Legislature(1993 - 1994)

02/19/1993 08:00 AM RES

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
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               HOUSE RESOURCES STANDING COMMITTEE                              
                        February 19, 1993                                      
                            8:00 a.m.                                          
                                                                               
                                                                               
  MEMBERS PRESENT                                                              
                                                                               
  Representative Bill Williams, Chairman                                       
  Representative Bill Hudson, Vice Chairman                                    
  Representative Con Bunde                                                     
  Representative Pat Carney                                                    
  Representative Joe Green                                                     
  Representative Eldon Mulder                                                  
  Representative John Davies                                                   
  Representative Jeannette James                                               
                                                                               
  MEMBERS ABSENT                                                               
                                                                               
  Representative David Finkelstein                                             
                                                                               
  OTHER LEGISLATORS PRESENT                                                    
                                                                               
  Representative Mark Hanley                                                   
                                                                               
  COMMITTEE CALENDAR                                                           
                                                                               
  Confirmation:  Bruce Twomley, Commercial Fisheries Entry                     
                 Commission                                                    
                                                                               
                 CONFIRMATION RECOMMENDED                                      
                                                                               
  *HB 116   "An Act directing the commissioner of natural                      
            resources to accept, under certain circumstances,                  
            the contract price agreed to between a lessee of                   
            federal land and a gas or electric utility as the                  
            value of the federal government's royalty share                    
            from natural gas production when royalty is                        
            payable to the state under applicable federal law;                 
            and providing for an effective date."                              
                                                                               
            HEARD AND HELD FOR FURTHER CONSIDERATION                           
                                                                               
  (* first public hearing)                                                     
                                                                               
  WITNESS REGISTER                                                             
                                                                               
  Bruce Twomley, Chairman                                                      
  Commercial Fisheries Entry Commission                                        
  8800 Glacier Highway, Suite 109                                              
  Juneau, Alaska  99801-8079                                                   
  Phone:  789-6160                                                             
  Position Statement: Provided information and answered                        
                      questions related to his confirmation                    
                                                                               
  Representative Mark Hanley                                                   
  Alaska House of Representatives                                              
  Room 511, State Capitol                                                      
  Juneau, Alaska  99801                                                        
  Phone:  465-4939                                                             
  Position Statement: Prime Sponsor, HB 116                                    
                                                                               
  Kent Boyd, Deputy Director                                                   
  Department of Natural Resources                                              
  Division of Oil and Gas                                                      
  P.O. Box 107034                                                              
  Anchorage,   99510-0734                                                      
  Phone:  762-2547                                                             
  Position Statement: Testified on HB 116                                      
                                                                               
  Bill Van Dyke, Lease Administrator                                           
  Division of Oil and Gas                                                      
  Department of Natural Resources                                              
  P.O. Box 107034                                                              
  Anchorage,   99510-0734                                                      
  Phone:  762-2547                                                             
  Position Statement: Testified on HB 116                                      
                                                                               
  John Tillinghast, Attorney                                                   
  Birch, Horton, Bittner and Cherot                                            
  One Sealaska Plaza, Suite 301                                                
  Juneau, Alaska  99801                                                        
  Phone:  586-2890                                                             
  Position Statement: Testified on HB 116                                      
                                                                               
  Raga Elim, Special Assistant                                                 
  Department of Natural Resources                                              
  400 Willoughby Ave.                                                          
  Juneau, Alaska  99801                                                        
  Phone:  465-2400                                                             
  Position Statement: Explained the DNR's position on HB 116                   
                                                                               
  PREVIOUS ACTION                                                              
                                                                               
  BILL:  HB 116                                                                
  SHORT TITLE:  STATE SHARE OF FEDERAL GAS ROYALTIES                           
  BILL VERSION: CSHB 116(FIN)(TITLE AM)                                        
  SPONSOR(S):  REPRESENTATIVE(S) HANLEY,Phillips,Larson,Green,                 
  Parnell,Navarre                                                              
  TITLE: "An Act amending the manner of determining the                        
  royalty received by the state on gas production, and                         
  directing the commissioner of natural resources to accept,                   
  under certain circumstances, the contract price agreed to                    
  between a lessee of federal land and a gas or electric                       
  utility as the value of the federal government's royalty                     
  share from natural gas production on federal land from which                 
  the state is entitled under applicable federal law to                        
  receive a share of the royalty on gas production; and                        
  providing for an effective date."                                            
                                                                               
