Legislature(1995 - 1996)
04/24/1996 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 April 24, 1996 8:15 a.m. MEMBERS PRESENT Representative William K. "Bill" Williams, Co-Chairman Representative Joe Green, Co-Chairman Representative Scott Ogan, Vice Chairman Representative Alan Austerman Representative Pete Kott Representative Don Long Representative Irene Nicholia Representative John Davies Representative Ramona Barnes MEMBERS ABSENT All Members Present COMMITTEE CALENDAR WORK SESSION: Pacific Salmon Treaty HOUSE BILL NO. 548 "An Act authorizing, approving, and ratifying the amendment of Northstar Unit oil and gas leases between the State of Alaska and BP Exploration (Alaska) Inc.; and providing for an effective date." - HEARD AND HELD CS FOR SENATE BILL NO. 198(FIN) "An Act establishing the Homer Airport Critical Habitat Area." - PASSED HCS CSSB 198(RES) FROM COMMITTEE CS FOR SENATE BILL NO. 199(FIN) "An Act relating to environmental audits and health and safety audits to determine compliance with certain laws, permits, and regulations." - HEARD AND HELD HOUSE BILL NO. 516 "An Act relating to air quality control." - SCHEDULED BUT NOT HEARD PREVIOUS ACTION BILL: HB 548 SHORT TITLE: NORTH STAR OIL & GAS LEASE AMENDMENT SPONSOR(S): RULES BY REQUEST OF THE GOVERNOR JRN-DATE JRN-PG ACTION 03/28/96 3434 (H) READ THE FIRST TIME - REFERRAL(S) 03/28/96 3434 (H) RESOURCES, FINANCE 03/28/96 3434 (H) FISCAL NOTE (DNR) 03/28/96 3435 (H) GOVERNOR'S TRANSMITTAL LETTER 03/28/96 3436 (H) ATTACHMENT/S&H SUPPLEMENT #21 04/03/96 (H) RES AT 8:00 AM CAPITOL 124 04/03/96 (H) MINUTE(RES) 04/10/96 (H) RES AT 8:00 AM CAPITOL 124 04/10/96 (H) MINUTE(RES) 04/12/96 (H) RES AT 8:00 AM CAPITOL 124 04/12/96 (H) MINUTE(RES) 04/15/96 (H) RES AT 5:00 PM CAPITOL 124 04/15/96 (H) MINUTE(RES) 04/23/96 (H) RES AT 3:00 PM CAPITOL 124 04/23/96 (H) MINUTE(RES) BILL: SB 198 SHORT TITLE: HOMER AIRPORT CRITICAL HAB. AREA SPONSOR(S): SENATOR(S) TORGERSON; REPRESENTATIVE(S) Navarre JRN-DATE JRN-PG ACTION 01/05/96 2058 (S) PREFILE RELEASED - 1/5/95 01/08/96 2058 (S) READ THE FIRST TIME - REFERRAL(S) 01/08/96 2058 (S) RES, FIN 02/21/96 (S) RES AT 3:30 PM BUTROVICH ROOM 205 02/21/96 (S) MINUTE(RES) 03/01/96 (S) RES AT 11:30 AM BUTROVICH RM 205 03/01/96 (S) MINUTE(RES) 03/13/96 (S) RES AT 3:30 PM BUTROVICH ROOM 205 03/13/96 (S) MINUTE(RES) 03/14/96 2735 (S) RES RPT CS 3DP 2NR SAME TITLE 03/22/96 2831 (S) ZERO FISCAL NOTE TO CS (DNR) 03/28/96 (S) FIN AT 8:30 AM SENATE FINANCE 532 03/28/96 (S) MINUTE(FIN) 03/28/96 2939 (S) ZERO FISCAL NOTE TO CS (F&G) 03/28/96 2939 (S) FIN RPT CS 3DP 1NR SAME TITLE 03/29/96 (S) RLS AT 12:05 PM FAHRENKAMP RM 203 03/29/96 (S) MINUTE(RLS) 03/29/96 2964 (S) FORTHCOMING CS RECEIVED 03/28/96 2939 (S) PREVIOUS ZERO FNS 04/01/96 2993 (S) RULES TO CALENDAR 4/1/96 04/01/96 2995 (S) READ THE SECOND TIME 04/01/96 2995 (S) FIN CS ADOPTED UNAN CONSENT 04/01/96 2995 (S) ADVANCED TO THIRD READING UNAN CONSENT 04/01/96 2995 (S) READ THE THIRD TIME CSSB 198(FIN) 04/01/96 2995 (S) PASSED Y19 N1 04/01/96 2995 (S) ADAMS NOTICE OF RECONSIDERATION 04/02/96 3028 (S) RECON TAKEN UP - IN THIRD READING 04/02/96 3028 (S) PASSED ON RECONSIDERATION Y20 N- 04/02/96 3030 (S) TRANSMITTED TO (H) 04/03/96 3615 (H) READ THE FIRST TIME - REFERRAL(S) 04/03/96 3615 (H) RESOURCES, FINANCE 04/03/96 3629 (H) CROSS SPONSOR(S): NAVARRE 04/22/96 (H) RES AT 8:00 AM CAPITOL 124 04/22/96 (H) MINUTE(RES) BILL: SB 199 SHORT TITLE: ENVIRONMENTAL & HEALTH/SAFETY AUDITS SPONSOR(S): SENATOR(S) LEMAN,Pearce JRN-DATE JRN-PG ACTION 01/05/96 2058 (S) PREFILE RELEASED - 1/5/96 01/08/96 2058 (S) READ THE FIRST TIME - REFERRAL(S) 01/08/96 2058 (S) RESOURCES 01/31/96 (S) RES AT 3:30 PM BUTROVICH ROOM 205 01/31/96 (S) MINUTE(RES) 02/02/96 2287 (S) FIN REFERRAL ADDED 03/06/96 (S) RES AT 3:30 PM BUTROVICH ROOM 205 03/06/96 (S) MINUTE(RES) 03/11/96 (S) RES AT 3:30 PM BUTROVICH ROOM 205 03/11/96 (S) MINUTE(RES) 03/12/96 2708 (S) RES RPT CS 4DP 1NR NEW TITLE 03/12/96 2708 (S) FISCAL NOTES TO SB & CS (DEC, F&G) 03/12/96 2708 (S) INDETERMINATE FISCAL NOTE (DNR) 03/12/96 2708 (S) ZERO FISCAL NOTES TO SB & CS (DOT, MVA) 03/20/96 (S) FIN AT 9:00 AM SENATE FINANCE 532 03/21/96 (S) MINUTE(FIN) 03/26/96 (S) FIN AT 9:00 AM SENATE FINANCE 532 03/27/96 (S) MINUTE(FIN) 04/02/96 (S) FIN AT 9:00 AM SENATE FINANCE 532 04/03/96 (S) FIN AT 9:00 AM SENATE FINANCE 532 04/03/96 (S) RLS AT 1:15 PM FAHRENKAMP RM 203 04/03/96 (S) MINUTE(FIN) 04/03/96 (S) MINUTE(RLS) 04/03/96 3041 (S) FIN RPT CS 1DP 4NR 1AM NEW TITLE 04/03/96 3041 (S) FNS TO CS (DEC, DNR) 04/03/96 3041 (S) ZERO FN TO CS (DOT) 04/03/96 3041 (S) PREVIOUS FN (F&G) 04/03/96 3041 (S) PREVIOUS ZERO FN (DMVA) 04/09/96 3092 (S) RULES TO CALENDAR & 1NR 4/9/96 04/09/96 3094 (S) READ THE SECOND TIME 04/09/96 3094 (S) FIN CS ADOPTED Y11 N5 E4 04/09/96 3095 (S) ADVANCE TO THIRD READING FLD Y11 N5 E4 04/09/96 3095 (S) THIRD READING 4/10 CALENDAR 04/10/96 3128 (S) READ THE THIRD TIME CSSB 199(FIN) 04/10/96 3128 (S) PASSED Y11 N9 04/10/96 3128 (S) SALO NOTICE OF RECONSIDERATION 04/11/96 3161 (S) RECON TAKEN UP - IN THIRD READING 04/11/96 3161 (S) PLACED AT BOTTOM OF CALENDAR 04/11/96 3171 (S) PASSED Y11 N9 04/11/96 3176 (S) TRANSMITTED TO (H) 04/12/96 3689 (H) READ THE FIRST TIME - REFERRAL(S) 04/12/96 3690 (H) RESOURCES, LABOR & COMMERCE 04/17/96 (H) RES AT 8:00 AM CAPITOL 124 04/17/96 (H) L&C AT 3:00 PM CAPITOL 17 04/17/96 (H) MINUTE(RES) 04/17/96 (H) MINUTE(L&C) 04/19/96 (H) L&C AT 3:00 PM CAPITOL 17 04/19/96 (H) MINUTE(L&C) 04/22/96 (H) RES AT 8:00 AM CAPITOL 124 04/22/96 (H) MINUTE(RES) 04/23/96 (H) RES AT 3:00 PM CAPITOL 124 04/23/96 (H) MINUTE(RES) 04/24/96 (H) RES AT 8:00 AM CAPITOL 124 WITNESS REGISTER DAVID BENTON, Deputy Commissioner Alaska Department of Fish & Game; and Pacific Salmon Commissioner, State of Alaska on the Pacific Salmon Commission P.O. Box 25526 Juneau, Alaska 99811-5526 Telephone: (907) 465-6136 POSITION STATEMENT: Briefed committee on status of Pacific Salmon Treaty KEVIN BANKS, Petroleum Economist Division of Oil & Gas Department of Natural Resources 3601 C Street, Suite 1380 Anchorage, Alaska 99503-5948 Telephone: (907) 269-8799 POSITION STATEMENT: Testified on HB 548 KEN BOYD, Director Division of Oil & Gas Department of Natural Resources 3601 C Street, Suite 1380 Anchorage, Alaska 99503-5948 Telephone: (907) 269-8800 POSITION STATEMENT: Testified on HB 548 SENATOR JOHN TORGERSON Alaska State Legislature Capitol Building, Room 427 Juneau, Alaska 99801-1182 Telephone: (907) 465-2828 POSITION STATEMENT: Sponsor of SB 198 HARRY GREGOIRE, Mayor City of Homer 3891 Kachemak Way Homer, Alaska 99603 Telephone: (907) 235-8303 POSITION STATEMENT: Testified on CSSB 198(FIN) MILDRED MARTIN P.O. Box 2652 Homer, Alaska 99603 Telephone: (907) 235-6652 POSITION STATEMENT: Testified in support of CSSB 198(FIN) DEREK STONOROV, Vice Chairman Beluga Wetlands Task Force 51795 E. End Road Homer, Alaska 99603 Telephone: (907) 235-8273 POSITION STATEMENT: Testified in support of CSSB 198(FIN) ROY HOYT, JR. P.O. Box 2121 Homer, Alaska 99603 Telephone: (907) 235-6387 POSITION STATEMENT: Testified in opposition to CSSB 198(FIN) LUKE WELLES, Member Homer Economic Development Commission P.O. Box 3735 Homer, Alaska 99603 Telephone: (907) 235-5557 POSITION STATEMENT: Testified in opposition to CSSB 198(FIN) STAN WELLES, Business Owner P.O. Box 1447 Homer, Alaska 99603 Telephone: (907) 235-6788 POSITION STATEMENT: Testified in opposition to CSSB 198(FIN) RALPH CLENDENEN 231 East Danview Avenue Homer, Alaska 99603 Telephone: (907) 235-5187 POSITION STATEMENT: Testified in opposition to CSSB 198(FIN) LYNN WHITMORE, Co-Chairman Beluga Wetlands Task Force; and Chairman, Homer Fish & Game Advisory Committee P.O. Box 355 Anchor Point, Alaska 99556 Telephone: (907) 235-7220 POSITION STATEMENT: Testified on CSSB 198(FIN) NANCY LORD P.O. Box 558 Homer, Alaska 99603 Telephone: (907) 235-8252 POSITION STATEMENT: Testified in support of CSSB 198(FIN) MARY GRISWOLD P.O. Box 1417 Homer, Alaska 99603 Telephone: (907) 235-3725 POSITION STATEMENT: Testified in support of CSSB 198(FIN) JIM REARDON 413 East Lee Drive Homer, Alaska 99603 Telephone: (907) 235-8543 POSITION STATEMENT: Testified in support of CSSB 198(FIN) JACK CUSHING, City Council Member Homer City Council City Hall Homer, Alaska 99603 Telephone: (907) 235-6745 POSITION STATEMENT: Testified in support of CSSB 198(FIN) JACK LENTFER, Wildlife Biologist and former member, Board of Game P.O. Box 217 Homer, Alaska 99603 Telephone: (907) 235-5945 POSITION STATEMENT: Testified in support of CSSB 198(FIN) SENATOR LOREN LEMAN Alaska State Legislature Capitol Building, Room 115 Juneau, Alaska 99801-1182 Telephone: (907) 465-2095 POSITION STATEMENT: Sponsor of SB 199 KEN DONAJKOWSKI, Representative Alaska Oil & Gas Association 12211 Lilac Circle Anchorage, Alaska 99510 Telephone: Not Available POSITION STATEMENT: Testified in support of CSSB 199(FIN) PETER GAMACHE, Assistant Attorney General Medicaid Provider Fraud Section Department of Law 1031 West 4th Avenue, Suite 200 Anchorage, Alaska 99501-1994 Telephone: (907) 269-5100 POSITION STATEMENT: Testified on CSSB 199(FIN) TOBY STEINBERGER, Assistant Attorney General Governmental Affairs Section Department of Law 1031 West 4th Avenue, Suite 200 Anchorage, Alaska 99501-1994 Telephone: (907) 259-5100 POSITION STATEMENT: Testified on CSSB 199(FIN) ROBERT BUNDY United States Attorney for the District of Alaska Address Not Available POSITION STATEMENT: Testified in opposition to CSSB 199(FIN) JANICE ADAIR, Director Division of Environmental Health Department of Environmental Conservation 555 Cordova Street Anchorage, Alaska 99501 Telephone: (907) 269-7644 POSITION STATEMENT: Testified on CSSB 199(FIN) ERIC LUTTRELL, Vice President Exploration and Development BP Exploration, Alaska 900 East Benson Blvd. Anchorage, Alaska 99508 Telephone: (907) 561-5111 POSITION STATEMENT: Testified on HB 548 NANCY WELLER Division of Medical Assistance Department of Health & Social Services P.O. Box 110660 Juneau, Alaska 99811-0660 Telephone: (907) 465-3355 POSITION STATEMENT: Testified on CSSB 199(FIN) MIKE PAULEY, Legislative Administrative Assistant to Senator Loren Leman Alaska State Legislature Capitol Building, Room 115 Juneau, Alaska 99801-1182 Telephone: (907) 465-2095 POSITION STATEMENT: Testified on CSSB 199(FIN) MARIE SANSONE, Assistant Attorney General Natural Resources Section Department of Law P.O. Box 110300 Juneau, Alaska 99811-0300 Telephone: (907) 465-3600 POSITION STATEMENT: Testified on CSSB 199(FIN) ACTION NARRATIVE TAPE 96-65, SIDE A Number 001 CO-CHAIRMAN BILL WILLIAMS called the House Resources Committee meeting to order at 8:15 a.m. Members present at the call to order were Representatives Long, Green, Ogan, Austerman, Kott and Williams. Members absent at the call to order were Representatives Nicholia, Barnes and Davies. A quorum was present to conduct business. WORK SESSION - PACIFIC SALMON TREATY CO-CHAIRMAN WILLIAMS announced the committee would receive an update on the Pacific Salmon Treaty and asked David Benton, Deputy Commissioner, Department of Fish & Game to brief the committee on the status of the negotiations. Number 102 DAVID BENTON, Deputy Commissioner, Alaska Department of Fish & Game; and Pacific Salmon Commissioner, State of Alaska on the Pacific