have a                      
competitive price for distribution in Fairbanks or for whoever is              
able to bring a gas to the Trans-Alaskan Natural Gas Pipeline.  He             
stated that Fairbanks buys more B.T.U.s per year than any other                
metropolitan are in the U.S., yet they pay more than any else per              
B.T.U.  A source of cheap energy is extremely important to them.               
Number 0144                                                                    
REPRESENTATIVE RYAN stated that coincidentally the price of gas                
dropped 10 cents after the economic development meeting.                       
Number 0170                                                                    
REPRESENTATIVE ALAN KEMPLEN referred to point 4 on the "Proposed               
Amendments to HB 393 by Pipeline Mayors", in reference to schools              
and bonding.  He stated that there are a lot more impacts on local             
municipalities than just kids coming in.  He asked how he would                
address those impacts and would he have the ability to address                 
those other impacts.  He asked if the bonding ability is all he                
Number 0207                                                                    
DAVID COBB, Mayor of Valdez, responded that right now it is                    
difficult to pin point what those other impacts are going to be.               
In Valdez there is the history with the past pipeline and with the             
oil spill.  He stated that with 100 families moving into Valdez a              
new school is needed.  He stated that as land is for sale, water               
and sewers will become an issue.  He pointed out that there is a               
myriad of things that will have to be done to take care of the                 
impact.  Bonds are one avenue to be able to do what is needed up-              
front, with this and some guarantees from the state they have more             
flexibility of the things that can be done in the communities.                 
Number 0272                                                                    
BENJAMIN NAGEAK, Mayor of North Slope Borough, stated that they do             
have some experience with the impacts.  He stated that they are                
short of health aides due to the influx of people.  He stated that             
they are addressing that within their budget and are looking for               
ways to provide more services to people.  He stated that if the                
pipeline happens, there will be more impacts but they are unknown              
at this time.                                                                  
Number 0337                                                                    
REPRESENTATIVE KEMPLEN stated that the pipeline mayors feel that               
they will be able to meet the increased needs from the existing                
sources in the communities and that the communities do not need to             
address any mechanisms to assist with the operating budget.  He                
asked if this was correct.                                                     
Number 0362                                                                    
MAYOR HOVE replied that in order to specifically answer his                    
question, it requires an element of judgement on their part without            
a great deal of data available to them.  It is their feeling that              
the construction of the pipeline will result in people moving into             
the communities, buying homes, so the tax base will increase on a              
secondary basis.  He stated that it is their judgement, that those             
events will be sufficient to take care of the operational side.  He            
stated that the biggest problem is the capital requirement to build            
a school.  He stated that if there was legislation that was a means            
for handling that problem then they think they can handle the rest             
of the problems.                                                               
REPRESENTATIVE KEMPLEN stated that he was writing this down.                   
MAYOR HOVE reiterated that he feels that it will be the case,                  
although he did say they are operating without a lot of the facts.             
He stated that they have been asked to keep this simple and make it            
fundamental.  He stated that this is a fundamental bottom line and             
they hope that they will never have to appear before legislature               
again.  He asserted that he hoped the legislature would use the                
desired amendments that they have articulated for the committee.               
Number 0481                                                                    
REPRESENTATIVE NORMAN ROKEBERG stated that he has not seen any                 
baseline data on the communities and would appreciate getting that             
information.  He asked what the combined population is of the North            
Star Borough and the city of Fairbanks.                                        
MAYOR HOVE replied 85,000                                                      
REPRESENTATIVE ROKEBERG asked what is the combined budget for                  
schools and operations for the borough and the city.                           
Number 0572                                                                    
MAYOR HOVE replied approximately $195 million.                                 
REPRESENTATIVE ROKEBERG asked how much is in debt service payments.            
