Legislature(1993 - 1994)
03/16/1994 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 16, 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 Representative Al Vezey Senator Mike Miller 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 IN COMMITTEE WITNESS REGISTER DAVE PARISH Exxon Company, U.S.A. P.O. Box 196601 Anchorage, Alaska 99519 Phone: 561-5331 POSITION STATEMENT: Commented on various versions of HB 238 KEN REITHER Exxon Company, U.S.A. P.O. Box 196601 Anchorage, Alaska 99519 Phone: 561-5331 POSITION STATEMENT: Commented on various versions of HB 238 BOB POE, Director Division of Information and Administrative Services Department of Environmental Conservation 410 Willoughby Avenue, Suite 105 Juneau, Alaska 99801-1795 Phone: 465-5010 POSITION STATEMENT: Commented on Mr. Reither's overview and the various versions of HB 238 JIM GRIFFIN, Manager Legislative Audit Division P.O. Box 113300 Juneau, Alaska 99811-3300 Phone: 465-3830 POSITION STATEMENT: Commented on the Oil and Hazardous Substance Release Response Fund Audit MEAD TREADWELL, Deputy Commissioner Department of Environmental Conservation 410 Willoughby Avenue, Suite 105 Juneau, Alaska 99801-1795 Phone: 465-5050 POSITION STATEMENT: Answered questions MIKE CONWAY, Director Division of Spill Prevention and Response Department of Environmental Conservation 410 Willoughby Avenue, Suite 105 Juneau, Alaska 99801-1795 Phone: 465-5250 POSITION STATEMENT: Answered questions 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 03/02/94 (H) MINUTE(RES) 03/09/94 (H) RES AT 08:15 AM CAPITOL 124 03/09/94 (H) MINUTE(RES) 03/16/94 (H) RES AT 08:15 AM CAPITOL 124 ACTION NARRATIVE TAPE 94-33, SIDE A Number 000 HB 238 - OIL/HAZARDOUS SUBS. FUND,TAX,PLANS The House Resources Committee was called to order by Chairman Bill Williams at 8:27 a.m. Members present at the call to order were Representatives Williams, Bunde, Carney, Davies, Finkelstein, Green, James, and Mulder. Representative Hudson was absent. CHAIRMAN WILLIAMS announced there is a quorum present. The meeting is on listen only teleconference with Anchorage, Cordova, Homer, Soldotna and Valdez. He stated HB 404 was taken off the schedule at the request of the sponsor. DAVE PARISH, EXXON COMPANY, U.S.A., stated Ken Reither will be giving a presentation on how Exxon understands the different versions of the bills. He commented Exxon has not yet seen a copy of the Department of Environmental Conservation (DEC) Oil and Hazardous Substance Release Response Fund audit and understood there are several sections in HB 238, version Y that attempt to incorporate the key findings of the audit. He said Exxon has seen those sections, they seem reasonable and Exxon would support them. From Exxon's perspective, there have been problems with the 470 fund, but not particularly with the management of the fund by the current Administration. The industry agrees that this Administration has been responsible in their efforts to build up the fund balance, which has grown significantly under their stewardship. Number 053 KEN REITHER, EXXON COMPANY, U.S.A., stated he will discuss the tax suspension mechanism, what the industry is seeking in this matter, some charts showing the immediate benefit of the various proposals, the concept of splitting the nickel, and version Y. He said despite testimony last week to the contrary, the tax suspension mechanism in the current 470 fund law does not work. The last calculation made to determine whether or not the $50 million cap had been reached was on January 24, 1994. At that time, the commissioner of Administration calculated as follows: oil surcharge cumulative revenue-$115 million; cumulative expenditures-$128 million; with a difference of negative $13 million. MR. REITHER stated there is $37.4 million in the spill reserve and any mechanism which calculates whether or not the $50 million is reached ought to reach a result close to the $37.4 million. He said the negative $13 million is wrong, it does not work and it ought to be fixed. MR. REITHER recalled that a lot of testimony characterized the industry as seeking a tax break. The industry would like to see a mechanism which provides a stable source of revenue to DEC for ongoing spill prevention and response programs, and a fix to the tax suspension mechanism so that funds available for spill response build to $50 million as intended, but then part of the tax suspends unless and until there is a draw down below the $50 million target level. He said the law in 1989 was intended to build up a $50 million fund and the tax was supposed to shut off. MR. REITHER remarked there have been charts developed by DEC which show an immediate benefit from the various proposals ranging from $26.8 million to $64.7 million. These amounts were derived by comparing the negative $13 million against what the result would be if the formula was fixed, which has nothing to do with tax liability, but rather only has to do with when the tax turns on and shuts off in the future. Exxon feels the comparison is invalid. The proper way to calculate any benefit to the industry is to compute the difference between the tax the industry pays under present law versus the tax it would pay under the new law. He pointed out there is no immediate benefit to industry from any of the proposals. What happens under a couple of the proposals is there is a partial suspension of some of the tax beginning in mid fiscal year 1995. That benefit is no where close to $26.8 to $64.7 million. Number 106 MR. REITHER commented