Legislature(1993 - 1994)
03/02/1994 08:15 AM RES
* first hearing in first committee of referral
= bill was previously heard/scheduled
= bill was previously heard/scheduled
HOUSE RESOURCES STANDING COMMITTEE March 2, 1994 8:15 a.m. MEMBERS PRESENT Representative Bill Williams, Chairman Representative Bill Hudson, Vice Chairman Representative Con Bunde Representative Pat Carney Representative John Davies Representative David Finkelstein Representative Joe Green Representative Jeannette James Representative Eldon Mulder MEMBERS ABSENT None OTHER LEGISLATORS PRESENT Senator Mike Miller Representative Mike Navarre COMMITTEE CALENDAR HB 238: "An Act relating to the oil and hazardous substance release response fund, repealing the oil and hazardous substance municipal impact assistance program and the authority in law by which marine highway vessels may be designed and constructed to aid in oil and hazardous substance spill cleanup in state marine water using money in the oil and hazardous substance release response fund, amending requirements relating to the revision of state and regional master prevention and contingency plans, altering requirements applicable to liens for recovery of state expenditures related to oil or hazardous substances, relating to a restoration standard in certain state environmental laws, modifying definitions of related terms, amending the manner of computing the amounts required for the suspension and reimposition of the oil conservation surcharge, relating to fees to be charged and collected by the Department of Environmental Conservation, and annulling a regulation related to costs for certain site restorations." HEARD AND HELD WITNESS REGISTER JOHN SANDOR, Commissioner Department of Environmental Conservation 410 Willoughby Avenue, Ste. 105 Juneau, Alaska 99801-1795 Phone: 465-5050 POSITION STATEMENT: Supported HB 238, 2 cent/3 cent proposal BOB POE, Director Division of Information and Administrative Services Department of Environmental Conservation 410 Willoughby Avenue, Ste. 105 Juneau, Alaska 99801-1795 Phone: 465-5010 POSITION STATEMENT: Gave briefing on different proposed versions of HB 238 VIRGINIA STONKUS, Fiscal Analyst Legislative Finance Division P.O. Box 113200 Juneau, Alaska 99811-3200 Phone: 465-3795 POSITION STATEMENT: Answered a question MIKE CONWAY, Director Division of Spill Prevention and Response Department of Environmental Conservation 410 Willoughby Avenue, Ste. 105 Juneau, Alaska 99801-1795 Phone: 465-5250 POSITION STATEMENT: Answered questions JAMES CARLTON, Mayor Ketchikan Gateway Borough 1043 Woodland Ketchikan, Alaska 99901 Phone: 225-4261 POSITION STATEMENT: Supported HB 238, Version Y DENNIS LODGE, Representative Prince William Sound Regional Citizens' Advisory Council P.O. Box 1975 Seward, Alaska 99664 Phone: 224-8933 POSITION STATEMENT: Supported HB 238, Version Y LARRY SMITH, Representative Kachemak Resource Institute 1520 Lakeshore Drive Homer, Alaska 99603 Phone: 235-3855 POSITION STATEMENT: Supported progress made in HB 238, version Y; felt more work is needed WAYNE COLEMAN, Member Executive Committee Prince William Sound Regional Citizens' Advisory Council P.O. Box 1913 Kodiak, Alaska 99615 Phone: 486-3916 POSITION STATEMENT: Supported HB 238, version Y PATTI SAUNDERS, Representative Alaska Center For The Environment 1233 W. 11th Anchorage, Alaska 99501 Phone: 278-9308 POSITION STATEMENT: Supported HB 238, Version Y RICHARD BREWER, Assistant Director Oil and Gas Audit Division Department of Revenue 550 W. 7th, Suite 570 Anchorage, Alaska 99501-3557 Phone: 276-1363 POSITION STATEMENT: Commented on HB 238, Version Y ARDIE GRAY, Public Affairs Manager Alaska Oil and Gas Association 121 W. Fireweed, Suite 207 Anchorage, Alaska 99503 Phone: 272-1481 POSITION STATEMENT: Supported HB 238, split nickel version BECKY GAY, Executive Director Resource Development Council 121 W. Fireweed, Suite 250 Anchorage, Alaska 99503 Phone: 276-0700 POSITION STATEMENT: Supported HB 238, split nickel version WALT FURNACE, General Manager Alaska Industry Support Alliance 4220 B Street Anchorage, Alaska 99503 Phone: 563-2226 POSITION STATEMENT: Supported SB 215 JOHN BERNITZ 1229 I Street Anchorage, Alaska 99501 Phone: 277-8805 POSITION STATEMENT: Opposed HB 238, split nickel version PREVIOUS ACTION BILL: HB 238 SHORT TITLE: OIL/HAZARDOUS SUBS. FUND,TAX,PLANS SPONSOR(S): SPECIAL COMMITTEE ON OIL AND GAS JRN-DATE JRN-PG ACTION 03/19/93 707 (H) READ THE FIRST TIME/REFERRAL(S) 03/19/93 708 (H) RESOURCES, STATE AFFAIRS 03/24/93 (H) RES AT 08:00 AM CAPITOL 124 03/24/93 (H) MINUTE(RES) 04/07/93 (H) MINUTE(RES) 04/07/93 (H) MINUTE(JUD) 04/14/93 (H) MINUTE(RES) 04/16/93 (H) MINUTE(RES) 04/17/93 (H) RES AT 10:00 AM CAPITOL 124 04/17/93 (H) MINUTE(RES) 11/12/93 (H) MINUTE(RES) 02/23/94 (H) MINUTE(RES) 03/02/94 (H) RES AT 08:15 AM CAPITOL 124 ACTION NARRATIVE TAPE 94-23, SIDE A Number 000 The House Resources Committee was called to order by Chairman Bill Williams at 8:24 a.m. Members present at the call to order were Representatives Williams, Hudson, Bunde, Carney, Davies, Finkelstein, Green, James and Mulder. No members were absent. CHAIRMAN BILL WILLIAMS stated there is a quorum present. He announced the committee is on teleconference with Anchorage, Cordova, Fairbanks, Homer, Ketchikan, Kodiak, Seward, and Valdez. HB 238 - OIL/HAZARDOUS SUBS. FUND,TAX,PLANS CHAIRMAN WILLIAMS advised the committee will hear HB 238, which the committee had heard twice last session and once during the interim. He stated no action will be taken on the bill. He said the Senate has introduced and held a number of hearings on a similar measure, SB 215, which is also aimed at revisions to the 470 fund and added that many draft versions of both bills have been proposed. Throughout the process, the public has expressed concerns about many of the provisions of the various versions. He stressed many hours of testimony has been heard from municipal officials, fishermen, business people, the oil industry, and other Alaskans. CHAIRMAN WILLIAMS said as Chairman of the committee which currently has possession of HB 238, he has followed the various mutations of this legislation and has thought how the committee might best proceed with it. He believed there are problems with the 470 fund which deserve legislative action. He expressed concern that the changes which should be made, have become entangled with many other proposed changes which go beyond fixing what is broken. Number 032 CHAIRMAN WILLIAMS said in seeking an approach, he tried to focus on the question of what is not working well and then on finding the simplest and fairest way to fix those things. The product of that effort is draft version Y. He stressed version Y is before the committee. He stated draft version Y recognizes that the accounting mechanisms for the 470 fund need revision. CHAIRMAN WILLIAMS stressed the need for the $50 million response fund to fill up quickly, and