Number 0533                                                                    
MAYOR HOVE replied that the only debt that they have is in relation            
to schools and is largely taken care of by the state.  He stated               
that they have some debt in relation to a recently closed landfill             
and the new one.                                                               
REPRESENTATIVE ROKEBERG asked if there are any rainy day account               
Number 0565                                                                    
MAYOR HOVE replied that the city has a permanent fund which                    
consists of the revenues derived from the sale of the telephone                
utility, electric generating utility and sewer utility which totals            
$87 million.  He stated that it requires a super majority of the               
vote to be able to remove that money.  He stated that the general              
fund balance in the Fairbanks North Star borough, which is not a               
cash account as it moves back and forth, is around $8 to $10                   
Number 0602                                                                    
REPRESENTATIVE ROKEBERG asked Mayor Cobb what the population of                
Valdez is.                                                                     
MAYOR COBB replied 4,600.                                                      
REPRESENTATIVE ROKEBERG asked what the annual budget is of the                 
municipal services and the school.                                             
MAYOR COBB replied $23 million.                                                
Number 0617                                                                    
REPRESENTATIVE ROKEBERG asked what the debt service is.                        
MAYOR COBB replied that there is 6 million in school debt.                     
REPRESENTATIVE ROKEBERG asked if the $23 million includes the local            
contribution of University of Alaska community college.                        
MAYOR COBB replied that it does, about 700,000.                                
REPRESENTATIVE ROKEBERG asked if they have a rainy day and a                   
permanent fund account.                                                        
Number 0640                                                                    
MAYOR COBB replied that they have both, the total being $60                    
REPRESENTATIVE ROKEBERG asked Mayor Nageak the same questions.                 
Number 0649                                                                    
MAYOR NAGEAK stated that the population is 8,000.  The borough's               
contribution to the seven village schools is $28 million out of the            
operating budget for $169 million.  He stated that they provide for            
all the services: airports, clinics, fire department etc.  He                  
stated that the budget would provide training for local hire to                
work on the pipeline.                                                          
REPRESENTATIVE ROKEBERG stated that his information stated that the            
total borough's budget is around $350 million including everything.            
DAVE HIRE, North Slope Borough, Department of Administration,                  
stated that the debt service would be added on top of the operating            
REPRESENTATIVE ROKEBERG stated his information states that the debt            
service is about $110 million a year.                                          
Number 0782                                                                    
MR. HIRE stated that the operating budget is approximately $169                
million and on top of that is the debt service repayment, which he             
does not have the figure.  He stated that the majority of their                
debt is retired over the next ten and a half years as they do not              
bond past an eleven year schedule.                                             
REPRESENTATIVE ROKEBERG asked what the "mill" rate is in the                   
MR. HIRE replied that it is 18.5 mills.                                        
Number 0845                                                                    
REPRESENTATIVE ROKEBERG asked if there are any economic incentive              
programs for development.                                                      
Number 0867                                                                    
MAYOR COBB replied that Valdez is working with a Montana grain                 
company to try and get Valdez's grain elevators utilized.  He                  
stated that they are always trying to find new economic development            
within the community.  He stated that the major problem is the high            
electrical rates.  He stated that when the rates are 19 cents a                
kilowatt no one wants to come into the community.                              
Number 0967                                                                    
REPRESENTATIVE ROKEBERG asked Mayor Cobb to tell the committee the             
history of their bond issues for infrastructure during the oil                 
Number 0991                                                                    
MAYOR COBB replied that they had bonded the dock infrastructure                
through revenue sharing bonds that were paid buy the oil companies             
and are still being paid off.  He stated that it is not a debt to              
the city as they are industrial revenue bonds.                                 
Number 1035                                                                    
REPRESENTATIVE ROKEBERG asked if there was any tax relief granted              
to "Alyeska pipe" by the municipality.                                         
Number 1043                                                                    
MAYOR COBB replied that it was a 1 percent return.                             
Number 1080                                                                    
REPRESENTATIVE ROKEBERG asked Mayor Hove if there was an inherent              
benefit to the communities, if this gas was make available for                 
local generation.  He stated that it is unusual that they are                  
asking for a further benefit.                                                  
Number 1122                                                                    
MAYOR HOVE replied that he presumed his question arises from the               
statement made regarding well head value plus allocable                        
transportation costs.  He stated that if he thought it out,                    
Representative Rokeberg, would find that the return to the pipeline            
owner and to the state, assuming it is royalty gas would be the                
same if it had been liquefied and loaded into a tanker.  He stated             
that he would find that it would net out to the same amount.  He               
stated that they want to pay their fair share, they are not looking            
for subsidized gas they are looking for gas that is priced the same            
to them as it is to wherever it is going.                                      