  JRN-DATE     JRN-PG               ACTION                                     
  02/03/93       213    (H)   READ THE FIRST TIME/REFERRAL(S)                  
  02/03/93       214    (H)   RESOURCES, FINANCE                               
  02/19/93              (H)   RES AT 08:00 AM CAPITOL 124                      
                                                                               
                                                                               
  ACTION NARRATIVE                                                             
                                                                               
  TAPE 93-21, SIDE A                                                           
  Number 000                                                                   
                                                                               
  The House Resources Committee was called to order by                         
  Chairman Bill Williams at 8:07 a.m.  Members present at the                  
  call to order were Representatives Williams, Hudson, Bunde,                  
  Carney, Green, and Mulder.  Members absent at the call were                  
  Representatives Davies, Finkelstein and James.                               
                                                                               
  CHAIRMAN BILL WILLIAMS announced the committee's first item                  
  of business would be consideration of Bruce Twomley's                        
  confirmation to the Commercial Fisheries Entry Commission                    
  (CFEC), followed by consideration of HB 116.  He said Mr.                    
  Twomley, chairman of the CFEC, had been reappointed to the                   
  CFEC.  Mr. Twomley's resume and a summary of the agency and                  
  its functions were before the committee members.                             
                                                                               
  Number 010                                                                   
                                                                               
  BRUCE TWOMLEY, CHAIRMAN, CFEC, addressed the committee,                      
  telling them he had served on the CFEC for roughly ten                       
  years, and asked that members review his qualifications for                  
  reappointment to the CFEC.                                                   
                                                                               
  Number 016                                                                   
                                                                               
  CHAIRMAN WILLIAMS noted Representative Davies had joined the                 
  meeting.                                                                     
                                                                               
  Number 024                                                                   
                                                                               
  REPRESENTATIVE ELDON MULDER asked for a review of the                        
  highlights of Mr. Twomley's experience on the CFEC.                          
                                                                               
  Number 028                                                                   
                                                                               
  MR. TWOMLEY reviewed his history on the CFEC, and said he                    
  was first recruited for the CFEC in 1982, and appointed                      
  chairman in 1983.  He explained that the CFEC had three                      
  members, and any action required the agreement of at least                   
  two of the three.  He also praised the CFEC's staff, and                     
  noted that prior to 1983, the panel of commissioners served                  
  mostly as administrative law judges deciding individual                      
  fishermen's cases.  In 1983, the commissioners attended the                  
  National Judicial College's training program for                             
  administrative law judges.  As a result of that training,                    
  the CFEC revised its procedures for adjudicating cases,                      
  thereby streamlining the process.                                            
                                                                               
  MR. TWOMLEY said the CFEC acts on about 100 cases per year,                  
  and in ten years at that rate, only one case had been                        
  reversed in court, and only ten cases have been appealed.                    
  He mentioned prior to 1983, 150 appeals had been filed.                      
                                                                               
  Number 097                                                                   
                                                                               
  REPRESENTATIVE JOE GREEN requested an explanation of how the                 
  CFEC had been able to both streamline the process and deal                   
  with cases in more detail.                                                   
                                                                               
  Number 105                                                                   
                                                                               
  MR. TWOMLEY explained that hearing officers had more                         
  authority to make final decisions.  A 60-day deadline for                    
  appeal or reconsideration by the commissioners had been                      
  self-imposed.  He described the process for individuals                      
  applying for a limited entry permit, and said the CFEC                       
  looked closely at the individual's need and fishing history.                 
                                                                               
  Number 156                                                                   
                                                                               
  VICE CHAIRMAN BILL HUDSON asked what percentage of the                       
  CFEC's operating costs came from recipients of the services                  
  and what percent from general funds.                                         
                                                                               
  Number 167                                                                   
                                                                               
  MR. TWOMLEY answered that the CFEC was wholely funded by its                 
  own program receipts.  Specifically, the funds came from                     
  fees charged to fishermen for the renewal of their permits                   
  based on the economic value of their fishery.  The agency's                  
  budget approximated $2.4 million, and the CFEC brought in                    
  about $6 million in fees annually, he advised.                               
                                                                               
  Number 175                                                                   
                                                                               
  VICE CHAIR HUDSON raised the question of permits leaving the                 
  state, and asked whether the CFEC could take an activist                     
  role in stemming the outflow.  He used Bristol Bay as an                     
  example, where approximately 70% of the value of the                         
  fisheries was going outside the state.  He asked whether                     
  current law allowed the commissioners to be activists in                     
  keeping fish values in Alaska.                                               
                                                                               