Salmon Commission said, "Mr. Chairman, my presentation to you will be brief. I know you have a very busy schedule. It will be pretty much similar to the presentation I made to the Fisheries Subcommittee, but I will provide you with an update as to where we are in the negotiating process. Mr. Chairman, I'd like to just provide a context for the committee if I can, regarding why Alaska's in the Pacific Salmon Treaty and why these issues are of such importance to us now." MR. BENTON explained, "In the late 1970s and early 1980s, some events happened in the Lower 48 that changed fisheries management down there, pretty much forever. And that has to do with the Boldt decision and implementation of the Boldt decision and sharing arrangements that developed out of that court case to provide fish to the Stevens and Palmer Indian Treaty Tribes in Oregon and Washington. Basically, what that did was it set up an arrangement for 50/50 sharing of fish resources between treaty tribe members and non-treaty citizens of the United States. Towards the end of the `70s and more into the `80s, the tribes sought to extend the Boldt decision allocation into fisheries off the state of Alaska and that litigation and the threat of that litigation was a key component of why Alaska joined the Pacific Salmon Treaty. In 1985, the - just prior to 1985, a deal was struck whereby Alaska would support and enter into the Pacific Salmon Treaty, be bound by that treaty and provisions in it. In exchange for that, the tribes suspended their lawsuits to extend the Boldt decision into Alaskan waters and Alaskan fisheries. That was accomplished through a mechanism called the "Baldridge stipulation" and that basically just set those court cases off to the side and said as long as the Pacific Salmon Treaty is in place, this matter is dealt with." MR. BENTON continued, "When we signed into the treaty, the protections aside from the Baldridge stipulation that Alaska got, were primarily in the structure of how the commission works on the U.S. side. In that structure, there are three commissioners. There's a tribal commissioner, there's a southern states commissioner and an Alaska commissioner. Each commissioner has a veto over actions that are being taken place inside the U.S. section, to develop a U.S. position. And that was a very key component for Alaska because - and the other two sort of entities - because it maintained a balance so that no two entities could gang up on a third. There's a fourth commissioner and it's a federal commissioner and that commissioner does not have a vote. So, the federal government was specifically excluded from the decision making - from making the final decisions, anyway, within the U.S. section. The reason I bring that up is that it is a very important context for where we are at right now in the Pacific Salmon Treaty negotiations." Number 427 MR. BENTON stated, "The Northwest tribes have re-instituted through sort of - I wouldn't say they're sneaky back door channels, but at least they figured out a way to get around the Baldridge stipulation and re-institute the Boldt decision litigation. They have -- and that was not the lawsuit last summer. This is another lawsuit called U.S. v. Washington and it's scheduled to go to trial this fall. If they are successful in that, then we believe that it's going to seriously prejudice our position in the treaty and certainly is going to be disruptive for our fisheries in the long run. The other thing the tribes have done, of course, is that they took us to court last year on Chinook and they succeeded in that litigation and that was primarily because of some procedural issues within the U.S. section and how things were done. They have given us every signal that they're intending to pursue similar litigation this year. That's sort of the context, Mr. Chairman, that we're operating under and that's just within the U.S. section and it's not an easy situation to be in." Number 527 MR. BENTON commented, "The other aspect, of course, is our relationship with Canada. Canada has some very significant internal political problems and issues they are dealing with. They are cutting back their fleet dramatically, they're in the middle of a provincial election and we become the good target in all of that. For that reason, if for no other reason, Canada has been again this year very, very active in the press, blaming Alaska for what I believe are a lot of their internal domestic problems." Number 588 MR. BENTON continued, "Mr. Chairman, with that context, let me give you just a very brief rundown of where we are in the negotiations. There are two issues at play. One has to do with Chinook; the other one has to do with equity. The Chinook negotiations have been proceeding since January. We have done everything we can to avoid any of the procedural issues that we were faced with last year in court. We have been resolutely pursuing addressing the scientific issues that we brought up last year and we continue to think are valid and keep pushing the southern U.S. and Canada on. In January, the southern United States came forward with a position that would have essentially shut down the Southeast Alaska troll fishery this year. They've moved off that position since that time. The Canadians have maintained a very similar position however, and that would be a harvest level for this year that would in essence shut down the troll fishery for Chinook. The status of Chinook stocks coast-wide are not good. The southern Chinook stocks that do not come to Alaska are in particularly poor shape. The far north migrating Chinook stock complex, which are the ones that we fish on, are in our view, in not as bad a shape. There are a couple of stocks that have some problems. Overall however, abundance is down. Current forecasts for this year would have abundance sitting at levels lower than the base period under the treaty and significantly lower than the levels that were present when the treaty was signed. So Alaska believes that we do have to take some action to address that conservation issue; however, the magnitude of that action is what's in debate. And we do not believe and do not support and will not agree to the positions that Canada put forward. And currently, I can say that we do not agree and will not agree to the position that the southern U.S. has put forward. I can't get into numbers because we're in the middle of the negotiations." MR. BENTON further stated, "I did provide to you and I see you have them and I apologize -- these pie charts that you have that are in black and white -- I only have the one set of colored ones and I only got them about 6 o'clock last night. We don't need to go through all of them; I just wanted to point out a couple of things. The top one just shows the origin by percentage of the stocks that are in the Southeast Alaska Chinook fishery. What you can see there is that U.S. natural spawning stocks that are rebuilt comprise 43 percent. That means that they are classified in the Pacific Salmon Treaty process as rebuilt. Canadian natural spawning stocks that are in our fishery that are rebuilt comprise 37 percent of the fishery. Hatcheries account for roughly 12 percent of the fishery and then natural spawning stocks that are not rebuilding are roughly 8 percent of the overall fishery." Number 817 REPRESENTATIVE ALAN AUSTERMAN asked, "Dave, 43 percent of the U.S. natural spawning stocks - would you give us a breakout of Alaska versus (indisc.)." MR. BENTON responded, "Roughly, Mr. Chairman, I would say that that's -- I'm trying to think of the percentage -- it's around 10 to 12 percent of the U.S. stocks. The harvest in Southeast Alaska is 85 -- 90 some odd percent stocks that spawn elsewhere, if that's the question. I can give you a rundown of which stocks are which. I have that information, but I got that at 7:30 this morning and didn't have time to bring it over here. Of the 43 percent that are rebuilt, those are Columbia River brights...." Number 826 REPRESENTATIVE JOHN DAVIES asked Mr. Benton to explain what rebuilt means. MR. BENTON replied, "Rebuilt means when the treaty was signed, there was an obligation to rebuild Chinook stocks - all parties took that obligation on and within the context of the treaty, we are trying to -- we have a suite of indicator stocks and we were trying to rebuild those stocks. Every year the status is assessed by the parties and then they are classified as either not rebuilding, indeterminate, rebuilt or else they don't have a category like that because they're hatchery -- you know, you don't rebuild hatcheries. So that's what that means. That means, generally speaking, they're in good shape. And of that 43 percent rebuilt, it's Columbia River brights, Oregon Coastals, Southeast Alaska, Washington Coastals, mid-Columbia brights and some others - they constitute about .5 percent of that total. The Canadian stocks or North Central B.C. are the more northerly stocks than the upper Fraser early stocks and the stocks that are not rebuilding would be such stocks as Puget Sound stocks and there's just a very small number of them and some of the stocks on west coast Vancouver Island and in Upper Georgia Strait out of British Columbia. But by and large, most of the stocks that are not rebuilt comprise, you know, 1 to 2 percent or less of the fishery in our fishery." Number 967 MR. BENTON continued with his briefing, "Presently, Mr. Chairman, we're scheduled for a meeting with the southern U.S. tribes to try and negotiate a U.S. position on May 7. We're going to go down there and attempt to reach some agreement on a U.S. Section position. If we do that, it's my opinion, that it's very unlikely that we will be in court this summer on the Chinook fishery. I think it's going to very difficult, however, for us to get that agreement from the southern U.S. Section. They have, if nothing else, some internal political problems. In the tribal caucus, there's 24 tribal representatives that go to these things and I don't know whether they can get consensus to have an agreement." Number 1016 MR. BENTON further stated, "Mr. Chairman, very briefly I'll touch on the equity issue and then I'll leave it open for questions. Equity is simply one of several principles that are in the treaty and it basically says that you get the benefits of the production that come from your streams and it's an allocation issue, primarily. It has been a very contentious issue over the past several years. It was the issue that brought Canada around to instituting the transit fee in 1994. It was the issue that was the subject of the mediation involving the New Zealand ambassador last year. That mediation failed. You've seen a lot of rhetoric in the press by Canada about that mediation and the desire to release the report and findings of the mediator. Mr. Chairman, I'm here to tell you that I've never seen, and I've been told by our federal lead negotiator, there is no report from the mediator; the mediator made no findings. The mediator did float around concepts for consideration. Some of those concepts were rejected by Canada, some of those concepts were rejected by the United States. One observation I make is that Christopher Beebe (sp.) was not a fisheries negotiator when he