on the concept of splitting the nickel. One of the reasons why splitting the nickel makes sense is that the 470 fund has in reality become a dual purpose fund, trying to serve two purposes. First, it is used to fund ongoing spill preparation and prevention programs which are done by DEC. Second, it is used as a storehouse of moneys available to respond to catastrophic and other spills. He stressed there are two separate and distinct, but really unrelated purposes trying to be served by a single fund. MR. REITHER stated splitting the nickel into two separate surcharges - one to take care of the ongoing needs of DEC and the other to build the fund, and make one of them a permanent tax and the other a suspending tax, seems to be a sensible and workable approach. He said Exhibit A shows how a split of 2 cents for ongoing programs and 3 cents for the suspending tax will work. (Exhibit A is on file.) He explained the concept is simple. There is $37.4 million in the spill reserve and approximately $26 million has been collected from the nickel during fiscal year 1994. The proposals basically divide the $26 million into two piles of money; one going to fund the ongoing DEC programs in the coming fiscal year and the other going in the spill reserve. Adding the one part from the $26 million for the spill reserve, to the $37.4 million already there, results in approximately $50 million. Mr. Reither explained depending how the nickel is split, he determined a $49.9 million fund. The tax would suspend under that scenario as of January 1, 1995. Number 144 MR. REITHER stated Exhibit B illustrates a split of 2 1/2 cents and 2 1/2 cents. The differences shown in Exhibit B are: 1) more dollars are available for appropriation to DEC for ongoing programs in future years; $16.1 million or more versus DEC's projected need of $13.5 million, and 2) the buildup of the $50 million fund is not quite as fast as under the 2 cents/3 cents proposal. He stressed both proposals raise the fund above $50 million, but how fast that point is reached is different between the proposals. MR. REITHER stated DEC has come forward with a 3 cents/2 cents proposal with 3 cents going to ongoing programs and 2 cents for the spill reserve fund and taking 60 percent of the $37.4 million spill reserve and appropriating that amount to DEC in a nonlapsing appropriation to be spent for ongoing programs (illustrated in Exhibit C, on file.) The result is $38 million appropriated to DEC for ongoing programs, compared to DEC's projected need of $13.5 million. In addition, that proposal would reduce the spill reserve to $25.4 million and it would take 2 1/2 years for the fund to build to $50 million as compared to the 2 cents/3 cents split, or the 2.5 cents/2.5 cents split where the fund will exceed $50 million by the middle of the coming fiscal year. He added that under the 2 cents/3 cents and 2.5 cents/2.5 cents proposals, the fund actually grows higher than the $50 million. Number 191 MR. REITHER stated the fourth proposal, HB 238, version Y is illustrated in Exhibit D. Under version Y, the nickel surcharge would remain in place and a tax credit would be given when the spill response fund got to $50 million. He said he tried to prepare a detailed analysis of how version Y would work, but did not get very far before he ran into problems due to ambiguities as to how it would work. He noted he had examined the work draft and the amendments and determined the following problems. In the work draft by itself, the accounting problem is not fixed and none of the amendments fix the accounting problem. In section 4 of the bill, which contains the calculation whether the $50 million target is reached, the bill subtracts reserves for outstanding appropriations and then subtracts total appropriations. He said he remembered a comment by members of the Administration that it seemed like double accounting. He stated in some of the earlier versions of the Senate Bill and most recent versions of the Senate and House bills, that problem had been taken care of. MR. REITHER stated in the version Y work draft, a taxpayer is entitled to a credit against the tax imposed by AS 43.55.011-150. He said that range of tax laws covers two taxes, an oil production tax and a gas production tax, which are two separate taxes. Presumably the credit would be against the oil production tax, but the bill should be more precise in this area. If passed as drafted, he thought the Department of Revenue (DOR) would have to pass a regulation attempting to clarify this point. Number 230 MR. REITHER said the second problem is the credit may be taken only during a tax year in which the credit is calculated and reported, but under neither tax is there a tax year. He stressed both the oil production tax and the gas production tax are calculated and paid monthly, not annually. MR. REITHER stated the third problem under version Y is the surcharge would be segregated into a separate account in the general fund. At the end of the year, the legislature would appropriate the nickels collected into the 470 fund, but since the credit is allowed against production taxes, which are paid into the general fund, that credit effectively comes out of the general fund, not the 470 fund. Thus the 470 fund would continue to grow, funded indirectly by the general fund, and not by the surcharge itself. MR. REITHER said the Y.4 amendment does solve that problem in that it changes the credit to be against the surcharge itself. He pointed out it also solves the problem of clarifying