Number 1185                                                                    
REPRESENTATIVE ROKEBERG asked if wouldn't the municipalities be                
able to grant a franchise and/or have control over the distributor             
and marketer of the gas, within their boundaries.                              
Number 1211                                                                    
MAYOR HOVE replied no.  He stated that they presently have a                   
privately owned gas distribution firm and that is hauling Liquefied            
Natural Gas (LNG) by tanker truck up to the city and putting it                
into the line.  He stated that to the extent that they continue to             
expand that distribution system, they will probably be the natural             
gas distributors, that they will be using.                                     
Number 1242                                                                    
REPRESENTATIVE ROKEBERG stated that in this era of deregulation, as            
natural gas transmission and distribution within the municipality              
of Anchorage is totally deregulated.  He stated that it is ironic              
Mayor Hove would want to stipulate (UNDISC.) price.                            
Number 1286                                                                    
MAYOR NAGEAK stated that he has to barge in fuel to all of the                 
communities.  He stated that the borough subsidizes it because of              
the high cost of transportation.  He stated that they are trying to            
find alternative energy ways due to the high cost of gasoline.                 
Number 1388                                                                    
REPRESENTATIVE CON BUNDE stated that he was at the energy summit               
and they are talking about $8 a barrel.  He stated that proximity              
of the gas pipeline and future uses are a soft word for him and                
asked for the Mayor's definition.                                              
Number 1462                                                                    
MAYOR HOVE stated that he uses the word proximity advisably.  He               
stated that the Beluga Fields, are most likely, not going to be                
able to supply the demand for gas in Southcentral.  He stated that             
it is conceivable that a smaller pipeline could transport gas to               
South Central Alaska.  He stated that to the maximum extent                    
possible Alaskans should benefit from Alaskan gas first, as long as            
it is not on the subsidized basis.  That is why they chose the word            
Number 1594                                                                    
MAYOR HOVE stated that in regards to future use it is hard to                  
define.  He stated that they are trying to make provisions for                 
future use, meaning the gas will be available to them when they                
require it.                                                                    
Number 1643                                                                    
MAYOR COBB stated that in Valdez they look at it as an energy                  
source and it would be more then the community would ever use.  He             
stated that with 200 mega watts of surplus electricity sent up to              
Southcentral Alaska, they could see electricity being produced in              
the 2 to 4 cent range.  He stated that electricity and the need for            
an "inertia" becomes very viable to send the electricity back to               
the rest of Alaska.                                                            
REPRESENTATIVE BUNDE stated that they can't do anything that cannot            
be undone by a future legislature.  He stated that in regards to               
the bottom line, he asked how would they be able to commit future              
municipal administrations to what would be their bottom line.                  
Number 1784                                                                    
MAYOR HOVE stated that they operate under the same rules.  He                  
stated he could not obligate a successor.  When considering things             
of this sort, they are usually not easily modified.  He stated that            
there will be point where these events will not be able to be                  
Number 1920                                                                    
MAYOR COBB stated that he perceives this to be the bottom line,                
however, anything is negotiable and they could discuss this with               
any party involved.                                                            
Number 1979                                                                    
CHAIRMAN HODGINS referred to the bond issues and asked if the                  
communities have a special assessment district for roads and sewer             
lines etc.                                                                     
MAYOR HOVE responded yes.                                                      
Number 2008                                                                    
REPRESENTATIVE ROKEBERG stated that's what troubles him, is that               
there is not provision for any front-loaded monies to respond to               
the actual impact.  He stated that there are not impact funds.                 
Number 2118                                                                    
CHAIRMAN HODGINS asked what type of dollars are they speculating on            
and what would the bonding needs be over the five years.                       
Number 2137                                                                    
MAYOR HOVE replied that it is difficult to answer until more                   
information is known about the scope of project, such as how many              
people are coming.  He stated that in response to impact funding,              
it could be said that this is their contribution to the project.               