stay full. That savings account enables response to many small spills which occur every year in the state, and enables response if the state is faced with another big spill in the future. He stated the bill also recognizes that prevention and preparedness programs are at least as important to the well being of the state, as the ability to respond and clean up if a spill does occur. Version Y acknowledges that the legislature, as the entity empowered by state laws and the Constitution to write the state's budget and make appropriations of state revenue, is the appropriate entity to decide what programs should be funded and at what levels. CHAIRMAN WILLIAMS explained version Y does not provide for the constant starting and stopping of the nickel surcharge when the balance of the fund alternately reaches, and then drops below, the $50 million level. He stated what is proposed in draft version Y includes the following: The nickel surcharge continues to be collected. At the end of each tax year, a calculation will be made to determine what percentage of the total nickels collected were actually needed to accomplish two main goals: 1) Keeping the response fund at the full $50 million level; and 2) funding the prevention and preparedness programs at the legislatively appropriated level. CHAIRMAN WILLIAMS said the amount of nickels collected above and beyond the amount required to cover those expenses will then be returned to the oil industry in the form of a tax credit, proportional to the amount of surcharge paid by each company. He stated several other fine-tuning provisions are also included in the bill. Among those are several items which were modeled after the statutory changes recommended in a draft legislative audit of the 470 fund. Number 068 CHAIRMAN WILLIAMS felt the approach in draft version Y is a sound one, is fair, uniform, and predictable for industry. He stressed while passage of the bill will save the oil industry substantial amounts of money, it also leaves state revenue spending decisions where they belong, in the hands of the legislative and administrative branches of government. That enables government to fulfill their responsibility to provide for the things which are basic to any oil producing state: Adequate programs for spill prevention, preparedness, and response. He said version Y provides a win-win approach, for the state and the oil industry. CHAIRMAN WILLIAMS advised committee members that there is further information in their folders, including a financial analysis of the bill, as well as a sectional analysis. He added there are also two draft amendments, Y-1 and Y-2, which address concerns raised by the oil industry. He noted that he had asked representatives from several agencies who are knowledgeable about the 470 fund laws and programs, and who have reviewed the draft version Y to speak at the meeting, describing how the provisions of the draft will work and to be available for questions. Number 101 JOHN SANDOR, COMMISSIONER, DEPARTMENT OF ENVIRONMENTAL CONSERVATION (DEC), expressed appreciation for efforts made in examining the Oil and Hazardous Substance Release Response Fund and determining what opportunities there are to amend and improve the process by which the fund is managed and administered. He also expressed appreciation for efforts made to develop a consensus approach which is fair to industry, yet also assures a strong prevention program and a strong response program. MR. SANDOR emphasized the Administration's positive record of improved management of the response fund. In 1991, an internal audit of the fund was ordered and over the past three years, a number of improvements in its management and administration have been implemented. As a result, the fund balance has increased from $6 million in 1991 to $12 million in 1992, $24 million in 1993 and a projected balance of $37 million at the end of 1994. He felt DEC is well on the way to achieving the objective of a $50 million fund balance. MR. SANDOR also emphasized the Administration's strong commitment to environmental protection. He said when Governor Hickel was Secretary of Interior, and the Santa Barbara offshore spill occurred, he instituted dramatic changes in governmental oversight to not only clean up the spill, but to put in place, prevention and response requirements which were tough, but reasonable. His liability and financial responsibility requirements prompted some from the oil industry to seek his dismissal, but he did not waiver. Number 132 MR. SANDOR stressed the state cannot afford to be less vigilant or forget the lessons of the Exxon Valdez Oil Spill. The state cannot afford to make further reductions in oversight, prevention and response capabilities. The state cannot afford to be satisfied with half-time environmental coverage on the North Slope. DEC cannot afford to diminish its technical staff even as it is currently reviewing the audits of an aging pipeline. He added, at the same time, DEC does want to continue to improve the management of the response fund, and is analyzing various options to achieving that objective. MR. SANDOR stated DEC continues to support the proposed improvements in the operation and management of the response fund which was presented to the Senate and House Resources Committees. He advised that although several amendments were adopted at the February 16, 1994, Senate Resources Committee hearing which improved the proposed legislation, the Administration's proposal that the nickel be split on a 3 cent prevention/operations and 2 cent response split was not adopted. MR. SANDOR said the 2 1/2 cent prevention/operations split is unwise from several standpoints. First, this level of 470 funding would not support the existing prevention/operations program in the future, and would require authorization of appropriated General Funds or new fee programs of $550,000 in fiscal year 1995, and greater amounts in later years. Second, DEC has had a series of spills and incidents in the last 60 days which clearly show weaknesses in the state's and industry's spill prevention and response programs. Third, this level of funding would not assure adequate support for the combined Department of Military and Veterans Affairs (DMVA), Division of Emergency Services and DEC's emergency programs stemming from natural disasters. Number 159 MR. SANDOR stated for those and other reasons, the Administration does not support a 2 1/2 cent split of the nickel. The Administration is clearly on record favoring a 3 cent prevention/operations; 2 cent catastrophic fund split. If that is not acceptable, the Administration would favor utilizing a whole nickel approach to make further improvements in the fund. MR. SANDOR mentioned he had made reference to a number of wake-up calls in the last sixty days which should remind everyone of the state's vulnerability to accidents and natural disasters which will lead to oil and hazardous