was in the New Zealand Foreign Service; he was their lead ambassador to France. He negotiated some arrangements for Antarctica on the environment and was in that kind of mode. He was not familiar with salmon fisheries in the North Pacific at all." MR. BENTON continued, "Before the mediation, we told Canada that we would sit with them - meet with them any time, any where on a fishery by fishery basis for northern fisheries, the only ones that we have any ability to effect and negotiate an accommodation on equity. We made that proposal again during the mediation and we said, `Look, we'll sit at the table with you to negotiate these arrangements and have the mediator there to be the referee - that's fine with us.' They rejected that proposal. Following the collapse of the mediation and the withdrawal of Ambassador Beebe, we again made the overtures to Canada and said, `Look, this doesn't have to end the negotiation. We're willing to sit down on a fishery by fishery basis on fisheries in the northern boundary area, at least, and negotiate a resolution on equity.' Canada again refused. We're going to continue to make those overtures and last week when I was in Anchorage at the North Pacific Fishery Management Council, I also had the opportunity to meet with one of the Canadian commissioners, Mr. Bud Graham, the head of the Department of Fisheries and Oceans in Canada on the West Coast. I made that overture to him again. He rejected that. I met with David Zirnhelt who is the Fisheries Minister for the Premier for British Columbia. I informed him of our overtures to the Canadian government and urged him to see if he couldn't get his government to agree to come back to the table and negotiate those arrangements. All I can say is that since I've met with him, the Premier has issued a call for more transit fees and things like that. I'm just not convinced that we're going to get any where quick with Canada on the equity issue. With that, Mr. Chairman, I'll be happy to answer any questions you have." Number 1220 REPRESENTATIVE DAVIES asked Mr. Benton to expand on the procedural issues that were involved in the case we lost last year. MR. BENTON replied, "What happened was, in January 1995 when I first started doing Pacific Salmon Treaty issues -- I've done international fisheries for the state for quite awhile, but not Pacific Salmon Treaty -- the southern U.S. basically came in with ourselves and said, `We have to develop a U.S. position' and then they laid out a proposal which we all thought was a bit extreme and was built around the use of a computer model to forecast abundance that our scientists had demonstrated to have a fairly significant bias pre-season in terms of forecasting abundance. And in fact, because of the way the model was constructed and still is constructed, the abundance forecast is biased low pre-season and as data comes in and is put back into the model, you actually come up with the actual number for the abundance of Chinook. In some cases it takes two years and the bias is on the order of 20 - 25 percent which is pretty significant. They wanted to use that model to set our harvest level pre-season and lock us in on that. And the way that that then benefits southern folks is that if you look at the graphic and you notice that basically 80 percent -- 79 percent of the natural spawning stocks are rebuilt and roughly, I think it's 13 percent of our hatcheries -- what happens is when you reduce our fishery, all those fish that (indisc.) other stocks pass south and get caught in other fisheries. It's a reallocation issue; it doesn't have a whole lot to do with (indisc.). What we did was, we went and investigated how that model operated and then proceeded to develop an in-season methodology similar to what we would use in fisheries up here. And we developed that in-season methodology, we provided it to the southern U.S. in March. We didn't hear anything from them until basically late June. That was the first time that we met with Canada -- I think it was -- or was it late May -- these things sort of blur together -- but anyway, much later in the year, and we met with Canada -- no, I know exactly when that is now -- it was on June 6. At that meeting, Canada came forward with a very draconian proposal that was not based on any evaluation -- scientific evaluation that they had provided to us for our review. They just sort of laid out these numbers and said `Here's the rationale and you got to do it.' We said, `no.' We then proceeded to refine our proposal for an in-season management regime. We gave them a number that we said we would not fish above but it was lower than the number under the treaty. It was a number -- 230,000 fish, but it was a number that was acceptable for Endangered Species Act needs and then we proceeded to (indisc.) the fishery." Number 1401 MR. BENTON continued to explain, "It was at that juncture that the procedural issues that they got us on really came into play. And that is, we were implementing a new approach in their minds without it going through the proper review inside the Pacific Salmon Commission. We contested that perspective and still do because what we said was, `We're not implementing this approach to adjust the fisheries upward or down in mode' which is what you normally would do. What we said was `We're going to fish to this ceiling level or this quota level - this cap of 230,000 fish or less - but we will implement this methodology just to check whether abundances are certainly as low as you, Canada, and the southern U.S. are telling us you think they're going to be and if they are, we will reduce the fishery accordingly.' It's sort of a fine point, but it was the point that the judge found particularly intriguing and used to shut down the fishery. This year we're not doing that. This year, the way I phrase it is, we've done everything by the numbers, we've gone every step, we've run everything through the commission process, we're not going to do anything like that in terms of implementing a new regime that has not been reviewed. And in that way, we're not going to be in that situation." Number 1468 REPRESENTATIVE IRENE NICHOLIA remarked that she remembered this issue from last September and at that time, the Canadians and the Natives from Oregon and Washington were suing. She asked if that was an ongoing case? MR. BENTON responded that it was an ongoing case. He said, "That was the one last summer and it's on appeal now to the Ninth Circuit Court. It was Washington, Oregon and the tribes and then Canada entered that case as an amicus - as a friend of the court. They can't legally sue us other than just providing information. But the court did let Canada in. It is ongoing and in fact, there were oral arguments at the Ninth Circuit a few weeks ago and the Ninth Circuit has indicated they may rule on that in the not too distant future." Number 1513 CO-CHAIRMAN JOE GREEN inquired, "In that you've got litigation going on and you've got the ESA that's hanging out there as a threat, what is that doing to your ability to freely negotiate? I mean, are you getting hammered by both of those situations and the fact that we're taking a lion's share - we're greedy and, I mean, how is that affecting your negotiations?" MR. BENTON replied, "It makes the negotiating process extremely difficult, to say the least. The threat of the litigation frankly doesn't trouble me a whole lot in the sense that it makes me reluctant to put forward what I think is the best position, the most defensible position for Alaska. But what it does do is because of the way it went last summer, the tribes and the southern states, in particular, it really hardened their position. They really don't want to negotiate. It's been pretty apparent by some of their actions. They have kept saying all along, `This is of paramount importance. We want to resolve it; we want to meet with you.' We set up a set of meetings in Victoria in late March. They showed up late, they left early and they really didn't seem interested in talking all that much. I tried to arrange meetings with them on April 15 while I was in Anchorage at the North Pacific Council meeting. I said, `If you guys want to sit down and negotiate, let's do it; that's a good time.' It wasn't a convenient time, but let's do it. They couldn't make those dates. We tried to do it for April 27; they couldn't make those dates. And now we have a negotiating session supposedly on May 7. I don't hold out a whole lot of hope that the southern U.S. folks are going to want to meaningfully engage in negotiations, to be honest." Number 1606 CO-CHAIRMAN GREEN inquired if that's the case, what effect is that going to have on the seasons if these negotiations are pending and just keep being pending. MR. BENTON replied, "At some point we have to get resolution." CO-CHAIRMAN GREEN remarked that fishing is coming up. MR. BENTON responded that was correct. He said, "This is not an unusual circumstance in U.S./Canada Treaty forum. In past years, when there was not an annex provision agreed to with Canada, Alaska has fished according to the latest proposal put on the table that it thought was justifiable. And we would do the same thing. I mean, we are in the process right now of putting together and refining our proposal to the south in terms of what would happen for Chinook. We think it's going to be quite defensible, scientifically. And if there was no agreement and they did not take us to court and we did not have an agreement with Canada, then we would fish in accordance with that proposal. I don't think we'll get from here to there. I think either we will have an agreement or more likely, we'll wind up in court if we don't. So somebody else may tell us what we're going to do. In the instance when there is no agreement, we will fish in accordance with the proposal we put forward." Number 1680 CO-CHAIRMAN WILLIAMS remarked that since 1995 the Chinook salmon have been at the forefront of the Pacific Salmon discussion, yet recently the Fraser River sockeye appears to be gaining a bit of attention in Canada as an additional threatening tool and a political tool. It was his understanding that fishermen in Southeast Alaska catch approximately 5 percent of the Canadian grown stock. He asked if the Canadians had a legitimate claim and what is the state of Alaska prepared to do to combat these accusations. MR. BENTON said, "Mr. Chairman, you've identified a very important issue. Because there's such a wide misunderstanding in the public of what's going on and you're correct, the stocks in Southeast Alaska - the composition of the catch overall - 95 percent of the salmon harvested in Southeast Alaska are spawned in Alaska. Roughly 5 percent or so come from waters elsewhere. Of that 5 percent - a very small percent by the way, is Chinook. The Fraser River in particular is a very troubling situation. Fraser River is a major salmon producer. It is one of the premier salmon producers on the West Coast of North America. It has runs on the order of 10 million sockeye a year and that's been sort of historical in recent history, anyway, of the run size. This year the projections are on the order of maybe 3 million fish and there's not going to be any commercial fishing on Fraser River