exactly which tax the credit is applied against. He stated the Y.4 amendment presents another problem in that it only allows the credit during the state fiscal year in which the credit is calculated and reported. He outlined the fourth quarter of the fiscal year. By April 30, the commissioner of Administration must make the calculation and by May 14 must report that to DOR. DOR, within no specified time limit, calculates the amount of credit by taxpayer and notifies each taxpayer the exact amount of credit which is allowed. He stressed the problem is the next tax return before the end of the quarter is due June 20 and delinquent June 30. That leaves only 45 days for DOR to make the calculation, notify taxpayers of the amount of credit, and the taxpayers to fold the credit into their return; otherwise the credit is apparently lost. MR. REITHER stated another problem with the tax credit mechanism is if there is an amended return filed later in which the volumes change. He said Exxon has had volume changes which occurred during the audit process. He pointed out that taxes are not calculated on a close enough basis, they have to be calculated exactly to the penny. Otherwise, the company is not complying with the law. He another concern is the issue of whether natural gas liquids are gas or oil. Should the DOR prevail in it's claim that natural gas liquids are oil, then amended returns will be required which change the number of barrels reported and accordingly, the surcharge due. Depending on when the issue is resolved, and it could be five to ten years from now, DOR will have to go back and calculate what the tax credit would have been in a certain year. MR. REITHER emphasized that while the tax credit looks like a good idea in theory, in practice it puts a large burden on DOR and the taxpayers. He added that no taxpayer can verify the accuracy of the amount of credit calculated by DOR without knowing the total amount of surcharge collected from the other taxpayers, which is confidential, as adjusted after audits are closed, ten or more years later. He stated there is no doubt that DOR can write regulations and make any calculation required under just about any law which is passed. However, he felt the tax credit mechanism is burdensome, creates a tax compliance problem, and it seems that splitting the nickel is simpler. If the nickel is split and there is a tax suspension mechanism which really works, when the $50 million cap is reached, all DOR would have to do is send a form letter to the producers, notifying them of the suspension or reinstatement of the surcharge. DOR would have nothing to calculate. MR. REITHER stated in summary, Exxon does not support the tax credit solution. Although some of the problems he described could be resolved through amendments, the result is still one fund trying to do two jobs; the effort required by DOR and the taxpayers to make and keep up with the calculations seems out of line with the objectives that are being sought. He stressed the far simpler approach is to split the tax into two parts: One to fund ongoing programs and the other to build the $50 million fund. Under the split nickel approach which Exxon has supported, only part of the nickel tax suspends, and only after full funding of DEC's ongoing programs, and only after the full $50 million fund is built up for response to catastrophic and other spills to be addressed out of that fund. (CHAIRMAN WILLIAMS noted for the record that Senator Mike Miller had joined the committee.) REPRESENTATIVE DAVID FINKELSTEIN stated the complexities of what is being discussed are significant but many of them can be solved. He asked if the surcharge is shut off when the $50 million cap is reached, will there be a situation created where the surcharge will shut off and turned on over and over during a quarter since spending is erratic. MR. REITHER stated what Exxon contemplates and what is being proposed under one of the proposals is splitting the tax. The funding for ongoing programs is in place and the suspension only works quarterly. The suspension would not be on a daily or weekly basis. The result is a stable source of money for the amounts appropriated for ongoing programs and a $50 million fund. REPRESENTATIVE FINKELSTEIN asked in a situation where there was a big drain on the fund within a quarter due to a significant spill, would the restarting of the nickel surcharge not start until the next quarter. MR. REITHER responded the surcharge would begin again the next quarter. REPRESENTATIVE FINKELSTEIN expressed concern. He said it is possible that the state could have two catastrophic spills within one quarter. He stated he cannot support a system where the fund drops below $50 million and there is no restarting of the surcharge for a whole quarter, regardless of what happens. MR. REITHER stated that is the way it works in present law. REPRESENTATIVE FINKELSTEIN agreed but said the $50 million cap has never been reached, so it is not an issue. If the nickel tax is going to shut off, there needs to be a basis for what the spending needs are. MR. REITHER said the present law has a shut off mechanism. It was put in place to shut off at $50 million but it does not work. He stated he is advocating that be fixed. He noted the shut off mechanism would not work differently under any of the proposals, including the tax credit proposal. Number 466 REPRESENTATIVE FINKELSTEIN stated the $50 million is a theoretical number which has not been reached and was put into law as an estimate. He