  Number 199                                                                   
                                                                               
  MR. TWOMLEY answered that the CFEC had taken on the role of                  
  being activists for Alaska.  He said the CFEC published the                  
  transfer figures annually.  In terms of permits leaving the                  
  state, he said the situation had remained fairly stable, at                  
  about 78% of permits being held by Alaskans.  The greater                    
  problem was with permits leaving rural areas for urban                       
  areas.  The problem varied from place to place and from time                 
  to time.  He said ideas that have been used successfully                     
  have been presented at various workshops throughout the                      
  state.                                                                       
                                                                               
  Number 249                                                                   
                                                                               
  VICE CHAIR HUDSON offered praise for the CFEC's work, and                    
  asked about individual fishing quotas (IFQs), and whether                    
  Mr. Twomley could foresee the CFEC becoming involved in the                  
  administration of IFQs.                                                      
                                                                               
  Number 254                                                                   
                                                                               
  MR. TWOMLEY did not anticipate being involved in the                         
  administration of IFQs, since that was separate from the                     
  CFEC.  He pointed out IFQs were before the North Pacific                     
  Fisheries Management Council which dealt with federally                      
  managed fisheries.  He said the state's research capacity                    
  was sometimes used, but that was the only involvement in IFQ                 
  issues.  He added the state's limited entry system was                       
  intended for the salmon fishery, and the system broke down                   
  when there was departure from that model.  The current                       
  process might not be the best form of limiting entry into                    
  other fisheries, he conceded.                                                
                                                                               
  Number 292                                                                   
                                                                               
  VICE CHAIR HUDSON wondered if it would be in Alaska's best                   
  interests to manage the IFQs with some form of limited entry                 
  program.                                                                     
                                                                               
  Number 299                                                                   
                                                                               
  REPRESENTATIVE CON BUNDE expressed concern that with the                     
  limited entry system, the state had created a "crap shoot"                   
  that allowed a few people to get wealthy.  He suggested if                   
  fisheries were controlled with limited entry, the program                    
  should be modified to offset that result, and asked Mr.                      
  Twomley to comment on that.                                                  
                                                                               
  Number 315                                                                   
                                                                               
  MR. TWOMLEY responded that for its purpose, the CFEC was                     
  doing what it was set up to do.  He said there has been                      
  concern about the scallop fishery, where large outside                       
  interests were planning to enter the fishery in a big way,                   
  threatening Alaskans in the fishery.  He suggested there                     
  might be a need to limit that fishery, perhaps by limiting                   
  vessels instead of people.                                                   
                                                                               
  Number 355                                                                   
                                                                               
  REPRESENTATIVE BUNDE reiterated his question about permits                   
  as transferable personal property creating wealth for a few                  
  individuals.                                                                 
                                                                               
  Number 363                                                                   
                                                                               
  MR. TWOMLEY answered that the CFEC took its direction from                   
  the legislature, which could change the statutes, and felt                   
  the CFEC could certainly manage such a program.  He                          
  explained when the legislature created the program with free                 
  transferability of permits, it had in mind that Alaska                       
  fishermen and their families could keep a stake in fishing.                  
  The transferability also created less work and cost for the                  
  state, he said, than if the permits had to be brought back                   
  in to the CFEC to be reissued.  That would involve high                      
  administration costs, he added.  The percentage of permits                   
  staying within the state, he said, was fairly high, which                    
  might be a result of the transferability.                                    
                                                                               
  Number 412                                                                   
                                                                               
  REPRESENTATIVE BUNDE expressed dissatisfaction with the                      
  state's involvement in keeping permits out of the hands of                   
  the Internal Revenue Service (IRS).  He said the limited                     
  entry permit was comparable to a business license, and no                    
  other business was protected by the state.  He was appalled                  
  at the number of permit holders not paying taxes, a figure                   
  he estimated at approximately 40%.                                           
                                                                               
  MR. TWOMLEY addressed the IRS problems, and pointed out the                  
  statutes that originally made the permits exempt from                        
  creditors.  He said there was no attempt by the state to                     
  shield fishermen from their tax liabilities.  The underlying                 
  issue, he said, was that the state has created a notion of a                 
  limited entry permit, which created a "cash value" that                      
  could be seized by the IRS.  He added it was unique for a                    
  tax collector or any other creditor to have the right to                     
  take away a tool of trade, especially in a position where                    
  taking away the asset could put the debtor out of business                   
  forever.                                                                     
                                                                               