in Canada. Probably no fishing on Fraser River sockeye in the United States. There will be a small Indian food fishery in-river in Canada. Alaska, in years of very high abundance of Fraser River sockeye and under environmental conditions that cause a fish to swing in as they're migrating south, so they swing in towards Alaskan waters, we might take out of a run of 10 million fish, 80,000 to 90,000 fish; very minuscule amount. In the years of low -- like this year will be a low cycle year -- in three of the last four of these low cycles, we have taken no Fraser River fish. The one year we did take some Fraser River fish in the low cycle was a year of an El Nino event that caused the fish to swing in, we took a few thousand of them. This is not forecast to be a year of an El Nino event, so we don't believe we're going to take any Fraser River fish. We've been trying to educate the public about that. It's very difficult because all these things get mixed together but we're not the problem on Fraser River." MR. BENTON continued, "Nonetheless, Canada has a real problem on the Fraser River and they made it themselves. They announced a very aggressive fishing strategy because they wanted to get the United States to the table supposedly on the equity issue as a political maneuver on their part. Because of that maneuver and similar kinds of strategies, coupled with poor management by the Canadian Department of Fisheries and Oceans in the river and ocean fisheries, they have over-fished a lot of their stocks down there. Those stocks don't come up here, but we're getting blamed for it. The Fraser River is one, Southern coho is another and some of the southern Chinook stocks that don't even come to Alaska are the ones that really are in trouble and in some measures, because of their political maneuvering to get the United States to accede to their demands on equity." Number 1851 CO-CHAIRMAN WILLIAMS asked how this would affect District 4 (indisc.) 31 plan for the commercial salmon harvest in Noyes Island? MR. BENTON responded, "The Fraser River issue is not going to affect District 104. We put forward a proposal at the last round of talks where we discussed the boundary fisheries, like District 4, and that proposal would increase our fishing time there and probably under normal circumstances result in somewhat higher harvest of sockeye than in recent years. Those sockeye do not come from the Fraser River. The primary Canadian stock involved there is (indisc.) Rivers. Those are in really good shape. Last year we fished very responsibly - I think we took 80,000 or 90,000 of those fish. Canada over-escaped a large number of fish in the system. They couldn't even harvest their fish. And over the life of the treaty, whether or not there was annex, we've abided by the rules that were agreed to when the treaty was signed. This year, for the first time that I'm aware of, we put forward a proposal to actually fish beyond that agreement. Frankly, Alaska's a little bit tired of being the scapegoat for poor Canadian management and we've been constraining our fisheries and Canada hasn't been doing the same thing. They've been increasing their harvest on some of the transboundary rivers; they've been hammering the dickens out of coho and Chinook in the south end and we're just going to operate our fisheries responsibly and manage for our stocks and let them chill out for a while." Number 1944 CO-CHAIRMAN WILLIAMS inquired how the state of Alaska and its respective industries stay out of the Boldt decision? MR. BENTON responded, "There's three venues that we can try and resolve the Boldt decision issue. One is through negotiation with the southern United States, primarily with the tribes, to try and reach agreement on a long term sharing arrangement under the Baldridge stipulation. We're in the process of trying to do that. The courtroom is another one and that seems to be where the tribes want to take the issue - is to take us into the courtroom. Frankly, the Department of Law is not overly optimistic about our ability to prevail in the courtroom on this. And if you look at the history of the tribes' success in the southern United States on Stevens and Palmer Treaty litigation, they're pretty successful. The other one is possibly a legislative solution where the U.S. Congress defines the scope of the application of Stevens and Palmer Treaties. Some draft language was floated around last fall in that regard by Senator Stevens and that is a possible avenue as well. That avenue is not open this year - probably wouldn't be until some time when the Congress came back after the elections next year. So, those three avenues are there. Our preference is to avoid the courtroom if we can. We have made some proposals to the tribes down south that we would like to negotiate this long-term arrangement and if we're successful, maybe we can resolve it in that manner. Otherwise, we're either going to be in court or we're going to be seeking other solutions." Number 2021 CO-CHAIRMAN WILLIAMS commented that right now it looks like we won't even get close to binding arbitration of any kind. MR. BENTON stated, "There are two dispute resolution mechanisms that could come into play this year. Canada has called for binding arbitration to resolve the equity issue between Canada and the United States. The United States has a longstanding legal policy, if you will, that unless binding arbitration is specifically provided for in a treaty and the treaty was subsequently ratified with that in it by the Congress - by the Senate, then the United States cannot enter into binding arbitration because that, in effect, would remove the powers of the Legislative Branch in terms of the ratification. And the Pacific Salmon Treaty does not include binding arbitration provisions; it was not ratified in that manner and so the United States government has already informed Canada that legally the U.S. government cannot enter into binding arbitration with Canada. So, I don't believe we'll see that one. There's another dispute resolution mechanism on the U.S. side to resolve disputes between the southern and northern sections of the U.S. section. That's called a conciliation board, so that if we're at impasse, like say on Chinook and a position on Chinook - we potentially could go to a conciliation board which there's a mechanism for appointing it, and that conciliation board could assist us in resolving our differences. That's under discussion right now and it may come into play. Our position is that if we're going to use the conciliation board mechanism to resolve our differences with Washington, Oregon and the Northwest tribes, then that conciliation board should be focused on some of the key scientific questions regarding the status of these Chinook stocks and how you're going to manage them and not get into policy matters, because there's no criteria for policy matters. I mean, that's what the Pacific Salmon Commissioners are for - they are supposed to decide policy but there are certainly scientific and technical issues which we have not been able to get resolution on and I, for one, think it may be a good idea to use the conciliation board in that regard if we can't get the south to meaningfully sit down and resolve these key issues. It's not my preference, but we may wind up in that situation. Now the south is pushing very hard for a conciliation board - their view is very different. Their view is they just want the conciliation board to tell Alaska what number we get this year and then go home and we're not all that sanguine about that." Number 2158 REPRESENTATIVE DAVIES said, "You've mentioned these scientific issues several times throughout your talk and I have two questions relating to that. One is, it seems from your mannerisms and the way you've presented these that you think that these are pretty clear from Alaska's perspective - that there's some objective scientific issues that we're putting forward and we're not getting. Is it completely political strategy and negotiating strategy that drives the other side to not accept these issues or are the issues themselves a little bit more -- not as clear as maybe you've led us to believe?" MR. BENTON said, "Let me give you an example. A basic premise in fisheries management is the use of maximum sustainable yield escapement goals to ensure that you have adequate spawning escapement to maintain the continuation of those stocks. Under the terms of the treaty when the rebuilding program was agreed to, it was agreed that the parties would develop such goals and then manage accordingly and attempt through that management program to rebuild those stocks. And at the time the treaty was signed, for some of the indicator stocks, there just wasn't very good data so what happened was that some interim escapement goals were established. For example, on the west coast of Vancouver Island, which is one of the key issues that's before us this year, Canada had very poor data on some of the index streams so what they did was they went back through their historical data, they took the very highest escapement that they ever documented one way or another on that system, doubled it and said, `There's our escapement goal for now but we'll get back to it later and we'll sort of look into it and we'll investigate it.' This issue is particularly important there and it's important in southern U.S., like Puget Sound systems. In the Puget Sound area, once we started looking into this, we discovered that they don't have basic bottom line escapement goals for many systems. What they do is they set those escapement goals on an annual basis to accommodate their allocation issues between the tribal/nontribal sharing arrangements in the southern U.S. and the basic biological sort of shakes out in the end. The management of our fishery and all those so-called ceiling fisheries in the treaty are based around meeting the rebuilding goal and that rebuilding goal is driven by meeting escapement goals. So you would think that you would want to have escapement goals that are based on basic scientific information. That's probably the key issue that we have (indisc.-coughing) year and a half, almost two years, now is let's sit down, review the data and establish escapement goals for these stocks. If it's the current escapement goal, so be it, and we'll act accordingly if that's the right goal. If that's not the right goal, let's come up with the right goal and then let's manage these fisheries according to that goal so that we can rebuild these stocks. We haven't been able to get them to even sit down and discuss a schedule for putting together a team to negotiate - not negotiate, but to evaluate and develop escapement goals for these systems. That's probably the primary issue that we have in front of us." Number 2307 REPRESENTATIVE DAVIS inquired, "In light of the importance of these kinds of data driven and scientific issues in the negotiations, how important is it to maintain a healthy Alaska Department of Fish & Game to provide that kind of data?" MR. BENTON responded, "If we're not there doing this, Mr. Chairman, then it doesn't get done. Our budget, like a lot of other agency's budgets are declining and it has real impacts on our ability to maintain a presence. Because of the importance of this issue, this last year we re-arranged staff and whatnot to try and put more emphasis into this because it is a very staff-driven exercise. The more our budget gets hammered, the less ability we're going to have to do the job right. If we don't do it, the outcome of that is we either lose in court, we lose in the negotiation process or the federal government preempts our fishery." Number 2353 REPRESENTATIVE DON LONG inquired if the department had been given policy and direction by previous legislatures as to which way to go with this fisheries issue? MR. BENTON responded, "Mr. Chairman, we've had very good support out of the legislature on this matter. The policy direction with regard to the Pacific Salmon Treaty issues, I think has been pretty clear over the last several years and that is that we want our fisheries management regime to meet the requirements of the treaty, we want you to defend the interests of Alaskans in that treaty process and we want it to be (indisc.