said the state's final Exxon Valdez spill report which came out in June 1993 concluded that out-of-pocket costs to the state for cleaning up the spill exceeded $50 million. He asked if Exxon would support a proposal with the fund at a higher level, so if a situation like the Exxon Valdez happens again, the state would have enough money in the fund to pay for the cleanup. MR. REITHER replied probably not, because the $50 million fund is there to fund a cleanup of a spill caused by an elusive, foreign tanker; someone with low capitalization and no funds available to respond to a spill and someone likely to spill oil and disappear. That is not the case in respect to the major producers. There are Jones Act considerations and other funds available which give comfort. He believed that if another spill occurred similar to the Exxon Valdez, the company involved will be just as responsive as Exxon was. He felt $50 million is adequate. REPRESENTATIVE JEANNETTE JAMES felt the $50 million is to be used as an emergency response fund so that when a spill occurs, there is an immediate response and there is not a question of who pays. It allows the response to a spill, with an understanding that most likely the funds will be returned when the responsible party pays for the cleanup. Number 527 CHAIRMAN WILLIAMS recalled that Mr. Reither had said the present law says the fund will build to $50 million and then shut off. He asked if the 470 fund law does, in fact, say that. MR. REITHER stated the fund would temporarily shut off unless and until the fund drops below $50 million, provided the tax suspension mechanism is worded properly in the law. CHAIRMAN WILLIAMS clarified the present law says when the fund reaches $50 million, the tax shuts off. Number 540 MR. PARISH responded it shuts off on a temporary basis until it is drawn down below $50 million and then it begins again. REPRESENTATIVE ELDON MULDER recalled that Mr. Reither had said the fund could go higher than the $50 million before the tax shuts off and asked how that could happen. MR. REITHER replied that could happen because of the delay in how the shut off mechanism works. A full quarter has to elapse before any collections for that quarter are counted and there is a need to wait until recoveries come in. During the middle of the second quarter, the calculation is made and the effect of that calculation does not take place until the beginning of the next quarter. He said you effectively have two quarters of collections. REPRESENTATIVE JOHN DAVIES stated there is a need to be careful about what fund is being discussed when talking about current law because of the way the calculation is done. What has been talked about is a response fund and the other ongoing expenses are mixed. Therefore, the fund is an overall pot of money which consists of both the day-to-day expenditures and contingency funds for a major spill. Number 586 REPRESENTATIVE JOE GREEN stated that is why the split nickel version was introduced. The split nickel is to stabilize the fund so it would not be constantly vacillating. REPRESENTATIVE FINKELSTEIN felt the state's analysis of the Exxon Valdez spill costs were such that if one were to apply those costs to the kind of situation mentioned earlier where an irresponsible party caused a spill and disappeared, the state could easily be at a point where $50 million was not enough. He stated the $50 million is inadequate for the types of spills being discussed. He said the issues at hand are difficult because of the accounting. He asked if Exxon feels the nickel surcharge tax is excessive or feels the legislature is inappropriately appropriating the funds. MR. PARISH stated there is a systematic problem with the current law. He said last week DEC presented a chart to the committee which illustrated how costs had gone up because the legislature kept passing changes in the law with mandates to spend more money. He expressed concern with the pattern of "if the fund is there, it is going to be spent." He said that is particularly true when one looks back at the original fiscal notes where the expenditure estimates were $5 million a year and every year, the actual appropriations have exceeded that amount. Number 680 REPRESENTATIVE GREEN stated there has been concern expressed about the adequacy of the $50 million. He reiterated that the fund is for emergency response. He felt the state is currently in a completely different situation than when the Exxon Valdez oil spill occurred plus there is a $1 million federal government back up. He said funding is not the issue. It is the immediacy and the capability to go to a spill at a moments notice, and that is why there is a need to reach $50 million so there is money to accomplish that. He stressed what is happening currently is an attempt to revoke the law on its original purpose. The law was passed several years ago and currently there is a diffusion of attitude as to what the purpose of the 470 fund is. He felt the ongoing prevention programs, oversights, etc., are legitimate charges but he stressed in some instances, expenditures have exceeded the original purpose and that is why there is a need to refocus through this bill. TAPE 94-33, SIDE B Number 000 REPRESENTATIVE DAVIES stated Mr. Reither had commented it was inappropriate to consider a division of the $37.4 million currently in the fund balance. In light of the fact that the industry has pumped $112 million into the fund and the state has contributed approximately $75 million through general