substance spills. He cited a few incidents. On December 27-28, 1993, over 15,000 gallons of crude oil were spilled from a storage tank into secondary containment at the Drift River Terminal; on the morning of December 30, 1993, a break in a 6" pipeline in ARCO's North Slope operations was discovered by a workman who also discovered the automatic alarm and shut-off valve systems had been deactivated; on January 2, 1994, the Overseas Ohio tanker vessel hit an iceberg in Prince William Sound just 25 miles south of Valdez; and on February 17, 1994, the Overseas Washington tanker lost full power during its approach to the berth in Cook Inlet. He added that the recent Los Angeles earthquake which resulted in a major crude oil pipeline spill, as well as hazardous substance releases, reminds everyone that the state must also be prepared for natural disasters. He said over the past weekend, February 26, 1994, a 500 gallon oil spill was reported at Pump Station 10 on the Trans Alaska Pipeline System, when a residual oil tank overflowed-- apparently as a result of an alarm system failure. He added the spill estimate had been increased from 2,500 gallons to 3,000 gallons. Number 191 MR. SANDOR stressed that DEC believes improved prevention and preparedness programs will reduce the number of oil and hazardous substance spills. Because DEC believes that the state and industry can and should work together in this effort, he has written to the presidents of ARCO Alaska, Inc., BP Exploration (Alaska) Inc. and the Alyeska Pipeline Service Company suggesting that they, along with DEC, jointly evaluate and strengthen the prevention and response programs and develop a strategy which will result in improvements in the programs. MR. SANDOR said the state of Alaska must have strong and well-coordinated prevention, response, cleanup and restoration programs to deal with such incidents. The DMVA, DEC and other units of state government are working together to achieve that objective. He stated the Administration is prepared to work in partnership with the legislature and the industry to not only improve the management of the response fund, but to also strengthen the state's prevention and response capability. (CHAIRMAN WILLIAMS noted for the record that Senator Mike Miller and Representative Mike Navarre had joined the committee.) Number 223 BOB POE, RESPONSE FUND MANAGER, DIRECTOR, DIVISION OF INFORMATION AND ADMINISTRATIVE SERVICES, DEC, stated there are two sets of financial information he will review. Referring to several bar charts (on file), he said there are four summary graphs on the front and summary detail graphs behind which show how the numbers were developed. He pointed out there are six possibilities shown in the graph, ranging from the option of not passing any bill at all this session to the original proposal of the 2 cent/3 cent split, the current version in the Senate, version Y in front of the committee, the Administration's 3 cent/2 cent split proposal, and one comparative example of a 50/50 split which answers questions about the current version in front of the Senate. MR. POE stated if the accounting system is not changed, the industry will pay an additional $122.5 million over the next five years and at that time, the surcharge suspension calculation will equal $28.8 million. He stressed the $50 million will still not have been reached and the response fund will have an actual balance of $104,500,000. Those numbers illustrate the problem with the current accounting system. He said all of the versions to the right of "no change," correct the accounting problem the same way; the calculation is improved. The reason there is such a divergence is that under current law, the calculation compares total expenditures from the response fund to total nickels or surcharge arriving into the fund. MR. POE pointed out that in the history of the response fund, $74.5 million of General Funds and program receipts have also gone into the fund, so expenditures from the fund have exceeded the nickels. The current balance of the response fund is $37.4 million, yet the calculation to determine the surcharge suspension yields a negative $15 million. That is the problem from the financial standpoint. MR. POE said the first chart speaks to the initial financial benefit to the surcharge payer. This calculation is based on possible advantages on July 1 if any of the versions are passed. Without changes, the industry will pay $122 million over five years and still not reach the $50 million cap. If any of the versions are passed, there is a balance at the start which will immediately go into the suspension calculation. That balance is called the initial benefit. He stated version Y has the highest initial benefit. Number 301 REPRESENTATIVE JOE GREEN asked Mr. Poe if the initial financial benefit chart is actually a five year forecast. MR. POE responded no, it is an initial benefit. Under the current surcharge calculation, there is a minus $15 million and if that continues through the end of fiscal year 1994, the initial benefit will be minus $1.5 million. If version Y goes into effect, the next day that surcharge calculation is considering a $63.2 million balance representing the $37 million which is in the fund currently, plus all of the nickels collected in fiscal year 1994. REPRESENTATIVE CON BUNDE stated if version Y goes into effect, $63 million will be put in the response fund. Since there is a $50 million cap, does that mean there will be no further contributions. MR. POE replied it has to be looked at relative to the tax which is on the books presently. On June 30, 1994, there is a debt or a minus figure in the fund, but if the statute changes, it will result in $63.2 million in the fund. REPRESENTATIVE BUNDE asked if the nickel surcharge would stop. MR. POE responded the nickel surcharge does not stop under version Y because a tax refund is included. Under other proposals, the nickel does stop. In the first year under version Y, the surcharge payer receives an $11.9 million tax credit. If there was a device in version Y to stop the nickel surcharge by using a quarterly calculation, then yes the nickel would shut off in the first year. In version Y, a quarterly calculation is done and a tax credit is generated. The net result is an $11.9 million tax credit given in the first year, meaning if nickels amount to $26.2 million in that year, a large portion is shut off. Therefore, it does result in a tax reduction in the surcharge in the first year. Number 353 REPRESENTATIVE GREEN clarified dollars are paid in and then the overage turns into a tax credit, proportionately available to companies in the future. He felt that process will create more accounting problems. He added that expenditures from the fund have been higher than income, but because the state General Fund has contributed monies a surplus exists. MR. POE replied almost $75 million has been put into