-coughing) stocks is accommodated. There have been resolutions in the past out of the legislature in this regard and those have been helpful. Certainly, if the legislature has other recommendations and policy guidance that the legislature wants to provide to us, we'd be happy to work with you and receive that." REPRESENTATIVE LONG commented that the delegation of the authority to manage the fish and game have been given by the legislature to the Administration and he wondered whether or not the department was in fact requesting that assistance from the legislature by a resolution perhaps. MR. BENTON remarked, "Certainly, if the legislature wishes to provide a resolution on this issue, it'd be very helpful." TAPE 96-65, SIDE B Number 001 MR. BENTON continued, "...legislature wishes to do a resolution, that'd be great." CO-CHAIRMAN WILLIAMS thanked Mr. Benton for updating the committee on the negotiations and to feel free to contact them if there was anything the legislature could do. He turned the gavel over to Co- Chairman Green. HB 548 - NORTH STAR OIL & GAS LEASE AMENDMENT Number 050 CO-CHAIRMAN GREEN said the committee would hear from the Department of Natural Resources as to the economic analysis they have performed on the Northstar project of which British Petroleum (BP) has brought a considerable amount of interest to the state with their proposal for an offshore operation. He asked Kevin Banks to come forward to testify. Number 084 KEVIN BANKS, Petroleum Economist, Division of Oil & Gas, Department of Natural Resources (DNR), advised the committee he would be talking about four things that relate to the model, the most important he thought was the assumptions the department uses to develop the forecasts of state revenues and the economics to BP. He provided committee members with a list of assumptions and a simple version of a cash flow model to illustrate the main pieces and to show how the arithmetic in the model works. He said, "Basically, the model is a cash flow model that predicts what kinds of revenues come to BP and to the state and federal government and from that we can make an assessment about the profitability of the prospect to the company and get some prediction of the kinds of revenues the state can earn whether through severance taxes, income taxes, royalties or others." Number 221 MR. BANKS continued, "The model as I say is a cash flow model; it would be the same sort of thing that economists would use for public works kinds of projects to predict benefits and costs and then to calculate the distribution of those benefits and costs to the different players. The state, of course, doesn't participate in the costs, so to speak; that's the obligation of the lessee, but we do earn revenues from taxes, income taxes, severance taxes and royalties and on these leases, we also earn net profit shares. That's the part of the leases that we are changing in the amendments and then we can see the effect of that change on revenue to the state. The most important assumptions we make about the field are how much oil is there in terms of the reserves available to produce and also, what kind of production rates we can expect from those, how many wells you need to produce a certain amount oil and then how quickly that production rate can be sustained and then it begins to drop off. That's the aspect of reserves that's important." MR. BANKS stated, "Then we have to make some kind of assumption about price. In this model, we used the Department of Revenue's mid-case forecast and deducted from a West Coast North Slope oil price a forecast of marine transportation costs and tariffs on the TAPS pipeline. The third most important aspect of the model - the one thing you have to grab a hold of is the cost of developing the prospect....basically, the capital expenditures needed to construct the island, install the facilities, build a buried pipeline to shore, the operating costs, the everyday variable costs and fixed costs it takes to get oil out of the ground and expect to have to pay for wages and fuel and equipment through the life of the prospect and then also abandonment costs, some assessment of what you believe it will cost in the future to remove the equipment and to dismantle the island." Number 319 MR. BANKS further stated, "In the assumptions that we make the model that we used in assessing the deal throughout the process of negotiating it, we used some information that BP supplied to us. In the printout you have here and when you receive a copy of the model assumptions - the list of model assumptions - you'll see there's a couple of places where we've changed some assumptions. So this becomes now, a public version of the model. We've redacted from the model, a couple of items that BP felt were sensitive - internal financial and pieces of information. Among those are the income tax rates they pay to the state, the discount rate they use for calculating the present value of the prospect, the prime rate of interest, whatever that is, that applies to the calculation of the net profit share and their calculation of abandonment costs. Those have been redacted and we've replaced them with numbers that we could come up with on our own. For example, after talking to my counterparts in the Department of Revenue, we applied an effective state income tax rate of 2 percent. The statutory marginal rate is about 9.4 percent, but I'm told that the industry average for oil companies is about 2 percent. So that's the number you will see in the list of assumptions and when we get to the model, you'll see where it shows up there. The prime rate used for calculating the net profit share is from the Daily News; 8 1/4 is the current real prime rate at the moment. We've taken from the Arthur D. Little report that was done for the Governor's Oil & Gas Policy Council, a discount rate of about 10 percent. That discount rate is important only in calculating the net present value of the prospect, which an issue as far as calculating sort of revenues to the state, given the timing that those revenues are earned. In most of the documents that have probably reached you about this, there hasn't been a lot of present worth calculations shown. BP in their proposal has shown the total value of the prospect or revenues to the state in inflation adjusted dollars and we've given you some information that shows what it is in real 1996 dollars." Number 446 MR. BANKS continued, "Moving on to the simple discounted cash flow, this basically illustrates the kind of arithmetic that is going on in the 10 pages of this very hard to read printout. Basically, we need to know what the oil is. From that we deduct royalty oil, here it's calculated at 12.5 percent, and the remaining oil - the working interest oil that the lessee has to make their money on. So right off the top the state gets their royalty. And from the Working Interest Owner (WIO) then, this is the lessee, from their revenue they have to pay for capital expenditures, operating expenditures and to calculate their net revenues. Simple arithmetic - from revenue minus costs, equals net revenue. That's their taxable income and from that we take away their federal income tax and state income tax to get an after tax cash flow. I think, as an economist, I might call that profit, but I know accountants don't look at it quite the same way. I want to just leave you with the point that I was focused more on this revenue stream rather than some kind of financial analysis or impact that this prospect would have on say, an income statement or balance sheet which is something the accountants are thinking about. This is basically an illustration of how the big model works. Nothing to it really. There's nothing terribly more complicated than a little bit of multiplication and subtraction here. We do calculate a net present value of the stream of after tax cash flows that as you see on the bottom of this page - the net present value discounted at 10 percent is, in this case, it shows $1.50 and the rate of return is 11 percent." Number 547 CO-CHAIRMAN WILLIAMS asked Mr. Banks how he got the oil price? MR. BANKS replied, "This little model, Chairman Williams, was a `right out of the air' example to show you. The model itself, while covering lots of pages and lots of calculations, it really isn't rocket science. I suppose if I were a rocket scientist, I could say it wasn't brain surgery. I mean it's not very -- it's not something that involves some sort of mystery." Number 577 MR. BANKS added, "The model basically has three parts to it. In the first page, is where we make some of these assumptions that I first talked about - the reserve, the production rates, the number of wells that will be needed, the capital expenditures, assumptions about operating costs and tax rates - that's all done here on the first page. The second part of the model on pages 2 and 3, especially page 3, represents the results. The calculation of state royalty and income taxes and also the cash flow to BP and the federal government. I might add that you have in the box on the top of page 3, which has "$m,MOD"; that's money of the day, that's in inflation adjusted dollars or what economists will sometimes call nominal dollars and then of course, down below in the second box is real numbers; that would be real 1996 dollars not accounting for inflation. The third part of the model is what follows and that's basically all the financial calculations it takes to get to this page. I'll point out just a couple of things. Returning to the first page, the little box in the top left are most of the assumptions about federal income taxes and interest rates and the calculation of abandonment. There are a couple of boxes - the three smallest boxes on this page, the ones entitled "Supplemental Royalty Control Panel" and the "MonteCarlo simulation" are basically, I call them switches that gives us an opportunity by changing whether or not we want to look at NPSLs, switch that to on and the rest of the model will then calculate a net profit share. I switch that off and the supplemental royalty to on, it will go through and calculate the supplemental royalty. The long rectangular box towards the bottom in the middle is where