TAPE 98-21, SIDE A                                                             
Number 0031                                                                    
MAYOR HOVE stated that it either comes from the state of Alaska or             
it comes from the sponsor group of the gas pipeline.  He stated                
that acknowledging that the project is economically marginal seems             
to be troubling.  He stated that if they were to place a price on              
the impact funding in total, they might tip the project upside                 
down.  He stated the sum would be significant and would exceed the             
amount of the deferred taxes for the first five years.                         
Number 0284                                                                    
REPRESENTATIVE ROKEBERG stated that he is troubled by the statement            
that sum of impact would exceed the amount of deferred taxes.  He              
stated that it might not be the case that the impacts are going to             
be extraordinary.                                                              
Number 0327                                                                    
MAYOR HOVE replied that the only way that they have to look at the             
pipeline is to take the $12 billion figure, back out the cost of 14            
LNG tankers and reveal only the Alaska component of the                        
construction of the pipeline, including what might incur on the                
North Slope and Valdez.  He stated that what would occur in those              
communities is greatly in excess of what will occur in Fairbanks.              
He stated that in the first year there will be zero tax deferred               
because the taxes will not be due until the following year.  He                
stated that the construction phase will last until year 3.  The                
full taxable value of the pipeline will not occur until year 5 or              
6.  He stated that considering the time table the amount of taxes              
that would be deferred will not be as much as the impacts that are             
likely to occur in the communities.  He stated that the impacts are            
both negative and positive.  He stated that Anchorage will have                
many positive impacts, the construction of industry's building,                
which are under the local real estate tax laws.                                
Number 0712                                                                    
MAYOR COBB stated that they have a team put together that will be              
evaluating this as more information is available and will be                   
looking at every aspect.  He stated that until what the project                
consists of is known, it is very difficult to determine what the               
impacts are going to be.                                                       
Number 0838                                                                    
MAYOR NAGEAK responded (INDISC. -- STATIC on TAPE).                            
Number 1009                                                                    
REPRESENTATIVE TOM BRICE stated that his biggest concern is that               
the municipalities need to rely on the state to make sure they are             
not going to be left out.                                                      
Number 1207                                                                    
REPRESENTATIVE KEMPLEN referred to statements about inadequate                 
information and stated that it would be appropriate to insert a                
subsection into the legislation that asks the sponsor group to                 
address the issue of community impacts, since they will know the               
phasing and details of the project.  He stated that they should be             
the ones to present the solution to the impacts to local                       
CHAIRMAN HODGINS stated that we need to remember that we need to               
keep this project profitable.                                                  
REPRESENTATIVE KEMPLEN stated that lets encourage creativity.                  
Number 1552                                                                    
REPRESENTATIVE RYAN stated that the bill does not preclude a                   
municipality from enacting a sales (INDISC. -- TAPE STATIC).                   
TAPE 98-21, SIDE B                                                             
Number 0040                                                                    
CHAIRMAN HODGINS thanked the pipeline mayors and stated that the               
committee will consider their thoughts.                                        
LARRY OSTROVSKY, Assistant Attorney General, Oil, Gas & Mining                 
Section, Civil Division, Department of Law, stated that any                    
discussion of Alaska hire is related to Article 4 of the U.S.                  
Constitution which provides that the citizens of each state shall              
be entitled to all privileges and immunities of citizens in the                
serval states.  He stated that the Alaska Supreme Court has                    
construed the purpose of this provision being to prevent states                
from enacting measures which discriminate against nonresidents for             
reasons of economic protectionism.  He stated that a past court                
case had shown that some deference is due to the state of Alaska               
when it functions in a propriety capacity because that statute                 
involves public construction of the project.  He stated that the               
court also decided that classification among people affects a                  
fundamental right and it must for a permissible purpose be narrowly            
tailored to achieve that purpose.  He stated that it affected a                
vast majority of construction projects in the state.  He stated                
that the Alaska Supreme Court held that the purpose to exclude                 
nonresidents, so that more jobs would be available to Alaskans, was            
an impermissible purpose.  The reason being because the privileges             
and immunities clause applies to all states.                                   