the fund by the state. REPRESENTATIVE GREEN asked how can there be less in the response fund than what the General Fund has contributed if no overspending has occurred. MR. POE stated there have been other sources of revenue in the response fund other than the nickels paid into the fund. Expenditures reflect that total balance; a contribution of General Fund contributions, program receipts and nickels. Expenditures have exceeded the amount of nickels going into the fund. He explained the calculation in current law provides that nickels are only compared to total expenditures and pointed out that as long as there are more federal funds or other fund sources going into the fund, expenditures can always exceed nickels. REPRESENTATIVE GREEN stated if he is understanding correctly, under either plan, the nickel has not been adequate to fund the expenditures. Number 393 MR. POE replied he did not believe one could make that extrapolation. One could say that in the past, the total expenditures from the fund have been greater than the nickels. Both the 3 cent/2 cent split and version Y proposals generate sufficient revenues to cap the fund and to provide sufficient revenues to pay for spill response and prevention programs. REPRESENTATIVE GREEN asked if the difference in the way the funds are spent make the bar graphs different. He also asked if less is spent under one proposal as opposed to another. MR. POE stated spending does not change. It is how the flow of revenue is factored into the suspension calculation. He said all split nickel versions assume that only a portion of the nickel will go into building the spill reserve ($50 million) and the other side never shuts off. Depending on how the nickel is split, financial results can differ. He added version Y has a good starting point, because it applies all of the fund balance and all of the nickels to the suspension calculation. Under a split nickel version such as the 3 cent/2 cent split, only 2 cents of that surcharge or 40 percent will be applied toward the $50 million cap. Therefore, the initial benefit will only recognize 40 percent of the existing fund balance and 40 percent of the nickels paid in 1994. Number 428 REPRESENTATIVE GREEN clarified there is a difference in spending between the different versions. MR. POE stated spending remains constant. REPRESENTATIVE GREEN said what he heard is that under the total nickel version, the overage not spent comes back as a tax credit and in the split version, there is a dedicated fund to the $50 million balance and nickel surcharge continues. MR. POE stressed no more money is spent under any of the scenarios. He said the assumption is that DEC will spend $13.5 million as requested the current year, and noted that figure will go up three percent each year due to inflation. REPRESENTATIVE GREEN said if it is 3 cents versus 2 1/2 cents, there is more money from the industry being committed to either what is spent or to the General Fund, and the difference between the versions is the amount of money over expenditures for a five year period. MR. POE said that was incorrect and asked to meet with Representative Green at a later date to explain it further. Number 482 MR. POE stated the second chart refers to the net cost to the surcharge payers over five years. He said if there is no change, the industry can expect to pay $122.5 million, not reach the $50 million cap and $104 million will have accumulated in the response fund. With version Y, there is a very low cost to industry because at the start, there is an initial benefit of $63.2 million being applied to the suspension calculation. In addition, there are tax credits which occur each year throughout the five years. MR. POE pointed out that $46.4 million will be generated in tax credits over five years. If $46.4 million is subtracted from $122 million and the initial benefit is subtracted, the result is a very low net cost of $10.3 million to the surcharge payer. He stressed that does not mean that only $10.3 million is paid over five years. The important thing to remember is under the current legal scenario, there is an inequitable situation meaning a substantial improvement can be made. Again referring to the chart, he stated the net costs can vary. He stated there is $37.4 million in the fund currently and under all of the other versions, with the exception of the Senate version, if the nickel is split, the $37.4 million is also split in the same manner. The logic behind that is a large portion came from General Funds and program receipts, and therefore should not all be allocated to turning off the surcharge. MR. POE explained all split nickel versions set up one side for the prevention programs and the other side is for responding to spills. Under the Senate version, the nickel is split 50/50, but all of the $37.4 million is put into the spill response account. The result is the starting point on July 1, 1994, is $50.3 million in the spill account, the side which is applied toward suspending the surcharge. That means the nickel surcharge is shut off immediately. Number 596 REPRESENTATIVE ELDON MULDER asked if the money is split and half goes into the response fund, does the other half revert back to the General Fund. MR. POE responded it goes to the abatement account, which is the prevention account. REPRESENTATIVE MULDER asked where the abatement account came from. MR. POE replied that is what is called the prevention side. He said if the nickel is split, a portion will go to the prevention account and a portion will go to the spill account. Number 625 REPRESENTATIVE MULDER said therefore the prevention account will contain a large sum of money and asked what it will be used for. MR. POE said under some of the versions, normal spending for prevention is underfunded. He stated money in the prevention account will pay for some of the underfunding and added that a fiscal note would not be needed. REPRESENTATIVE MULDER clarified that a full 3 cents is required to cover the operating costs associated with prevention and the only reason to establish an abatement account is in case of underfunding. MR. POE stated the 3 cent/2 cent version provides sufficient revenue to ensure that a prevention program will be funded. REPRESENTATIVE MULDER felt the result is a prevention slush fund. Number 650 MR. POE said the important point to remember is that the legislature has to appropriate money from the response fund. He explained of the $127 million which has been spent from the response fund to date, all but $1.14 million has been appropriated by the present and previous legislatures. The only money DEC is authorized to use without an appropriation is to respond to an emergency situation. He added that if it is the decision of the legislature to reduce the prevention account through appropriations, that is their decision. REPRESENTATIVE MULDER felt that if there is an extra account, it discourages