fund appropriations, he asked if those two numbers should be taken into account in allocating the $37.4 million if the decision is made to split the fund. MR. REITHER responded as he understands it, an amount remains in the spill reserve after DEC has been fully funded for prior expenditures and what occurs is money left over from the nickels. Since it is there, he felt it was appropriate for the money to remain there. REPRESENTATIVE DAVIES disagreed. He stressed the money remaining is from the combination of nickels and state appropriations. He said people have argued that because the $37.4 million was created from both nickels and state appropriations, that fact should be taken into account. MR. PARISH stated Exxon had discussions with DEC last year in regard to the question of general fund money flowing through the fund and ending up in the reserve, and at that time, DEC could not track exactly what was nickels and what was general fund money in the fund. He said one of the primary original purposes of the nickel tax when it was enacted and revamped in 1989 was to build up an emergency fund. The discussion being heard from all parties is there is a desire to have a strong emergency response fund. For that reason, Exxon supports taking the existing emergency fund and keeping it whole. Number 044 REPRESENTATIVE CON BUNDE stated many people are saying that stopping the nickel when the $50 million is reached is a tax break for oil companies. He asked how Exxon would respond to that comment. MR. REITHER stated when the nickel-a-barrel surcharge was first enacted, it was supposed to stop at $50 million. If the stoppage mechanism does not work and there is a desire to fix it, he did not see how that translates into a tax break. He said the tax is not like a deduction where some particular aspect of the oil industry's function is being targeted for a deduction, to induce them to act in a certain way. He felt characterizing the shutting off of the nickel as a tax break is improper. REPRESENTATIVE BUNDE asked if the nickel continues, will it affect Exxon's operation in any way. MR. REITHER responded it would not make a foot note in the annual report. He said just because oil companies are profitable does not mean they do not face the same problems as what the legislature is facing today. The price of oil is hurting the industry just as bad as it is hurting the legislature. He said Exxon is doing everything possible to reduce costs. He stressed profits of the oil companies do not relate to the issue at hand. CHAIRMAN WILLIAMS stated he appreciates what the oil companies are confronted with. He said his initial discussion about the nickel-a-barrel tax was that all of the nickel should go right to the catastrophic fund. Then he was told the oil companies want to pay for preparedness programs and that is why the nickel should be split. He expressed concern with the split nickel because with the volume of oil leaving the state, there are questions as to where the nickel is going to come from and how the state can be assured that the programs are fully funded, and will continue. Today he has people talking to him about cutting welfare and education programs, etc., and he wonders how anyone can be assured that ten years from now the spill response and prevention programs will exist or if they are even needed. Number 110 MR. REITHER stated in regard to the volume of oil going down, there are other sources of funds in the various proposals such as using the interest off of the $50 million. The projections he made earlier under the 2 cent/3 cents or the 2 1/2 cents/2 1/2 cents proposals, show a result of more money available to fund ongoing programs over the next five years. He stressed it is very difficult to predict where industry will be five years from now. If a projection of oil production volumes made five years ago was looked at, now it would be determined that the projection was based on what could be seen at the moment. Many fields which have come on line, were not in the projections made. Therefore, what is happening is a projection which follows volumes of production is constantly being revised. He felt that five years from now, the volume will probably not be as low as projected because of past experience of improving production methods. MR. REITHER stated it is very difficult in the oil business to predict where anyone is going to be five years from now. He said it appears the mechanisms Exxon has been advocating takes care of the problem at least for five years and if at the end of five years if it is not working, take another look. Number 148 BOB POE, DIRECTOR, DIVISION OF INFORMATION AND ADMINISTRATIVE SERVICES, DEC, stated there has been a lot of discussion regarding the $50 million shut off, what it was intended for, etc. He advised that representatives from legislative audit are present and if there is a desire to review what the original intent of the law was, how it changed, etc., the audit is a good source to refer to. He pointed out present law says the nickel should shut off when total expenditures from the fund subtracted from the nickels which have gone into the fund equals $50 million. It does not say anywhere in the law that the nickel surcharge will stop when the spill reserve balance equals $50 million. Therein lies the problem. MR. POE said in regard to the question of what is in the $37.4 million spill reserve fund presently, DEC cannot go back and determine what came from nickels and what came from general fund dollars. Referring to a chart