Number 0202                                                                    
MR. OSTROVSKY stated that the other constitutional provision that              
is relevant, is that the Alaskan Constitution provides that "all               
persons are equal and entitled to equal rights, opportunities and              
protection under the law."  He stated that this was a provision                
construed in a local hire case which involved a statute involving              
the preference for individuals residing in areas determined by the             
Commissioner of Labor to be a zone under employment.  He stated                
that the court found that "the (INDISC.) treatment of unemployed               
workers in one region in order to confer an economic benefit on                
similarly situated workers in another region is not an legitimate              
legislative goal."  The court found that a nonresident worker in a             
less distressed zone might be unfairly disadvantaged.  He stated               
that the bill tries to not cross the line in order to not enter                
into unconstitutionality.                                                      
Number 0282                                                                    
CHAIRMAN HODGINS asked can we or can't we have local hire.                     
Number 0347                                                                    
MR. OSTROVSKY replied that local hire could be encouraged but it               
would be very easy to cross the line into unconstitutionality.                 
Number 0359                                                                    
CHAIRMAN HODGINS asked if the Department of Law has done a legal               
analysis of the bill.                                                          
Number 0368                                                                    
MR. OSTROVSKY replied that they have not done a formal legal                   
analysis of the bill.                                                          
CHAIRMAN HODGINS asked if the local hire issues in the bill work.              
MR. OSTROVSKY replied that the department believes that they work.             
Number 0375                                                                    
REPRESENTATIVE KEMPLEN stated that Alaska has licencing                        
requirements and courses need to be taken regarding Arctic and sub-            
Arctic conditions.  He asked if there were problems with those type            
of requirements.                                                               
Number 0406                                                                    
MR. OSTROVSKY replied that he is assuming he means occupational                
Number 0414                                                                    
REPRESENTATIVE KEMPLEN asked if it would be constitutional if the              
legislation were to include language that required participants in             
the construction of the gas pipeline, to attend an accredited                  
Alaskan institution in order to acquire knowledge that is relevant             
to Arctic and sub-Arctic environmental conditions.                             
Number 0457                                                                    
MR. OSTROVSKY stated that he has not considered that approach.  He             
stated that he thought that if there is a legitimate purpose for               
that requirement and not one that is for the sole purpose of                   
weeding out nonresidents, it would be legitimate.  For example a               
dentist or a doctor needs accreditation.  He reiterated that if it             
is transparent that it is to eliminate nonresidents it would not be            
Number 0485                                                                    
REPRESENTATIVE KEMPLEN stated that there is no other state that has            
winters as long as Alaska's which necessitates additional knowledge            
and training requirements.  He stated that it would take time for              
someone to acquire that training.                                              
Number 0517                                                                    
REPRESENTATIVE RYAN stated that contractually there are a lot of               
things that can be done that can't be done statutorily.                        
MR. OSTROVSKY stated that it is correct to distinguish what an                 
individual can do and what a governmental entity can do.  He stated            
that is why the courts have said that there will be greater                    
deference when the state is acting like a private citizen in a                 
proprietary capacity.                                                          
Number 0604                                                                    
REPRESENTATIVE RYAN stated that there are lots of local preference             
laws and asked if it would be possible to give a local hire                    
preference.  He stated that the state of Alaska is nothing more                
than its residents and the resource is owned by the people.  He                
stated that if he needed a carpenter he would be able to choose the            
carpenter that he wanted.  He asked how this project is any                    
Number 0683                                                                    
MR. OSTROVSKY replied that admittedly it is not a very bright line             
because the court has acknowledged, that the greater deference is              
to the state acting in a propriety capacity.  He stated that it                
could be argued that this project is distinguishable from the                  
others as this is just one project.  He stated that it would be                
difficult to say with any certainty whether it has crossed the line            
or not.                                                                        
Number 0752                                                                    
REPRESENTATIVE RYAN asked if it was conceivable to have a                      
contractual arrangement for provisions protecting Alaskans for hire            
than to do so statutorily.                                                     
Number 0776                                                                    
MR. OSTROVSKY stated that it is probably better if it is not a                 
function of legislature.  He stated that this process would go                 
through a level of negotiation when the sponsors and the                       
commissioners form the contract.  He stated that there could be                
stronger contractual terms and the less they are the product of                
legislation the better the legal argument is.                                  