  MR. TWOMLEY suggested the cyclical nature of fishing itself                  
  contributed to the problem.  He gave an example of a fishing                 
  family that had planned to pay taxes for 1990 with earnings                  
  from the 1991 fishery.  The fishery bottomed out that year,                  
  and they were unable to pay, and became two years behind.                    
  The IRS, he added, was unwilling to negotiate a payment plan                 
  and threatened to seize the permit and sell it to satisfy                    
  the tax obligations.                                                         
                                                                               
  Number 440                                                                   
                                                                               
  CHAIRMAN WILLIAMS noted Representative James had joined the                  
  meeting.                                                                     
                                                                               
  Number 468                                                                   
                                                                               
  REPRESENTATIVE BUNDE reiterated his preference that the                      
  state stay out of the tax problems of permit holders.                        
                                                                               
  Number 479                                                                   
                                                                               
  REPRESENTATIVE JEANNETTE JAMES commented that her experience                 
  as an accountant led her to wonder whether the tax problems                  
  experienced by fishers were mostly income tax, or involved                   
  other kinds of taxes.                                                        
                                                                               
  Number 488                                                                   
                                                                               
  MR. TWOMLEY could not answer that question, though he                        
  believed income taxes were the greatest problem.  He added                   
  unemployment taxes were not as great a problem, since crew                   
  members were considered independent contractors for                          
  employment tax purposes.                                                     
                                                                               
  Number 500                                                                   
                                                                               
  REPRESENTATIVE JAMES explained the IRS had phases of                         
  focussing on specific groups, and asked whether the IRS was                  
  indeed targeting the fishing industry.                                       
                                                                               
  MR. TWOMLEY confirmed the IRS had beefed up its resources in                 
  Alaska and had targeted the fishing industry.  He said this                  
  was because it was a big target with easy access to records.                 
                                                                               
  Number 508                                                                   
                                                                               
  CHAIRMAN WILLIAMS asked Mr. Twomley how many permits were                    
  sold each year.                                                              
                                                                               
  MR. TWOMLEY answered that about 1,000 permits were                           
  transferred every year.                                                      
                                                                               
  CHAIRMAN WILLIAMS asked how this reconciled with people who                  
  had applied for permits through the CFEC and did not receive                 
  them.                                                                        
                                                                               
  Number 520                                                                   
                                                                               
  MR. TWOMLEY explained how applicants were ranked according                   
  to need and other criteria.  The maximum number of permits                   
  was established by statute.  He said the system was designed                 
  to protect those in the fishery and those who were the most                  
  dependent.  If an individual demonstrated extreme hardship                   
  when they did not receive a permit in the first issuance,                    
  the CFEC could break the maximum permit number.  Usually,                    
  those people were left to get a permit through the transfer                  
  process.  He mentioned loan programs to help accomplish                      
  that.                                                                        
                                                                               
  Number 532                                                                   
                                                                               
  REPRESENTATIVE GREEN asked for the total number of permits.                  
                                                                               
  MR. TWOMLEY answered that more than 13,000 entry permits                     
  existed, with 1,000 being transferred each year.                             
                                                                               
  Number 530                                                                   
                                                                               
  REPRESENTATIVE GREEN asked for clarification on the criteria                 
  for deciding the number of permits to be issued each year.                   
                                                                               
  MR. TWOMLEY explained there were no short-term mechanisms                    
  for adjusting the number of outstanding permits; that was                    
  determined by the marketplace, and the CFEC determined                       
  original issuance based on statutory criteria.                               
                                                                               
  Number 579                                                                   
                                                                               
  VICE CHAIR HUDSON made a MOTION to APPROVE the confirmation                  
  of Bruce Twomley to the CFEC, asking for individual                          
  recommendations and unanimous consent.                                       
                                                                               
  CHAIRMAN WILLIAMS asked if there were any objections to the                  
  motion.  Hearing none, the MOTION PASSED and the                             
  confirmation was recommended.                                                
                                                                               
  Number 555                                                                   
                                                                               
  CHAIRMAN WILLIAMS announced the committee would take a brief                 
  at ease before taking up HB 116.                                             
  HB 116:  STATE SHARE OF FEDERAL GAS ROYALTIES                                
                                                                               
  CHAIRMAN WILLIAMS reconvened the meeting at 8:45 a.m, and                    
  announced there would be testimony by teleconference on                      
  HB 116.  He explained that the bill's sponsor would make a                   
  presentation, and added that this meeting would be for                       
  initial testimony on the bill, which he did not plan to move                 
  from the committee at this meeting.                                          
                                                                               