prudent financial management. MR. SANDOR assured committee members that is not the case. The only money that DEC can use is if there is an emergency situation. TAPE 94-23, SIDE B Number 000 REPRESENTATIVE JEANNETTE JAMES expressed concern with the numbers presented. She asked if other deposits, besides the nickel, going into the fund will continue and if so, are those amounts contained in the chart. MR. POE responded those figures are not included in the chart. He assumes that no additional General Funds will be forthcoming, unless a fiscal note is required. Number 025 REPRESENTATIVE JAMES expressed concern about the prevention account growing to a large amount, in connection with version Y, because there is no consideration for other funds going into the account which do not come from the nickel surcharge. MR. POE replied under version Y, there is only one account. In all of the calculation wording, there is an account called the mitigation account and going into that account are a variety of things: Fines, penalties, cost recovery, other kinds of payments, etc. Under the current law, if an oil company has a spill, the state responds and does oversight, which costs a certain amount of money. The state bills the company for the costs and the companies pay the state, but in the calculation currently, those companies get no credit for paying those costs. He explained in the calculation as it has been corrected in all of the proposed versions, cost recovery coming from nickels goes back into the calculation testing for the suspension of the surcharge. MR. POE stated companies do not get credit for fines and penalties, but added the legislature can give them credit through an appropriation. The feeling is that the nickel should not be turned off because of a punitive settlement, but if the legislature decides to take the balance of the mitigation account and appropriate it, it becomes a part of the response fund balance and therefore, factors into the equation. REPRESENTATIVE GREEN asked if the Department of Revenue has been included in developing version Y. CHAIRMAN WILLIAMS responded yes, and said the department is present to make comments. MR. POE referring to chart three, called total tax savings, stated the chart compares what the surcharge payers will pay if there is no change, and what they will pay over the next five years if there is a change made on July 1, 1994. If there is no change, there will be no tax savings and the payer will still pay $122.5 million, not reach the $50 million cap at the end of five years, and will have accumulated $104 million in the response fund. Under all of the other versions, there is some net tax benefit which accrues to the surcharge payer. REPRESENTATIVE JAMES expressed concern that with no changes, after five years the companies will have paid a lot of money and the $50 million cap will still not have been reached. She did not understand how the $50 million can be reached if changes are made, since the cap cannot be reached under current law. She asked if spending is going to be cut. MR. POE referred to another chart called Response Fund Summary as of November 5, 1993. He said the first column refers to the calculation in current law. As of November 5, 1993, there is $112,085,145 in nickels, and total expenditures from the fund have been $127,190,873 with the difference being -$15,105,728. That is what is looked at, under current law, to test whether or not to suspend the nickel surcharge. However, DEC is saying there is $37 million in the response fund. MR. POE pointed out the column on the right shows the fund accounting. It shows there is only $109,200,000 in nickels and he explained that is because the legislature has not appropriated the nickels collected in 1994 to the fund. Then, there is $127,190,873 in expenditures resulting in a difference of $17,990,873. Shown below are the other deposits: $44,447,000 in General Funds; $30,000,000 in program receipts; $5,007,800 in the mitigation account; and $3,049,952 in miscellaneous/accounts receivable. Encumbrances and other commitments of the fund are subtracted out with a result of $37,229,669. MR. POE stressed in all of the versions, the calculation corrects things so the current balance of the response fund is really reflected, not looking at just that portion of the fund which is only the nickels. Number 136 REPRESENTATIVE JAMES expressed concern that all of the expenditures are coming from the nickel surcharge. She said the money coming into the account from other sources, which is then spent, is taken away from the nickel to determine whether or not the $50 million cap is reached. Number 150 MR. POE said under the current calculation, that is correct. If the law said right now that the full balance or some portion of the fund is to be considered in calculating the suspension, a much more accurate accounting will exist. CHAIRMAN WILLIAMS asked if the draft audit is reflected in the summary. MR. POE said it is. Number 172 REPRESENTATIVE PAT CARNEY referring to the summary, asked what percentage of the mitigation account is fines. MR. POE said he did not know. Number 175 REPRESENTATIVE CARNEY questioned what is included in the mitigation account. MR. POE responded fines, penalties, cost recovery, etc. REPRESENTATIVE CARNEY asked what is included in program receipts. MR. POE stated program receipts include receipts received relative to the Exxon Valdez spill before the nickel surcharge was in place. REPRESENTATIVE MULDER asked when the legislature appropriated the $44,447,000 in General Funds VIRGINIA STONKUS, FISCAL ANALYST, LEGISLATIVE FINANCE DIVISION, responded the appropriation occurred between fiscal 1987 and 1989. Number 188 MR. POE referring to the final chart, said the chart shows the tax reduction to industry, and then factors in fiscal notes which would be required. The current Senate version and the 2 cent/3 cent split will require a fiscal note if it is assumed that the prevention and response programs stay at their current funding level. He said three percent inflation is also assumed. REPRESENTATIVE BUNDE said under the Senate version, there is a General Fund portion which continues spending at its current level and under version Y, the spending level is reduced resulting in no General Fund contribution. MR. POE stated since there is one fund under version Y, there is no fixed shortage in the program. There will be enough money under the single fund approach to pay for the entire $13.5 million in the first year, plus provide a $11.9 million tax credit. He said under the 2 cent/3 cent split, in the first year, approximately $2.5 million is underfunded because of the 2 cent limit. Under a 2 cent/3 cent split, there is an artificial cap of 2 cents. Therefore, less revenue is produced than the current program costs. There are other fund sources such as the General Fund. If the legislature does go to the General Fund to pay for