Number 0848                                                                    
REPRESENTATIVE BRICE asked if there were any other states that had             
local hire provisions.                                                         
Number 0860                                                                    
MR. OSTROVSKY replied yes, there have been a lot of cases.  They               
were different situations.  He referred to South Dakota and stated             
that the state owned a cement plant and gave a preference to                   
residents to purchase cement.  He stated that it was upheld because            
the state was acting in its propriety capacity.  He stated that                
Boston had a local preference for public construction project and              
it was challenged under the commerce clause of the U.S.                        
Constitution which prohibits restraints on commerce.  It survived              
the challenge as the state was acting as proprietor but it might               
not have survived the challenge under the privileges and immunities            
Number 0945                                                                    
REPRESENTATIVE BRICE stated that it was his understanding that                 
there were some areas in the Pacific Northwest that have been able             
to seek relief from Congress in establishing local hire provisions             
for the timber industry.                                                       
MR. OSTROVSKY stated that he would look into it.                               
Number 0998                                                                    
CHAIRMAN HODGINS stated that on page 15, Section 3,  defines an                
Alaska resident to be someone who received a permanent fund                    
dividend check or has obtained two items from a list which includes            
drivers license and voter registration.  He stated that this means             
that anyone can become a resident in close to an hour.                         
Number 1042                                                                    
MR. OSTROVSKY stated that he would change the language to read                 
"voter registration card and".  He would delete drivers license and            
motor vehicle registration.  He stated that with these changes the             
other requirements require a years residency.                                  
Number 1102                                                                    
CHAIRMAN HODGINS asked if that would stand the test.                           
Number 1109                                                                    
MR. OSTROVSKY replied that it is as it is an accountability method,            
for purposes of this project.                                                  
Number 1144                                                                    
CHAIRMAN HODGINS asked if it would be possible to come up with a               
level of participation and local hire to give incentives to certain            
Number 1158                                                                    
MR. OSTROVSKY replied that is an interesting question but incentive            
is the flip side of disincentive.  He stated that he would imagine             
it could provide an incentive for a royalty reduction.  However,               
favoring one over another would be coercing resident hire at the               
expense of nonresident hire.                                                   
Number 1213                                                                    
CHAIRMAN HODGINS asked if he could present the committee with some             
language, understanding what the committee would like to do.                   
Number 1235                                                                    
MR. OSTROVSKY stated that it is important to distinguish between               
employers and employees.  He stated that an incentive program may              
not act as a bar to an employer coming in because all employers                
would be able to bid and if they met certain local hire                        
requirements they would then get an incentive.  He stated that the             
bill was drafted thinking that it was as far as the department                 
could constitutionally go.  He stated that the changes he suggested            
would change the requirement to essentially a year.                            
Number 1371                                                                    
REPRESENTATIVE ROKEBERG asked if the Department of Law has recently            
defended that definition of what a resident is.                                
Number 1424                                                                    
MR. OSTROVSKY replied that he is not aware of a recent case and in             
a sense the definition of resident is not the constitutional                   
problem here.  It is how it is implemented.  He stated that the                
state can call a resident anything they want to, it is just the                
exclusionary measures that brings debate.                                      
Number 1466                                                                    
REPRESENTATIVE ROKEBERG asked if a one year residential requirement            
is constitutional and defendable.                                              
MR. OSTROVSKY stated that it is defendable as long as it is in this            
bill as long as it does not act as a bar...                                    
CHAIRMAN HODGINS asked as long as it is never applied.                         
MR. OSTROVSKY replied as long as it does not act as a bar to                   
someone seeking employment.  He stated that accountability is at               
the heart of this.  He stated that the industry will have to                   
disclose their hired Alaskan residents and as private contractors,             
they can do a lot things that the state cannot make them do.  The              
bill would provide the information for everyone to consider this in            
a contemporaneous way.                                                         
Number 1560                                                                    
REPRESENTATIVE ROKEBERG asked if the qualification for the                     
permanent fund dividend has ever been tested in the courts.                    