  Number 562                                                                   
                                                                               
  REPRESENTATIVE MARK HANLEY, PRIME SPONSOR of HB 116,                         
  described the background behind the bill.  In the 1960's he                  
  said, there were fields developed in Cook Inlet that had                     
  both federal and state leases for natural gas.  He explained                 
  that at that time there was no market for natural gas.  He                   
  said Chugach Electric signed a long-term contract as a basis                 
  for investments for the future.  They built gas-powered                      
  turbines near the fields and ran transmission lines.  Over                   
  time, he explained, other markets developed and other                        
  contracts were signed for higher prices.                                     
                                                                               
  REPRESENTATIVE HANLEY said the state came in and issued a                    
  notice to lessees in 1985, saying after that point they                      
  would no longer accept the contract price as the basis for                   
  state royalties.  He continued his explanation, and said in                  
  response to the state's action, the utility felt they had                    
  signed an "arm's length deal."  He said after 25 years, the                  
  utility got a good deal on its lease.  The legislature in                    
  1985 introduced legislation that said on state leases to                     
  utilities, the "arm's length" contract price would be                        
  accepted by the state for royalty valuations.  However, that                 
  law did not address federal leases, from which the state got                 
  90% royalties.                                                               
                                                                               
  REPRESENTATIVE HANLEY noted the Mineral Management Service                   
  had accepted the contract price of the gas as their value.                   
  The state appealed that decision, Representative Hanley                      
  said, claiming the federal government was not collecting                     
  enough money.  He noted the time frame went back to 1984 to                  
  1987.  He explained that this situation created a problem                    
  for utilities, who would have to charge current and future                   
  customers to make up for royalties owed from 1984 to 1987.                   
  He explained that HB 116 made state and federal leases the                   
  same as far as the lease price.  If the federal government                   
  decided to go with something other than the contract price,                  
  this law would not affect that.  This kept the state from                    
  going to the federal government and saying they should                       
  collect more, he added.                                                      
                                                                               
  REPRESENTATIVE HANLEY told the committee he worked with the                  
  Department of Natural Resources' (DNR's) Division of Oil and                 
  Gas, on HB 116.   He said an amendment had been suggested,                   
  which was before the committee.  The main purpose was to                     
  establish the same standards for federal leases that were                    
  established for the state in 1985.                                           
                                                                               
  Number 670                                                                   
                                                                               
  REPRESENTATIVE PAT CARNEY asked the state's position on                      
  HB 116.                                                                      
                                                                               
  REPRESENTATIVE HANLEY responded that the state had someone                   
  available to testify by teleconference.  He added that he                    
  had been trying to get a fiscal note and position paper on                   
  HB 116 from the state.                                                       
                                                                               
  Number 675                                                                   
                                                                               
  KENT BOYD, DEPUTY DIRECTOR, DIVISION OF OIL AND GAS, DNR,                    
  testified by teleconference from Anchorage.  He told the                     
  committee that with him was Bill Van Dyke, Petroleum Manager                 
  for the Division.  Regarding a position paper and fiscal                     
  note, Mr. Boyd said they had been sent to Juneau the                         
  previous day (February 18, 1993).                                            
                                                                               
  BILL VAN DYKE, PETROLEUM MANAGER, DIVISION OF OIL AND GAS,                   
  DNR, said the fiscal note was difficult to pin down to an                    
  exact number.  Anticipated principal and interest from                       
  royalties could be $10.4 million, but he cautioned there was                 
  no way to tell if that was the amount that would be agreed                   
  upon by the parties.                                                         
                                                                               
  Number 696                                                                   
                                                                               
  CHAIRMAN WILLIAMS said the committee would continue hearing                  
  testimony from Representative Hanley, with an opportunity                    
  for committee members to ask questions.                                      
                                                                               
  Number 701                                                                   
                                                                               
  REPRESENTATIVE CARNEY asked if the amount of anticipated                     
  income was retroactive.                                                      
                                                                               
  TAPE 93-21, SIDE B                                                           
  Number 000                                                                   
                                                                               
  REPRESENTATIVE HANLEY answered that the problem right now                    
  was that the federal government believed the contract price                  
  was the price on which royalties were based and, therefore,                  
  no monies were owed.  He said the state was appealing that                   
  decision.  On the question of whether there was any subsidy,                 
  he said he did not see it as one.                                            
                                                                               