the short funding, something else did not get done. REPRESENTATIVE GREEN asked if the chart includes the earnings which the fund generates. MR. POE replied it does not. REPRESENTATIVE GREEN asked if earnings would eliminate the need to go to the General Fund. MR. POE said the problem with using earnings is that those monies go to the General Fund. REPRESENTATIVE GREEN said by keeping the nickel whole, the balance goes into the General Fund and is appropriated back as a tax credit and could be designated. MR. POE said it cannot, because that would be a dedicated fund which is unconstitutional. MR. POE referring to another chart, said the chart shows how version Y would work. In terms of overall complexity, the single nickel is simpler. He stated the Administration does, however, support the 3 cent/2 cent split nickel. He said at the bottom of the chart, the version Y calculation is explained. Number 390 REPRESENTATIVE CARNEY said under some of the proposals, the fines, cost recoveries, etc., go into the mitigation account. He wondered what dollar amount represents just cost recovery. MR. POE replied current analysis uses the assumption of $300,000 a year in cost recovery coming from nickels. REPRESENTATIVE CARNEY pointed out that taking the balance of the response fund, which is partly General Funds, and applying it to the $50 million could be a point for or against justification. MR. POE stated in the calculation there is a clause which provides an incentive to do certain things, including the provision that cost recoveries coming from nickels or from the spill side account must be appropriated back into the spill account under peril of losing the surcharge for an entire year. REPRESENTATIVE JOHN DAVIES commented another way of looking at splitting the apportionment of the existing balance would be to look at the total amount coming in from nickels and the total amount coming from the General Fund and prorate on that basis. MR. POE stated it is a little greater than 40 percent from the General Fund and a little less than 60 percent on the nickel side. Number 330 MR. POE referring to a final chart, said the chart shows the history of spending. He reminded committee members that the 470 fund legislation has been changed 17 times. He stated the chart shows why expenditures are at the current level. Number 345 REPRESENTATIVE GREEN stated the chart shows just under $4 million a year for depots and asked how many depots there are. MR. SANDOR replied DEC has no depots. He said the local emergency planning committees, the State Emergency Response Commission, DMVA and DEC are working together to get the depots in place. Number 375 REPRESENTATIVE GREEN asked what the $20 million was used for. MIKE CONWAY, DIRECTOR, DIVISION OF SPILL PREVENTION AND RESPONSE, DEC, replied depots and corps is a program and includes the spill response office, the staff at DMVA, etc. He said expenditures include $800,000 for communications equipment, $300,000 for training, $300,000 for part of the hazardous analysis project, etc. REPRESENTATIVE GREEN stated the spills cited previously are small spills which might be in difficult places to access, yet the establishment of equipment, which could be used to prevent continued damage or clean up the spills, has not been done. MR. CONWAY stated there was no plan on depots and corps, no definition, and no identification on where they were to go. He stressed that when DMVA got their staff and sat down with the DEC staff, it was agreed to do a hazards analysis to identify the definition of depots. The state cannot afford to pay the kind of money that the industry has paid to have the capability. Therefore, DEC is looking at scaling it to the point where it meets communities' needs. He felt the wisest use of the money is to go out and give people in remote communities the ability to protect their interests, health, resources, etc., until the responsible party can take over. Number 462 REPRESENTATIVE MULDER asked how much money has gone to DMVA from the 470 fund. MR. CONWAY replied this year's budget request is $221,000, but added there is a historical amount of funding DMVA has received including $2 million in fiscal year 1992. REPRESENTATIVE MULDER said it has been stressed that money is going to various agencies, but he felt in fact it is not. He stated he serves on the DMVA subcommittee and DMVA is almost being cut out of the 470 fund allocation this year. He felt that cut was inappropriate because they are the people going out in the field. He would like to see a corresponding reduction in the budget of DEC as opposed to DMVA. Number 495 REPRESENTATIVE BILL HUDSON felt part of the problem goes back to the fact that there has been comingling of funds. He requested an analysis of before the oil spill and the nickel a barrel surcharge, what the appropriations were and what the expenditure levels were as they relate to the purpose at hand, and then starting at the beginning of the nickel a barrel surcharge, show the amount of money collected versus the amount of money spent, and wherever possible, target in some of the major expenditures and major mitigation receipts which came in. REPRESENTATIVE HUDSON said there has to be serious consideration of the best use of the $12 million. He stated he was involved when the depot language was created and the goal was to have spill response equipment stored in various locations, with trained people in isolated areas, not only in the Prince William Sound area. He stressed the analysis he requested is absolutely necessary if a determination on how to modify the law is going to be made. REPRESENTATIVE HUDSON stated he has never believed that DEC is the proper agency to respond to a catastrophic oil spill. He felt it should be DMVA with DEC behind them. He thought DEC should be the proper response agency for the small spills. Number 562 MR. POE apologized for how convoluted the accounting is and said he is not positive he can give Representative Hudson what he is asking for. He said when talking about a more simplistic approach, he pointed out that version Y does make it simpler. REPRESENTATIVE DAVID FINKELSTEIN stated he serves on the DEC subcommittee and stressed each budget item is scrutinized and debated. He agreed there are accounting problems. He felt there is a need to also look at what is not being done, instead of always looking at what is being done. TAPE 94-24, SIDE A Number 000 JIM CARLTON, MAYOR, KETCHIKAN GATEWAY BOROUGH, testified via teleconference, and expressed support of HB 238, version Y. He said there seems to be a general understanding among those knowledgeable of the 470 fund, that the accounting mechanism is broken. The original intent of the 470 fund was to provide a fund of $50 million to pay for spill response, preparedness, and prevention programs. He stressed that version Y attempts to fix those accounting problems and leave the other working provisions