he distributed, he said a snapshot was taken for each year; the money which went into the fund each year and the money that went out each year. (The referenced chart is on file). He then applied that ratio of money coming in and money going out to determine how much of the money going out was general funds and how much was nickels. In the early years, up to fiscal year 1990, 100 percent of the money going out was general funds. When the same ratio is used and 1987-1994 is looked at, 41.29 percent of the funds expended or funds remaining are general funds and 58.71 percent is from surcharge revenues. Number 204 MR. POE in response to Mr. Reither's testimony, felt the comparisons made were apples and oranges. In Mr. Reither's comparison of the 2 cents/3 cents split and the 2.5 cents/2.5 cents split, he takes all of the $37.4 million and puts it into the spill account. Therefore, those two versions come up with good immediate results in the first year in regard to suspending the nickel surcharge and reaching $50 million in the fund. On the 3 cents/2 cents version, Mr. Reither does follow the version, which DEC submitted to the Senate Resources Committee, that takes the $37.4 million and splits it 60/40 with the logic being the fund would split the way the nickel did giving DEC an advantage. MR. POE stated when the 3 cents/2 cents version results are compared under Mr. Reither's analysis to the 2 cents/3 cents or 2.5 cents/2.5 cents version, the reason the other two versions look so good is that he takes $37.4 million and puts it into the calculation to suspend the nickel and in the spill reserve, so the spill reserve reaches $50 million rather quickly. The other comment which Mr. Reither made which Mr. Poe takes exception with is there is no positive tax break other than the savings in the nickel paid in the first year upon changing the law. Mr. Poe pointed out that Mr. Reither starts out at the end of 1995 with a spill reserve of $57.7 million; he has only paid $7.8 million in surcharge that year; so somebody got $49.9 million under the 2 cents/3 cents version in one year, where before on June 30 of the same year, he was looking at a negative number. Number 259 MR. POE said if one takes the same scenario on the 2.5 cents/2.5 cents version, the industry gets $56.4 million, spends $6.5 million, with a $49.5 million benefit. He stated just because everyone feels the calculation is a problem now, does not mean there is no benefit from changing it. If everyone thinks the calculation is wrong today, it may have been very well thought out at that time. He stressed there is a benefit from changing the calculation because the law presently does not say when the spill reserve equals $50 million, the nickel turns off. The law says when the result of the calculation of subtracting all the expenditures from the nickels that went into the fund equal $50 million, the nickel will shut off. He pointed out those are two very different points. MR. POE stated currently the state is attempting to do two jobs with the same fund. He is not convinced that because the state has two jobs to do necessarily argues that there is a need to draw a partition around the two sources of money. Perhaps next year, it may be determined there are three jobs to do. The problem does limit DEC's ability to respond to the jobs faced. He said in regard to simplicity, he pointed out that version W contains 23 pages and version Y is 11 pages. He noted in version W, the number of accounts tracked is doubled and a lot of complexity has been added. MR. POE said many of the concerns Mr. Reither raised about the tax refund aspect seemed to be what is normally done in the departments of revenue. He did not know if the refund aspect necessarily says that a single nickel version is inherently flawed. Mr. Poe stated perhaps the refund aspect has a problem, but Mr. Reither's argument did not seem to be effective against version Y. Number 324 REPRESENTATIVE GREEN noted on the chart which Mr. Poe had distributed that mitigation account transfers in are coupled with the total general fund and asked if that was due to money paid in first goes through the general fund, then comes back and therefore it is considered a general fund. MR. POE responded that mitigation amounts are general fund money. He pointed out there is nothing in present law or in past practice which indicates the money is necessarily going into the response fund. Many of those funds come from fines, penalties, etc., which probably should not be going toward the spending of the nickels. Technically, accounting-wise and in practice, the amounts are general funds. REPRESENTATIVE FINKELSTEIN wondered if someone could answer the question of what the intent of the original law was. He recalled the issue which Mr. Parish raised, which was the comparison between the expectations of expenditures and the actual expenditures. He noted there is a chart in committee member folders which Stan Stephens mentioned at the hearing last week. The chart has a straight line across representing approximately $5 million for what the fiscal notes were supposed to be for oil and hazardous substance release response fund expenditures. Then there is a line at a higher level which goes up to $25 million for actual appropriations. He said items such as the one time expenditure on the ferry are not included in the expenditures and there is no inclusion of the fiscal notes. He noted what is being compared is a list which is not all inclusive and asked if the fiscal notes were