  Number 018                                                                   
                                                                               
  CHAIRMAN WILLIAMS announced the fiscal note to HB 116 had                    
  been received by the DNR, and would be delivered to the                      
  committee shortly.                                                           
                                                                               
  Number 050                                                                   
                                                                               
  REPRESENTATIVE GREEN said he had been employed in the past                   
  both as a seller of gas from the Beluga Field, and as a                      
  member of the board of Chugach Electric.  When dealing with                  
  a commodity, he said contracts were negotiated at arms                       
  length, and adhered to.  He said for the state to come in at                 
  a subsequent date, asking to negate a contract that was                      
  established as a way to help the fledgling state get                         
  revenue, would impact current utility rate payers and was                    
  absolutely unfair.  He described a process in utilities                      
  where at the end of a twenty year period, there was a credit                 
  to rate payers if there had been a profit.  He also pointed                  
  out any money the utility ended up owing to the state would                  
  come out of the pocket of current rate payers, so it would                   
  in fact penalize a few Alaskans for the benefit of the                       
  state.                                                                       
                                                                               
  Number 114                                                                   
                                                                               
  REPRESENTATIVE BUNDE raised the hypothetical question of                     
  whether the state would be acting to return $10.4 million if                 
  it felt royalties had been overpaid over the years since the                 
  original contract.                                                           
                                                                               
  REPRESENTATIVE BUNDE made a MOTION to ADOPT the DNR's                        
  amendment.                                                                   
                                                                               
  Number 154                                                                   
                                                                               
  CHAIRMAN WILLIAMS asked if there was any opposition to                       
  adopting the amendment.  Hearing none, the MOTION CARRIED                    
  and the amendment was adopted.                                               
                                                                               
  Number 157                                                                   
                                                                               
  VICE CHAIR HUDSON commented that the federal government was                  
  not asking for any back-payment on the lease royalties.                      
                                                                               
  Number 162                                                                   
                                                                               
  REPRESENTATIVE HANLEY responded that the way HB 116 was                      
  written, the federal government would have to determine that                 
  back-payments were due, and would have to ask for it, then                   
  the state would be entitled to its 90% share.                                
                                                                               
  Number 176                                                                   
                                                                               
  REPRESENTATIVE HUDSON echoed the comments of Representative                  
  Green, and noted the position paper showed the                               
  administration recognized that the courts might not see the                  
  wisdom of collecting back payments from people who were not                  
  utility customers during the time period in question.                        
  Regarding the position paper, he did not see the                             
  administration's position clearly stated.  Specifically, he                  
  referred to a portion of the fiscal note in support of the                   
  area pricing theory on median value pricing theory, and said                 
  the amount might or might not be sustained.  He questioned                   
  the ambiguity of the language.                                               
                                                                               
  Number 204                                                                   
                                                                               
  CHAIRMAN WILLIAMS announced the administration's perspective                 
  would be presented when Kent Boyd and Bill Van Dyke                          
  testified after the questions for Representative Hanley were                 
  complete.                                                                    
                                                                               
  Number 212                                                                   
                                                                               
  REPRESENTATIVE MULDER asked when the current contract would                  
  expire, and regarding the tentative $10.4 million windfall,                  
  he asked if that had been included in the state's budget for                 
  1993.                                                                        
                                                                               
  REPRESENTATIVE HANLEY responded that the money had not been                  
  budgeted, largely because the federal government had already                 
  ruled they would accept the contract price.  Representative                  
  Hanley deferred the question about contract dates to Mr.                     
  John Tillinghast.                                                            
                                                                               
  Number 233                                                                   
                                                                               
  REPRESENTATIVE JAMES was concerned with the state's methods                  
  of doing business.                                                           
                                                                               
  Number 244                                                                   
                                                                               
  JOHN TILLINGHAST, an ATTORNEY representing CHUGACH ELECTRIC                  
  ASSOCIATION, said HB 116 was intended to plug a loophole in                  
  a 1986 law that was supposed to have resolved this                           
  controversy.  When the DNR announced in 1985 that they would                 
  no longer accept the contract price, Chugach and the Beluga                  
  producers went to the legislature and said the state was                     
  proposing a plan that would result in taking money from                      
  individual Alaskans, and also that this was not a royalty                    
  assessment, but a tax.  The utilities need financial                         
  certainty, he said, to engage in planning and to set rates.                  
  Chugach had entered into the Beluga venture on the                           
  assumption that they would be paying under the long-term                     
  price, he added.                                                             
                                                                               