of the fund in place. Version Y takes into consideration concerns that coastal communities had expressed last year regarding the loss of community impact grants and funding for local emergency planning committees. That funding remains intact in version Y. Also intact are provisions which require the annual review of the state master plan, including public and legislative review. In addition, the legislature's ability to set funding levels for spill prevention programs within DEC is maintained. MR. CARLTON said he was pleased that the language pertaining to the funding of the oil spill response ferry remained intact in version Y. He agreed with comments made by Commissioner Sandor that other versions of HB 238 may leave the state's spill prevention and response programs underfunded. As the mayor of a coastal community, he would rather see the programs funded to the fullest extent possible. There is a need to be proactive and prepared in communities response to spills, not reactive, as was the case in the Exxon Valdez disaster. MR. CARLTON stated version Y still allows the funds to be used to respond to smaller spills which do occur more often than the spill of the magnitude experienced in the Prince William Sound. He said it was his understanding that although version Y does not go as far as the oil industry would like, large savings would still be realized by those companies. In addition, any amount over what is needed to maintain the spill reserve fund and fund the prevention and preparedness programs would be refunded to the oil industry. He felt HB 238, version Y, is a fair compromise between all of the draft bills which attempt to address the 470 fund. He told committee members that the main thing to keep in mind when reviewing version Y is whether it fulfills the original intent of the legislation which states, "Funds for the abatement of a release of oil or a hazardous substance will always be available." Number 066 DENNIS LODGE, REPRESENTATIVE, PRINCE WILLIAM SOUND REGIONAL CITIZENS' ADVISORY COUNCIL, testified via teleconference, and expressed support of HB 238, version Y. He said the headquarters of the Kenai Fjords National Park is located in Seward and thousands of people visit the area every year. He stressed there is a lot of interest in spill prevention. If a spill occurred, many communities would lose their livelihood. Therefore, he fully supports any efforts to keep prevention as a major effort. LARRY SMITH, REPRESENTATIVE, KACHEMAK RESOURCE INSTITUTE, testified via teleconference, and stated he served as the Chairman of the Prevention, Response and Operations Committee for the first two years of existence of the Cook Inlet Regional Citizens' Advisory Council. In that role, he was responsible for tracking the 470 fund. He said his conclusion is that dividing the responsibilities between DMVA and DEC was an error. Just as there is a need to know who is in charge of spill response, the same is true for prevention and preparation. It only takes a few visits with DMVA and DEC to determine that the Spill Prevention and Response Division at DEC is preferable to the Division of Emergency Services (DES). MR. SMITH stressed that DES is good at logistics and responding to other kinds of emergencies, but catastrophes are being talked about. He felt HB 238, version Y, represents a quantum leap forward from previous versions which are ignorant to program needs. He felt there is a need to go even further. There has been foot dragging by state agencies on implementation. He said there is a need to look at the California model. The implementation of their parallel act in 1990 was put in an agency with an appetite for it and explained that state's situation. Number 135 WAYNE COLEMAN, MEMBER, EXECUTIVE COMMITTEE, PRINCE WILLIAM SOUND REGIONAL CITIZENS' ADVISORY COUNCIL (RCAC), testified via teleconference, and stated version Y is a significant improvement over the previously proposed drafts of HB 238 and CSSB 215(RES), now in the Senate Finance Committee. He said RCAC supports the basic tenet of version Y which is to fix what is agreed to be broken - the mechanism for calculating the balance of the Oil and Hazardous Substance Release Response Fund, reduce some expenditures from the fund, and provide for improvements in the administration of the fund. MR. COLEMAN stated RCAC is opposed to splitting the nickel and dividing the response fund into two accounts. Opposition to splitting the nickel is based on the chronic insufficient funding directed toward spill preparedness and prevention programs, and the problems imposed by limiting response to subcatastrophic spills which account for most of spills in Alaska. He said despite rhetoric to the contrary by proponents of the split nickel legislation, CSSB 215(RES) and other HB 238 proposals do little, if anything, to improve how the response fund functions. He felt they are special interests legislation which provide at least a $74 million tax break to North Slope producers. Number 150 MR. COLEMAN commented that one factor which seems to be lost in the debate is that North Slope oil is a public resource which belongs to Alaskans. If Alaskans choose to assess a nickel-per-barrel surcharge on this resource to ensure adequate spill prevention and response programs, it is their prerogative. He said as this debate continues, it is beginning to be at best, insulting to have representatives of the Exxon Corporation tell the public and elected officials of Alaska what is an adequate level of funding for these programs - what they are willing to pay. MR. COLEMAN said, put in perspective, the Y draft proposal is still generous to the industry, but not a complete industry giveaway. He asked members to consider the following: 1) Version Y would also save North Slope oil producers at least $52 million in surcharge payments through a new method for calculating the fund balance; 2) This proposal differs from previous versions of HB 238 and CSSB 215(RES) in that it does not give surcharge payers an automatic additional $25 million to $30 million tax break through the underfunding of state preparedness, prevention and response programs. He stated the ability of the legislature to set funding levels for these programs is maintained, rather than being determined by splitting the nickel and declining North Slope production levels. MR. COLEMAN remarked that surcharge payments will probably decline by the same $30 million through the additional response fund revenue sources in version Y. The ultimate impact on surcharge payers will be the same, but without the spill risks to the public and tying of the hands of the legislators. He stated version Y also allows additional revenue sources to be included in the calculation of the fund cap. These include program receipts and mitigation account money received to the extent that the funds originated from the response fund. He stressed version Y does differ from other