included, would the two lines be closer. MR. POE responded they would be very close. He said DEC prepared a response to that chart, in committee member folders (copy on file) which shows the different changes in law and how the line was reached. The chart which Representative Finkelstein was showing started with a fiscal note that related to the starting point and then extended the fiscal note across the years. He noted there have been 17 legislative changes since the fund got started and those changes have resulted in additional fiscal notes or the enabling of the fund to be spent for other reasons, which were then later appropriated and raised the level of appropriations up. Referring to the chart, he said DEC has illustrated how those are composed through time and what made up that growth in the number. Number 393 REPRESENTATIVE JAMES felt the prime design of the original law was to have a $50 million pot of money to be available for an emergency response. She said the $50 million goal has not been reached and asked if that should be the primary goal. MR. POE responded yes and pointed out that even in the earlier split nickel versions, the equation was not fixed and the $50 million still would not have been reached. He said DEC showed how the equation should be structured to get there. JIM GRIFFIN, MANAGER, LEGISLATIVE AUDIT DIVISION, stated research indicates the intent of the original legislation passed two years prior to the Exxon Valdez incident was the cleanup of contaminated sites. When legislation was passed in 1989, another intent was put into the original intent which discussed future discharges of oil and it also set up the response fund. The legislation in 1989 took a mechanism already in place that had one type of intent, and put the nickel-a-barrel surcharge and the future discharge language on top of the original legislation, which resulted in a very broad intent. REPRESENTATIVE GREEN asked if the nickel surcharge was separated to handle crude oil and the 470 fund as it was envisioned prior to the nickel, would the accounting be simpler. MR. GRIFFIN responded administratively speaking there is an appeal to separate them. REPRESENTATIVE GREEN said the DEC commissioner is charged with supplying a review of what has happened each year by the tenth day after the legislature convenes. He asked if that report is available. MR. POE responded the report is late but will be available by the end of the week. He discussed why the report is late. REPRESENTATIVE GREEN clarified that DEC's proposal would split the amount of money in the fund similar to the way the nickel income is split. He asked if the amount of money to be split needs only to be big enough to cover DEC's expenses, why would DEC need the amount of money in the fund and what would DEC do with that money. MR. POE replied for the purpose of analysis, DEC made one basic assumption and that was the fund got split the same way as the nickel, because at that time DEC had not done the proof which shows the fund is 41 percent/58 percent. He said the numbers which Mr. Reither presented show there is no problem with the state's spill prevention and response program because there are other sources of money such as interest on the fund, Exxon payments to come in the future, etc. Mr. Poe agreed the interest is and always has been in the general fund, but it is being used for something else. To say now that the interest is going to be committed to this program is a general fund appropriation. On future Exxon payments, there is no guarantee when those payments will be received or in what amounts, so it is a very unpredictable revenue source. In addition, new possible oil sources are not predictable, so if there is a desire to have a fund available to respond to spills and another to fund a spill prevention program, there needs to be an assured funding source. DEC believes if the fund is split, general fund and nickels, there would be money to supplement the shortage occurring in the out years from a split nickel version. Number 548 REPRESENTATIVE GREEN pointed out that if the 3 cents tax went to fund ongoing programs it would generate approximately $16 million without the interest, mitigation, etc., and that is $3 million in excess of DEC's annual budget. REPRESENTATIVE MULDER stated that Mr. Poe had indicated a large amount of funds have gone into the response fund as general funds and asked if the general fund has received any reimbursements since 1988. MEAD TREADWELL, DEPUTY COMMISSIONER, DEC, answered the general fund made direct appropriations for the Exxon Valdez response, such as to the Department of Law and also appropriations to the response fund. The appropriations to the response fund have not reimbursed the general fund directly. He said it could be argued that some of the mitigation account expenditures which came from the Exxon reimbursements that might have come from general fund being put in the response fund were reimbursed (indiscernible) general fund but they were not called that. He stated some of the things which were appropriated out of the mitigation account were clearly response fund eligible, but they were taken from the mitigation account. Number 624 REPRESENTATIVE MULDER said he understands why DEC is advocating the 3 cents/2 cents proposal. He asked what the projected revenue is for the 3 cents split for the next five years. MR. POE replied $15.7 million, $15.2 million, $14.9 million, $14.3 million, and $13.4 million. REPRESENTATIVE MULDER clarified there is a steadily