  MR. TILLINGHAST added the DNR had been strong supporters of                  
  the 1986 legislation.  The only place the issue came up in                   
  1986, was in reference to the state leases.  No one thought                  
  about the federal leases at that time, and about a year and                  
  a half ago, he said, the federal government audited the                      
  Beluga leases for the 1980's.  Assuming the Alaska Public                    
  Utilities Commission allowed Chugach to make a retroactive                   
  assessment, he said, the consumers who use Chugach directly                  
  and also the consumers of its wholesale customers, would                     
  suffer a surcharge of approximately $50 per household.                       
                                                                               
  MR. TILLINGHAST said commercial customers were likely to see                 
  an average of $300 to $400 per business surcharge, although                  
  some would have more.  One of the larger customers he                        
  mentioned was the State of Alaska's Department of                            
  Transportation and Public Facilities, who would have a                       
  surcharge of over $100,000.  He then returned to the                         
  question about the expiration dates of contracts.  He said                   
  the long- term contracts were re-negotiated in 1988, and                     
  provided for prices that graduated over the coming years.                    
  In 1993, he said prices were generally 75 cents per thousand                 
  cubic feet, rising to $1.32 to $1.65 per thousand cubic feet                 
  by 1998.  The differential between the contract price and                    
  the market price would shrink as the years go by, he said,                   
  which was why the controversy centered on the retroactive                    
  period that Representative Hanley mentioned, he explained.                   
                                                                               
  Number 315                                                                   
                                                                               
  REPRESENTATIVE MULDER asked about the current market price                   
  for natural gas.                                                             
                                                                               
  MR. TILLINGHAST answered that Representative Mulder would                    
  have to ask the state that question, because the state's                     
  methodology for computing the "market price" was by finding                  
  the price at or below which a majority of Cook Inlet gas was                 
  sold.  The problem with the methodology, he explained, was                   
  that Cook Inlet gas was sold under many different                            
  circumstances.  Chugach's methodology, he added, was that                    
  the market price was the price a willing buyer would pay to                  
  a willing seller under the particular circumstances of their                 
  positions.                                                                   
                                                                               
  Number 335                                                                   
                                                                               
  REPRESENTATIVE GREEN referred to contracts between two                       
  utilities, and the difference in the contracts seemed to be                  
  in the aggressiveness of the negotiator.  He said that could                 
  sometimes be misleading in looking at the market as a whole.                 
                                                                               
  MR. TILLINGHAST asked Representative Green if he had been                    
  referring to ENSTAR.                                                         
                                                                               
  REPRESENTATIVE GREEN confirmed that he had.                                  
                                                                               
  MR. TILLINGHAST said when Chugach entered into its long-term                 
  contract in the 1960's, there was no alternative market.                     
  The state at that time had the choice of getting royalties                   
  on the Chugach price or getting no royalties at all.                         
                                                                               
  Number 362                                                                   
                                                                               
  MR. BOYD of the Division of Oil and Gas again testified by                   
  teleconference regarding the state's position on HB 116.  He                 
  said the DNR wanted to carry out the wishes of the                           
  legislature.  They have pursued the course of collecting                     
  what they believed were royalties due to the state, he                       
  added.                                                                       
                                                                               
  MR. VAN DYKE told the committee that with respect to the                     
  state leases, HB 116 did not follow the same approach that                   
  was taken in 1986.  As written today, he said the federal                    
  leases would be treated differently than some of the state                   
  leases were treated from 1985 forward.  He said the state                    
  collected about 75 cents per thousand cubic feet from 1985                   
  forward.  The contract price during that period was from 21                  
  cents.  Even though the statutes were amended in 1986, the                   
  statutes were not exercised by Chugach until 1989, when                      
  their contract was renegotiated.  The state, he said, did                    
  not accept the 21 cent contract value during that time                       
  period.  The contract price might not always represent                       
  value, he explained, and mentioned the collection of                         
  royalties for oil was based on valuation.                                    
                                                                               
  Number 427                                                                   
                                                                               
  VICE CHAIR HUDSON left the meeting at 9:22 a.m.                              
                                                                               
  Number 430                                                                   
                                                                               
  REPRESENTATIVE GREEN took exception to the analogy to oil                    
  costs and negotiation of value.  He said with the oil                        
  royalties, the cost of transportation and cleaning was                       
  considered, and that was not at issue with the gas                           
  situation.  He said it was not customary with gas contracts,                 
  to base a contract on the actual sales price per mcf                         
  (thousand cubic feet) at the time of sale.  Federal leases                   
  have always maintained the sale price was based on contract                  
  price, he said, not on a renegotiated price.  He asked what                  
  delta was used to determine the differential when the state                  
  got the utility to change the price for the 1985/86 gas, and                 
  as a basis for the $10.4 million figure.                                     
                                                                               