versions in that it does not jeopardize the state's ability to respond to all but the largest spills, and the response fund continues to be accessible for response to all spills regardless of size. He said this takes into consideration timing and location that are equally important as spill size. PATTI SAUNDERS, REPRESENTATIVE, ALASKA CENTER FOR THE ENVIRONMENT, testified via teleconference, and expressed support to previous speakers. RICHARD BREWER, ASSISTANT DIRECTOR, OIL AND GAS AUDIT DIVISION, DEPARTMENT OF REVENUE, testified via teleconference, and stated the conditions in version Y to obligating the Department of Revenue to calculate refunds or credits for the producers are quite workable. Number 222 ARDIE GRAY, PUBLIC AFFAIRS MANAGER, ALASKA OIL AND GAS ASSOCIATION (AOGA), testified via teleconference, and stated that AOGA supports the proposal to split the current nickel per barrel surcharge on oil production into two accounts; a 2 cents-per-barrel oil spill preparedness account, to be funded through a permanent 2 cents-per-barrel tax, and a 3 cents-per-barrel catastrophic oil discharge account. She said that AOGA believes the split proposal will ensure there is a separate and secure independent source of $50 million available to the state and local communities in case of an emergency. MS. GRAY stressed that AOGA believes the 2 cents-per-barrel tax will ensure a permanent and secure source of funding for state prevention and preparedness programs as long as oil is being produced in Alaska. The permanent 2 cents-per-barrel tax would provide over $10 million per year for state prevention and preparedness programs, more than the $6.5 million projected in the original fiscal notes from the 1989 and 1990 sessions. MS. GRAY said AOGA supports continuing the policy of using mitigation account reimbursement money to fund the state's share of the underground storage tank cleanup assistance program. Future Exxon Valdez settlement reimbursement payments should provide ample funding for the underground storage tank program. She stated AOGA supports the 2 cent/3 cent split as proposed by Representative Green. BECKY GAY, EXECUTIVE DIRECTOR, RESOURCE DEVELOPMENT COUNCIL (RDC), testified via teleconference, and said RDC supports a strong emergency fund as intended in the original legislation. RDC commends Representative Green and the Oil and Gas Committee for their work on HB 238. She said RDC believes it is imperative that the 470 fund be allowed to accumulate to the $50 million to assure an independent spill containment and cleanup capability. RDC feels people in opposition to HB 238 are the people who would scream the loudest if there was not a $50 million fund available and a catastrophic spill occurs. MS. GAY stated there are definitely accounting and spending problems. She said it sounds like progress is being made on fixing the accounting program. RDC supports the two cents to DEC and three cents to the fund split and believes the split gives clear direction, as well as an appropriate ratio to prevention, response and cleanup. RDC also believes there is an appropriate incentive in the bill to make DEC allow the fund to get to $50 million. She commented that in regard to testimony committee members will hear about cannibalizing the fund, leaving it alone, see how it works, etc., RDC believes HB 238 will help the fund to accumulate. Number 270 WALT FURNACE, GENERAL MANAGER, ALASKA SUPPORT INDUSTRY ALLIANCE, testified via teleconference, and stated the Alliance board of directors reviewed the content of HB 238 and opposes the bill in its present form. The Alliance does commend the sponsor of the legislation in bringing forth an alternative means of solving the dilemma of the 470 fund. However, the Alliance believes that a better vehicle is currently under consideration by this legislature. MR. FURNACE said the concerns with HB 238 are as follows. The tax (indiscernible) of the state demands certainty. This certainty is important not only to the proponents of industry paying the tax, but to the general public as well. HB 238 proposes a blending of the nickel into one fund. This blending has created the present problem facing the fund in that it does not properly identify the original purpose of the fund, which is to fund the $50 million response fund. Under the split nickel version, a certain assurance is needed. This assurance needs to be of concern not only to the taxpayer, but by the public as well. MR. FURNACE stated the concept of a tax credit back to the taxpayer is a novel approach. However, the Alliance views it as too little, too late. The tax credit represents a big stick with an offsetting small carrot. The big stick says, industry you deposit the nickel into the fund and we promise to provide some accounting on a quarterly basis. The small carrot says, if and only if there is a surplus, we will grant a tax credit. He questioned the committee when in the history of the state of Alaska can they remember any tax dollars being returned back to the taxpayer. The Alliance does not see that changing under the proposed legislation. MR. FURNACE said a third point of concern is this bill does not provide the assurance the department will spend the money wisely, nor that grants and other allocations from the fund will be kept under control. Everyone has seen the wanderlust of projected budgeted expenditures out of the fund. HB 238 does not provide the public comfort level that a close eye will be kept on those expenditures. He said under the split nickel approach, a certain budget amount can be identified and that budget amount can be closely watched, not only by the industry, but by the general public who demands to have a better eye and understanding as to how the state is spending its money. MR. FURNACE stated the Alliance believes HB 238 does not meet the need to identify means of stability, accountability and (indiscernible) taxation and the public deserves a clear and complete view of the public expenditure of those dollars. The Alliance believes that the split nickel approach is a better solution to the problem. Number 326 REPRESENTATIVE HUDSON asked which version the Alliance supports. MR. FURNACE said the Alliance support SB 215. JOHN BERNITZ, ANCHORAGE, testified via teleconference, and expressed opposition to the split nickel version of HB 238 which would reduce the amount available for abatement and preparedness. He said he supports Representative Williams in his efforts on version Y, although he does not understand the motivation for reducing the tax burden to oil producing companies in this time of declining revenues. He felt the 470 fund should be left as is. ANNOUNCEMENTS CHAIRMAN WILLIAMS announced the committee will meet on Friday, March 4 at 8:15 a.m. to hear HCR 12, SB 238, and SB 151. There being no further business to come before the House Resources Committee, Chairman Williams adjourned the meeting at 10:12 a.m.