we get into the assumptions about production, capital expenditures, the price of oil and the tariffs that we are deducting from the West Coast prices." Number 719 CO-CHAIRMAN GREEN asked, "When it comes to numbers of wells drilled and operating costs and costs of oils, are you getting that from the operator or are you doing those on your own?" MR. BANKS said, "I would have to say that the capital expenditures information was given to us by BP. We looked at them, however, did not do an independent engineering study of that. I can say that with respect to the reserve estimates, our staff had quite a bit of information from the previous owner, Amerada Hess, that had been provided to us through the years and we actually had a more independent assessment of the capability of this oil field to produce the oil that BP had said they could. There is a distinction in the level of scrutiny that we could give to that. We simply just don't have in-house, the engineering staff that BP has. Furthermore, I think BP is extending the envelop on capital expenditures, as you are well aware. We do have some information about historical costs on the Slope, which would have been higher than all of these. That would be our immediate assumption would be to say, `Well, if there is an attempt to illustrate to the state that this is somehow not a project that they could do, they've low- balled the estimates for capital expenditures' which would indicate to me that there was not an attempt to gain the (indisc.) some way, at least on that account here." Number 806 MR. BANKS further stated, "Page 2 has a whole list of oil prices and the model took the Department of Revenue oil price forecast for each year and then interpolated a smooth growth in prices for each month. The reason for that is that the supplemental royalty is paid on a monthly basis. So we wanted to capture the effect of changing oil prices each month and the impact that would have on the calculation of supplemental royalty. I'll get into this later, but there's actually a couple things happening on this page. In a single run of the model that we would look to say the prices -- I'm looking in the column for 1999 for example, for January -- the very first price in that column is $17.39, so in January we would assume possibly some -- I can't say that for sure but that's the price that would be used to determine the supplemental royalty, if the state were due that. Down below that January 1999 number, in the second set of rows that's shaded, that number is actually calculated as a part of a distribution of randomly generated prices. So if you wanted to see the impact of varying prices over time, the number that would appear here represents just one run of the model. We have the capability of running the model 200, 300 times to create a distribution of results. If you'd like, I can get into that in more detail later. The supplemental royalty, then, is calculated for each month and an average supplemental royalty is calculated for the year. And then that's the number we use to gin up the final calculation of the value of supplemental royalty to the state." MR. BANKS continued, "Page 3 is where we get all the results. As I said before, we passed out to you and to the Senate, information about what we believe is the potential forecasted revenue to the state and it's simply the sum of these rows which are added up on the righthand column. You can see that we're looking with a fair amount of detail - probably more detail than we can objectively say is -- or at least with precision that's probably beyond our capability to know about the future, but we can tell you some things about severance taxes, ad valorem taxes and the share of royalties we get from the federal tracts in the prospect and income tax to the federal government." Number 958 CO-CHAIRMAN GREEN remarked, "Collectively though that number of things are pretty minor, I would imagine compared to the total value." MR. BANKS replied, "I think you can see from this that the state gets their biggest bang from royalties right off the top. Severance taxes, because the effects of ELF are not very high and income taxes are relatively minor. Ad valorem taxes, by the way, in some of the discussions that I've had with people, we've assumed that most of that - 75 percent of that probably goes to the North Slope Borough. That's just a rule of thumb." Number 963 MR. BANKS noted, "On page 6 - this will be basically the last detail of the model I'd like to point out - is a calculation of the tract allocations. So, you've heard us talk about the net profit share rate at about 89 percent. That represents a weighted average of the net profit share for each of the leases weighted by the amount of reserves that we have tentatively allocated to each lease. This shows that, for example, the federal leases have about 20 percent -- 23 percent of the oil on those two tracts to the north and they bear a 16 2/3 percent royalty to the feds. The state, in turn, gets 27 percent of that back as part of the (indisc.) Lands Act statutes." MR. BANKS remarked, "I've mentioned just very briefly that we have this capability of sort of varying the assumptions to some degree so that we can run the model repeatedly to create a distribution of results. It's not an uncommon process - it's called MonteCarlo, actually. It was invented in the very early `50s to predict whether or not the hydrogen bomb would work before they built it. I think a good way of describing it is - to give you a clue about how the mathematician discovered how it worked - he was playing solitaire and realized that after he'd played a few cards that he could predict the result of the game - whether he would be able to beat the solitaire game or not. So by just looking at the variation of a couple of things at the very beginning, you can get a notion of where you might be towards the end. And that's sort of what MonteCarlo does. It gives us the opportunity to randomize our expectations about capital expenditures, operating costs, particularly oil prices in this model, and the reserve estimates. So on page 2 there's a little box called, `Development Summary MonteCarlo' and you see that the ML for reserves in this case - ML is the most likely - 130; however, there's a max and a minimum of 105 million barrels and 160 million barrels is considered the maximum. We do the same sort of thing for oil prices and that's illustrated in this page - the graphic here. What we've done is that we've assumed that prices will vary each month according to some kind of normal distribution, that there's an equal chance of the prices being higher or lower than what we think is the average. However, what we are randomizing in that is the standard deviation and that is represented by this little triangular box. Historically, prices have varied - that standard deviation has varied between about $1 and $7 with an average of about $1.80. Now that says that the chances are - about 70 percent of the time, the oil price will be either - our average prediction plus or minus $1.80. That's simply what we're saying so the model is allowed to vary that by that kind of deviation from the average. That's how we crank in what I think you can all attest to, the kind of variation you see in oil prices from month to month as it goes up ad down with the markets. Fairly unpredictable variation, so we don't know or we can't predict with any certainty why prices go up and down ahead of time in these short little run ups and downturns. But this gives us an opportunity to say, `Well, within these boundaries we know the prices may sometimes exceed the average by $7 at least 30 percent of the time -- 35 percent of the time -- and may fall below that at times. That has an impact of turning on the supplemental royalty, in fact, every now and then as the price exceeds the trigger price and so you've seen a couple of numbers I think, for supplemental royalty. The supplemental royalty with price volatility is what we mean here - that we've racheted on the supplemental royalty and triggered that event by this kind of variation." Number 1267 CO-CHAIRMAN GREEN said, "That would explain fluctuations due to something beyond the control of the state or the operator. What about the variation on a long-term basis from prognostications such as you said you were being driven by the Department of Revenue's long range oil forecast. Sometimes those long range oil forecasts have a tendency to either be more optimistic or pessimistic. Does this take into account any long range or is it strictly based on the fluctuation along the line that's established?" MR. BANKS said it was the later and added, "The Department of Revenue has predicted that oil prices in real dollars will increase about three-tenths of a percent each year over the next 15 years or so. So there is a slight inflationary effect that they are predicting or an effect that would exceed inflation by a tiny bit. It's almost flat but it has some rise to it so you'll see, for example, in the prediction of the West Coast oil price, in the year 2010 for example, this is a nominal dollar but it's $26.82 and that reflects this tiny bit of growth in real oil prices plus 3 percent or so inflation rate. The trigger price grows at half of that rate or about 1.5 percent of our assumed -- an inflation rate of 1.5; roughly half of what we assumed that's occurring here. The fact is, there is some growth in real oil prices predicted by this model. I can tell you that in the course of going through the negotiations we looked at what happens when the prices are flat. What that does is it turns on the supplemental royalty a little bit earlier or rather delays the supplemental royalty a little. That's really all I have to say about the model and I hope I've raised some questions that I can answer for you." Number 1393 REPRESENTATIVE ALAN AUSTERMAN referred to page 3 and said, "In reading the real dollar figures, indicates to me that this is a 15 or so year field?" MR. BANKS said, "That is correct. The end of field life is 2011. That's as you say, just 15 years of production." Number 1427 REPRESENTATIVE AUSTERMAN referred to the righthand column on the outside of the boxes and asked if those were the numbers that should be looked at for total (indisc.)