Legislature(1993 - 1994)
02/19/1993 08:00 AM RES
* first hearing in first committee of referral
= bill was previously heard/scheduled
= bill was previously heard/scheduled
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.