MR. OSTROVSKY stated that he is sure it has.                                   
REPRESENTATIVE ROKEBERG referred to Representative Ryan's idea that            
it could be held in contract and asked if it is better to not have             
the definition of Alaska residency in the bill.                                
Number 1642                                                                    
MR. OSTROVSKY replied that there is nothing wrong with defining an             
Alaskan but the individual contracts are better suited to further              
mandate Alaskan hire.                                                          
Number 1743                                                                    
REPRESENTATIVE BRICE asked what is the longest term of an Alaskan              
Number 1781                                                                    
MR. OSTROVSKY replied that as far as he knows it is a year.                    
Number 1805                                                                    
REPRESENTATIVE BRICE stated that he keeps bringing up the                      
distinction between a bar to employment verses accountability and              
asked if he could go into depth.                                               
Number 1820                                                                    
MR. OSTROVSKY replied that because of the constitutional                       
constraints, accountability  gives the incentive for producers to              
have local hire because they come to the legislature for many                  
things.  He stated that it would seem to be a powerful tool.                   
Number 1916                                                                    
REPRESENTATIVE RYAN suggested the longevity bonus and the pioneer              
home as criteria.                                                              
Number 1998                                                                    
REPRESENTATIVE ROKEBERG in regards to pioneer homes it has been                
lowered to one year.                                                           
TAPE 98-22, SIDE A                                                             
Number 0031                                                                    
ED FLANAGAN, Deputy Commissioner, Office of the Commissioner,                  
Department of Labor, stated that the big key is that the industry              
voluntarily agrees to adopt the language to hire residents.  He                
stated that within that context there could be the definition of a             
resident.  He stated that there has been a matrix of indicators                
that can be used.  He stated that it is in the eye of the beholder             
looking at the data to decide what a resident is.  He stated that              
British Petroleum gives a very detailed report every three years on            
their workers.                                                                 
Number 0138                                                                    
REPRESENTATIVE KEMPLEN asked page 15 the bill refers to                        
"qualified."  He asked if the Department of Labor has given any                
sort of hard thinking to future demand of qualified Alaskans for               
this project and whether there is in the current labor pool                    
sufficient numbers of qualified Alaskans to meet the projected                 
demand for the project.                                                        
Number 0170                                                                    
MR. FLANAGAN replied that not for this project but on a more                   
tangible basis there is a projected large amount of work for 1999              
and 2000 on the North Slope.  He stated that the Oil and Gas                   
working group has done a skills and projected labor needs                      
assessment with the industry for that period.  They have tried to              
identify the training needs for that demand.  He stated that if                
they address that need and meet it, it would roll-over and take                
care of this project.                                                          
Number 0226                                                                    
REPRESENTATIVE KEMPLEN stated that there was a suggestion to                   
solidify the connection between the industries need for trained                
labor and the provision of that trained labor was the notion "of               
payment in lieu of taxes".  The suggestion was that there could be             
a credit against that "payment in lieu of taxes".  For example, an             
oil company could train their labor force and get a benefit which              
would be a credit against that "payment in lieu of taxes".  He                 
asked if he was saying that the energy industry in Alaska is                   
already solid and that connection has already been established.  He            
asked if this notion of a credit is not to be needed.                          
Number 0280                                                                    
MR. FLANAGAN responded that he would not say that.  He thought that            
the efforts to date have probably identified the needs.  This                  
incentive, he did not believe has been discussed but would merit               
Number 0306                                                                    
REPRESENTATIVE BRICE referred to page 13, line 30 and the                      
requirements for local hire and stated that one of the provisos is             
competitive priced labor.  He asked that it is competitively priced            
compared to what.                                                              
Number 0325                                                                    
MR. FLANAGAN replied that he could not place that in context for               
CHAIRMAN HODGINS stated that the bill would be held over.                      
Number 0355                                                                    
CHAIRMAN HODGINS adjourned the House Special Committee on Oil and              
Gas meeting at 12:00 p.m.                                                      

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