? MR. BANKS responded that was correct. Number 1440 REPRESENTATIVE AUSTERMAN asked if the bill that was before the committee was based on this model? CO-CHAIRMAN GREEN said, "Well, we have another -- unless you would care to answer that - we have another member of DNR that might want to discuss that. The economics are based on this. The bill and the negotiations as it were, is that what you're getting to?" REPRESENTATIVE AUSTERMAN responded affirmatively. MR. BANKS replied, "What you have here is the public version. There are a few - as I mentioned earlier, Mr. Chairman, there are a few assumptions that we've changed to protect BP's financial -- basically information that's confidential to the firm which we have allowed that they could keep secret. As a result, some of the numbers, some of these totals, will be different than the information that we have produced for you. The basis on which we negotiated the deal was using their confidential numbers." REPRESENTATIVE AUSTERMAN asked if the assumption could be made that BP's numbers would be higher? MR. BANKS replied, "In this particular instance, as I look at it, we have -- the differences that I've reported total income to the state with the supplemental royalty to be $435 million and you can see here that's it's $424 million. The biggest effect in this particular run is on income tax." Number 1545 CO-CHAIRMAN GREEN said he had a few questions that were based on "what if" cases and was aware that the MonteCarlo sort was supposed to address that, but it's limited within the parameters that it's given. He wondered, "if you ran just an arbitrary case with a greater inflation of prices than the one that Department of Revenue (DOR) has. For example, back 20 years ago there were price estimates that by the end of the century oil would be $60 or $80 a barrel, so obviously they were wrong. But instead of a growth rate that is essentially flat with a slight increase due to inflation, did you run one that says there could be some problems with oil supply and therefore over the next 16 years or 18 years or whatever this project is going to go, that we could see a 5 percent increase (indisc.). So, just as a "what if." MR. BANKS responded, "Mr. Chairman, the answer to that question is that at one point in the process of evaluating the deals, as we played the tennis match, we looked at the DOR high priced case, the mid-price case here and a low price case and in the DOR high price, there is an assumption of greater real growth in prices and a higher inflation rate. Something like 4.5 percent instead of 3.2 percent which is in their mid-case. So, yes we did see -- the impact of doing that obviously has an impact on the value of the supplemental royalty and net profit shares; both go up as a result." Number 1669 CO-CHAIRMAN GREEN asked, "And is it fair to ask -- obviously we realize that some of that information is proprietary, but was there a sensitivity to that of significance. In other words, when you went up at 50 percent increase -- roughly, I think is what you indicated to us -- in the inflation rate, that would affect both the supplemental royalty and the net profits and was that effect of significance?" MR. BANKS said, "Let me try to give you an illustration. You have to remember that this model -- and it may be apparent to you by looking at it -- a (indisc.). It's because it started out in the fall as a fairly simple spreadsheet and as we went along, it got more and more complicated, and stuff was simply added to it as our refinements were added - the oil price forecasts and so forth. The point I'm trying to make is that when we did those kinds of runs in early March, we were using a version of the model that was slightly different than this and different only in the calculation of abandonment costs and how those abandonment costs affect net profit share. Now having said that, this model produces a net profit share amount which is slightly less than what we were working with in the course of negotiating. So, let me try to give you an idea. I have results from those sensitivities and I'll try to give you an idea of where we ended up." Number 1777 MR. BANKS continued, "The supplemental royalty in the high priced case - just assuming that the DOR numbers were what we were looking at - went from, I believe we had a number like 37 million and in the high priced case, it went to 102 million. In the low priced case, there is no supplemental royalty. With respect to net profit shares, this model produces a number and we've shared with you a number of about 85 million as the approximate calculation of net profit shares in 1996 dollars in the most likely case. In the high number, it's going to be something in excess of about 2 l/4, I'd say. I'm hedging here because I know for a fact that this model, if I were to run that again, would produce a number that's different than the one that I did in early March. But I think roughly speaking if the proportions are the same, that's the kind of difference that would happen." Number 1860 CO-CHAIRMAN GREEN said in the low case net profits also were zero. MR. BANKS confirmed that. CO-CHAIRMAN GREEN asked, "Would it be a fair assumption -- and I know this is drawing on something you may not want to answer -- if instead of the 50 percent increase, would this be linear or exponential, do you think? These number, for example, the high case going for 100 million, more than doubling, if you were to double the rate of inflation, would we expect say a fourfold increase in net profits or is that beyond what you want to stretch your...." MR. BANKS said he rather not because he only had two estimates to make that prediction. CO-CHAIRMAN GREEN asked if it was a fair assumption that it is sensitive to that? MR. BANKS responded both supplemental royalty and net profit shares are sensitive to it and it would appear -- that the net profit shares, at least on the high side is more sensitive to a price increase over time. Number 1953 REPRESENTATIVE AUSTERMAN inquired about the prices of oil on page 2. MR. BANKS responded, "The Department of Revenue forecast is, I think it's 3.2 percent for the first couple of years and then 3.0 percent thereafter. No, vice versa - 3.0 through about 1999 and then 3.2 percent inflation through the remaining period. There's also a tiny bit at three-tenths of a percent growth in real prices. So the number you see, as I pointed out, 2010 is 26.41. That represents what an accountant would see when he opens up the newspaper in 2010. So it represents a number that includes some inflation over time and a tiny bit of growth in real prices." REPRESENTATIVE AUSTERMAN inquired if these were the Department of Revenue figures. MR. BANKS confirmed that. Number 2022 REPRESENTATIVE AUSTERMAN asked if that compared with the last 10 years - from 1986 to 96 figures and is that basically what the percentage of growth has been? MR. BANKS said he had looked at the last 10 years and there is no reliable correlation between time and price. Number 2073 CO-CHAIRMAN GREEN asked, "We've found there is some sensitivity to crude price. Did you, in these runs where you had difference in ultimate recovery, did you also vary the rate during those cases in order -- did the project expand in time or in production rate or both?" MR. BANKS stated, "We did some forecasts like that for the Senate Resources just last week - week before last. In those assumptions, in the high side - they had asked specifically for a total recovery of about 180 million barrels which is outside the 160 that we had capped in the model. And we did predict that the production rates at peak rose from 50,000 barrels a day to 80,000 barrels a day and then dropped off rather suddenly after that to get us to this same end point. In each case, that 15 year assumption was held, except in one run at a very low production where you hit the same peak (indisc.) 50,000 but then the field is exhausted prematurely or sooner than 2011." CO-CHAIRMAN GREEN questioned, "Did you, from those runs, find a sensitivity that would affect the comparison between supplemental royalty and (indisc.)." MR. BANKS responded, "As I'm looking this up, Mr. Chairman, I want to add that increased production comes at a fairly high cost. The most likely case represents what kind of facilities you perceive you can put on the island initially and that in order to achieve higher rates, it's my understanding that those facilities have to be beefed up by quite a bit and may even require importation of, from other fields, substances that are used to inject into the ground to lift the oil. So there are -- it's true that you might be able to get greater production, but it will come at a cost that has a significant impact on the payout of the net profit share." Number 2287 CO-CHAIRMAN GREEN commented, "I can certainly see that if you time constrain it, but if you were to say that there's more oil there and you may have a few additional wells, but in effect what you could do is rise to the truncation of your erroneously low production and keep that truncation for a longer period of time; similar to what happened at Prudhoe. Obviously, Prudhoe Bay was capable of producing far more than 1.5 million per day, but that was the MER that was established and so that rate was continued over several years whereas it might have gone way up which would have increased the amount of paraphernalia that would have been required to do it. But by not doing it, they just kept what they had and were able to continue the rate which while it does increase the length of time, it still may have a significant sensitivity to the total economics. Did you by chance run anything like that?" Number 2363 MR. BANKS replied, "We were a little bit more optimistic, Mr. Chairman, in terms of how long the rate could be sustained than BP when we had these discussions with them. However, I would have to say that no, that was not a consideration -- sustaining say 50,000 barrels for a longer period of time in order to achieve those higher rates." Number 2400 REPRESENTATIVE DAVIES commented he would be interested in knowing what the results of such a run would be. CO-CHAIRMAN GREEN agreed and added, "Because there may be again a fairly significant sensitivity to that. Now I can understand if you have to beef up facilities so that your capital expenditures skyrocket with an additional.... TAPE 96-66, SIDE A Number 001 MR. BANKS stated, "...royalty. Insofar as you can lengthen field life means that the inflation has caught up with your trigger price. Recall now that the trigger price is inflating at only half of what the inflation is. So the model will produce 7.5 percent supplemental royalties in those out years consistently, assuming the prices (indisc.) as we predicted they would. I think in the model here you can take a look, but you'll see that, I think, in the last four years or so, we're hitting the 7.5 percent all the time, while obviously, if you can continue production beyond that, that will add 7.5 percent of supplemental royalty each time you're charged for it." Number 100 CO-CHAIRMAN GREEN remarked, "It may not be as effective on the net profits, then. If what you're saying is case, if costs are going to trail with an increase in crude price, then that would adversely affect net profits more than it would the 7.5 supplement?" MR. BANKS responded, "I'll speculate and I believe that actually -- you have to keep in mind that we're getting 90 percent of everything over and above what it takes to get the oil out of the ground in the net profit share. So, I would speculate that the net profit share would turn out to be much better in a case like that." CO-CHAIRMAN GREEN remarked, "In additional recovery...." MR. BANKS interjected, "In terms of additional revenues." Number 150 CO-CHAIRMAN GREEN inquired, "Much better meaning, much better than the base case or much better than the supplemental royalty case?" MR. BANKS noted, "Much better than the base case." Number 161 CHAIRMAN GREEN questioned, "How do you speculate it would affect or -- what we're trying to do is maybe get from you a speculation that may avoid asking you to make a run. We may ultimately do that, anyway." MR. BANKS commented, "Maybe it would be best that