diminishing supply of funds coming in from the 3 cents, but when adjustments are made for inflation, the $13.5 million is going to go up to $14.4 million, so to be somewhat responsible for a five year plan, DEC is saying the 3 cents is necessary. MR. POE said that is correct. He pointed out that DEC does fiscal notes in a five year plan, but expects oil development to be ongoing for a long time so there is a need to think even further out. He stated DEC does not currently have any indications that the rate of dissent is going to decrease in terms of production. TAPE 94-34, SIDE A Number 000 REPRESENTATIVE DAVIES asked if existing DEC budgets adequately fund prevention programs. Number 024 MIKE CONWAY, DIRECTOR, DIVISION OF SPILL PREVENTION AND RESPONSE, DEC, stated the division based their budget on requirements in statute to be able to continue programs on the current level. He added there are many issues which the legislature can choose to take on in the future not being addressed currently. He said as long as there is a stable climate in responsibilities for the next several years, the budget is adequate. He commented there is a philosophical debate which goes on amongst members of the legislature to figure out what the funding level should be for each program. The State Emergency Response Commission had a task force put together to look at a strategic plan for local emergency planning committees (LEPC) and there is an indication there will be about 20 plans submitted during fiscal year 1995. Once the plans are submitted, the substantial up-front costs of getting them going has already occurred and the debate is how much do the communities kick in to keep the plan going since they have the responsibility to do the response. REPRESENTATIVE JAMES asked if there is a written plan showing when and where the depots and corps will occur. MR. CONWAY responded the Department of Military and Veteran Affairs (DMVA) has the current responsibility for depots and corps. He said DMVA would have to answer the question. He stated in working with DMVA, he knows when DMVA first got that responsibility, their plan included $20 million to start up depots and corps with approximately $5 million a year needed after that. He added that the legislature funded the program at about the $2 million level in the beginning. MR. POE commented that when the legislature funded the program at that level, there was legislative intent which said the funding was to be used for allowing DMVA to be in a ready status to respond to spills, so that money basically goes to personal services. MR. CONWAY stated DEC has been working on the near shore demonstration projects to be able to have an equivalent to depots and corps, based upon current statutes. DEC can enter into an agreement with local communities and contractors to provide the capability to respond to the day- in, day-out spills which are 99 percent of the spills. By using those existing authorities, DEC is looking at the near shore demonstration projects to come up with a package for coastal communities on what kinds of things could be the equivalent of depots and corps. He described several upcoming demonstrations. MR. CONWAY said when DEC finishes evaluating the projects, they will have packages with a price tag which will come before the legislature in the future. He added that DEC has response vessels under construction to be part of the demonstration projects. He stated DEC will have two kinds of packages showing what they need for noncrude areas and what is needed for crude. He pointed out the demonstration projects have been an independent activity because in fiscal year 1993, the legislature made a decision to give DEC funding for the near shore demonstration projects and did not give any funding, other than for staff, to DMVA for depots and corps. REPRESENTATIVE FINKELSTEIN asked in regard to the audit, how many laws contributed to the legislative intent on the 470 fund. MR. GRIFFIN responded there is a chart on pages 8 and 9 in the audit which indicates there have been sixteen. REPRESENTATIVE FINKELSTEIN clarified the determinations on intent all promulgates from either language from the law or fiscal notes, and does not include committee minutes, etc. MR. GRIFFIN replied the division does read committee minutes in the course of the audit, but the determination of the intent comes straight from the law. REPRESENTATIVE FINKELSTEIN said there has been a debate over and over again indicating the intent of the 470 fund is for responding to catastrophic spills, but the audit shows the purpose is both prevention and dealing with hazardous waste, as well as dealing with catastrophic spills. MR. GRIFFIN stated the preamble to the 1989 legislation which established the nickel-a-barrel surcharge talked specifically about future events and catastrophic spills. He said the division also asked the question of Mr. Chenoweth at legislative counsel as to how that affects everything which came before and after, and he said it does not have much effect. REPRESENTATIVE FINKELSTEIN clarified that the final conclusion in the audit is that the 470 fund is for both prevention and dealing with hazardous waste and dealing with catastrophic spills. MR. GRIFFIN replied that was correct. ANNOUNCEMENTS CHAIRMAN WILLIAMS announced the committee will hear HB 446, HB 462, and HB 352 on Friday, March 18 at 8:15 a.m. ADJOURNMENT There being no further business to come before the House Resources Committee, Chairman Williams adjourned the meeting at 10:10 a.m.