  MR. BOYD explained the methodology used, which was an                        
  average price calculated each month, and said that averaged                  
  about $1.50 during the months that served as a basis for the                 
  calculation.                                                                 
                                                                               
  Number 463                                                                   
                                                                               
  REPRESENTATIVE GREEN commended the zealousness of the DNR in                 
  trying to generate some revenue for the state, but suggested                 
  some of that be curtailed when the money came out of one                     
  pocket and went into another.                                                
                                                                               
  Number 474                                                                   
                                                                               
  REPRESENTATIVE HANLEY clarified HB 116 did not set a new                     
  precedent.  The higher price referred to earlier was a                       
  negotiated settlement, he said, and Chugach settled the                      
  lawsuit for 75 cents a thousand cubic feet because they did                  
  not know if the law was going to pass.  He commented that                    
  the legislature made a policy call back in 1986, that the                    
  contract price, as long as it was an arm's length deal, was                  
  the value that would be used for that particular type of                     
  resource sales to the utilities.  The federal government has                 
  generally been using the contract price, and might not be                    
  receiving the same price the state got on similar leases.                    
  He concluded by saying he hoped HB 116 did not go                            
  retrospective.                                                               
                                                                               
  Number 520                                                                   
                                                                               
  CHAIRMAN WILLIAMS asked if there more questions or                           
  discussions on the issue.                                                    
                                                                               
  REPRESENTATIVE GREEN commented that if the fair price to be                  
  paid for the gas was the average price, then he presumed                     
  there would soon be a recommendation by the DNR to reimburse                 
  ENSTAR because they have paid considerably higher than                       
  average.                                                                     
                                                                               
  Number 529                                                                   
                                                                               
  RAGA ELIM, SPECIAL ASSISTANT, DNR, understood the federal                    
  government at one time, in 1985, did not accept the contract                 
  price in a sale on the Kenai.  He commented that in that                     
  case, another way to determine fair value had been sought.                   
  It was the DNR's position that the situation in the Beluga                   
  field paralleled that.  He agreed there was an odd dynamic                   
  at work, with the state going to the federal government and                  
  telling them they did not get the right value.  Their                        
  motivations might be different because they only got 10% and                 
  the state got 90%, he added.                                                 
                                                                               
  Number 553                                                                   
                                                                               
  REPRESENTATIVE GREEN asked if there was an adjustment in the                 
  10-90 split in 1985.                                                         
                                                                               
  MR. ELIM confirmed the same percentages prevailed at that                    
  time.                                                                        
                                                                               
  Number 602                                                                   
                                                                               
  REPRESENTATIVE GREEN said he had asked to emphasize that the                 
  10% share had not been the justification in the past for the                 
  federal government to fail to aggressively pursue royalties                  
  owed them.                                                                   
                                                                               
  MR. ELIM said the DNR's position was that the federal                        
  government ought to be consistent; since they pursued the                    
  royalties aggressively in the past, they should do so now as                 
  well.                                                                        
                                                                               
  Number 666                                                                   
                                                                               
  CHAIRMAN WILLIAMS asked whether anyone else wanted to                        
  comment on HB 116.  No one came forward, and he concluded                    
  with the comment that it was not the intention of the chair                  
  to move the bill today.  He thanked those who testified.                     
                                                                               
  ANNOUNCEMENTS                                                                
                                                                               
  CHAIRMAN WILLIAMS announced the tour of the A-J Mine planned                 
  for Saturday, February 20, 1993, had been preempted by a                     
  majority caucus meeting.  He announced further that the next                 
  meeting, on Monday, February 22, would be for the purpose of                 
  confirming appointees to the Big Game Commercial Services                    
  Board and the Alaska Oil and Gas Conservation Commission.                    
  In response to a question from Representative Green on when                  
  HB 116 would be moved, Chairman Williams responded that it                   
  would probably be the following week.                                        
                                                                               
  REPRESENTATIVE CARNEY suggested the committee would like to                  
  have a time certain for reconsideration of HB 116.                           
                                                                               
  ADJOURNMENT                                                                  
                                                                               
  There being no further business to come before the House                     
  Resources Committee, Chairman Williams adjourned the meeting                 
  at 9:35 a.m.                                                                 

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