we do a run like that because then we can avoid misunderstanding." Number 206 REPRESENTATIVE DAVIES referred to the numbers that were given to the Senate and asked what the sensitivities were to the assumptions on the total amount of recovery. Number 241 MR. BANKS said, "Mr. Chairman, they asked us to give them some estimate of what would happen to the field if you were producing at 160,000 million barrels as the top case - sorry, 190,000, I believe it was. And we had supplemental royalties in that instance and I recall that things are dropping off at the end of 2011 of $49 million under that case. In the case for net profit shares, we assumed that production start up would be delayed and that would produce a $217 million net profit share. So that's the comparison for the 190 million barrel case." CO-CHAIRMAN GREEN inquired if that was based on the most likely crude price. MR. BANKS responded affirmatively and added, "The only thing we're changing is reserves and the capital expenditures together." Number 333 REPRESENTATIVE DAVIES remarked, "And also the assumption here is that the rate goes up to keep the time constant." MR. BANKS said that was correct. REPRESENTATIVE DAVIES said he would like to get one that looks at the other case. Number 353 CO-CHAIRMAN GREEN asked if it would be a fairly easily accessible model. MR. BANKS responded he could have something for the committee perhaps by the end of the day. CO-CHAIRMAN GREEN stated, "If we could do that and I would also like to see if -- just for -- I mean, you can always decide whether it's likely or not, but it's good to know -- if we could do what you did for -- just for the base change in price that you would do that as well with this increase in recovery so that you would have both the -- the new case then would show an expanded rate without - - expanded time to get the additional oil and it would also show that this is the most likely crude price -- what if we were to find crude prices going up or inflation going up at I think you used about a 4.5 percent. Again, we're not trying to nitpick, we're just trying to get a feel of sensitivities." MR. BANKS replied, "okay." Number 434 REPRESENTATIVE RAMONA BARNES said, "In your presentation, you said that you knew a lot about these leases because of Amerada Hess holdings of these leases previously. And assuming that you knew a lot about them, then did you not also assume that BP knew a lot about them when they purchased them?" MR. BANKS replied, "We had available to us, information that was supplied to us by Amerada Hess as a result of their plans of development in the course of developing the field or drilling. Some of the -- I think Mr. Boyd can give you more of the details, however, we had information on wells and their development costs as well that was not acquired by BP until they bought the property." Number 527 KEN BOYD, Director, Division of Oil & Gas, Department of Natural Resources, confirmed that Mr. Banks was correct. He commented, "As Kevin said, we had the data and we would get the seismic data that they shot as soon as they shot it. We would get that right away because that's part of the law. But BP would not. The same thing is true of the wells; we would have gotten the wells as part of the plan of development. They were held confidential for a certain number of years. BP sort of bought this as a kit. They got the Northstar kit with engineering studies, the seismic data, the wells -- here's your money - here's your Northstar kit. Good luck because we thought it was going to cost a billion and a half dollars to develop and go see what you can do." Number 584 REPRESENTATIVE BARNES said, "Well, having said that, you don't suppose that BP would have bought it if they thought they were buying a pig in a poke, would you?" MR. BOYD responded, "Mr. Chairman, I believe you'd have to ask BP that. I certainly hope not." REPRESENTATIVE BARNES continued, "But you would think that BP would have known that the way the leases were written, would you not, that there were net profit sharing as well as your royalty written into them?" MR. BOYD replied, "Mr. Chairman, I should back up. By the time BP bought the package, I presumed that they had seen the wells -- three of the wells were public domain. There's still one that's held confidential in this other lease and perhaps had been given a demonstration or been shown the seismic data - probably the maps of the structures and things. So I think BP was fairly well informed. I mean, you can ask them as to what they were shown, but typical of these sort of deals, when someone is trying to sell something, they're not going to (indisc.), but they're going to show it (indisc.) as possible. So, I believe the answer to your question is yes." Number 654 REPRESENTATIVE BARNES said, "Well, if they knew what we know today in the testimony before this committee and other committees exactly what those leases provided for and now they're saying a very short time later that they can't develop them under the scenario they purchased them under, do you have any idea as to why they purchased them?" MR. BOYD responded, "It's a better question for BP, but I believe in previous testimony they say they took a chance. They bought this and said. `Gee, I hope we can go to the state and make a deal and if we can't,' -- I don't know what they would have done. I believe it's a better a question for BP as to what their motive was for buying -- again, in testimony and I don't want to short change BP on this, but they said they thought maybe they could make a deal and that's what they're trying to do." Number 713 CO-CHAIRMAN GREEN commented, "Not speaking for BP, but I think another reason is that they have a history on the North Slope of being able to develop projects at less value than other operators. I know they did that at Endicott and that may have been another thing that drove them, thinking, as Director Boyd had indicated, the original concept was that this was going to cost a lot more than I think now BP feels that they can develop it for. So, therein may have been their ace, thinking, `We'll get this thing and do it at a less up-front money, therefore we can make money.' But that again I think, probably would be a question that we need to ask BP. But it's a combination of things when you're making these kinds of investments." Number 771 REPRESENTATIVE BARNES asked Mr. Boyd to explain how the net profit sharing is different in these leases than in other leases. MR. BOYD said, "I'll let Kevin get into the egregious details but they're not different. It's just a high enough profit share. It was the bid variable for the lease which does make it different. It was actually the bid variable in the sale. When companies were bidding, there was a fixed bonus, there was a fixed royalty and variable. The thing you won with was the net profit share and the net profit share win - it was slightly different on each of the four leases, but it was about 90 percent - 89 percent. Some were 78, some were 91. But that was the number that won. If you bid that high number, you got that. Now that's different than net profit shares in the sense of oil leases where the net profit share was fixed. There are a number of leases that say a 40 percent net profit share (indisc.). But that was a fixed part of the sale. The bid variable is something else. So, I think the only unique part, and Kevin's going to correct me here when I'm wrong, but the only unique part about the net profit share at Northstar is it was the bid variable and it's also the highest net profit share anywhere in the state." MR. BANKS verified that was correct. Number 852 CO-CHAIRMAN GREEN said, "And just for a microcosm of background. In the decade before this, there was a fairly large extension in southern California called the Wilmington Offshore and that was, to my knowledge at least, certainly the biggest and I think one of the earliest of that kind of leasing. And in that case they knew exactly what they had and the only variable was the net profits back to the state and the city of Long Beach. I didn't like it then; I don't like it now, but at any rate that's...." Number 891 REPRESENTATIVE BARNES stated, "The royalty that was in the original leases, could you just explain to us then briefly, what is the supplemental royalty to these leases that we're getting in exchange for giving up the 89 percent net profit sharing." MR. BOYD said, "I'll let Kevin address that, but again four of the leases have a 20 percent royalty and the fifth lease had a 12.5 royalty (indisc.) this other lease, that part of the deal has been jacked up to 20 percent. So, there's a base, I think in more simple terms -- I think of that as a brick of 20 royalty and you build some steps on top of it, but I'll let Kevin go into the supplemental royalty goes from 17....you've always got that 20 percent royalty and Kevin is going to build a ramp on top of that that's gets as high as 7.5 percent on top of the 20." Number 968 MR. BANKS stated, "And in the details, Mr. Chairman, we've set a price at $17.35 - that's the ANS West Coast reported spot price - we calculate an average price each month. If it exceeds that amount, then the proportion that it exceeds that amount is multiplied by 1.5 times to calculate a supplemental percentage. So if it's a dollar more, then BP will pay us 1.5 percent more in supplemental royalties. It's linear - there's no steps in it; it's strictly a calculation of a line and it's capped at 7.5 percent which you'd hit at -- well, at today's price, BP would be paying a total of 27.5 percent because we're right now in this blip of high prices. The trigger price, and this is really the only other refinement -the trigger price will inflate at one-half of the inflation rate, as calculated by the producer price index. So, there's a certain amount of sharing in the inflation risk between the state and BP, so to speak. We get that one-half between the actual rate and the inflation rate on the trigger price, so eventually if prices show a trend that can keep up with inflation - - if oil prices keep up with inflation -- at some point, the state will just -- the trigger price will be lower than the average price and we'll always get some kind of supplemental royalty in the out years." Number 1072 REPRESENTATIVE BARNES asked how the ELF affects these particular leases under this particular scenario laid out. MR. BANKS responded, "In fact, the ELF, Mr. Chairman, has the effect in the early years of -- I think the ELF is at about seven- tenths at its peak, so seven-tenths of 12.25, whatever is the rate in those first few years of production, amounts to about 8 or 9 percent severance tax. It drops off pretty quickly. As the field declines, severance tax doesn't pay anymore. I think I can illustrate that by taking a quick look at the model. I believe on page 4, in the middle of the page, you see the oil severance rate - a row titled under the `Tax ($m, mod)' you see the oil severance rate and the oil ELF and as I said, at it's highest point, it's seven-tenths but then it falls to zero effectively by 2005." Number 1186 CO-CHAIRMAN GREEN said, "Kevin, I have one more of these sensitivity things to ask you about. With BP's exemplary history of being able to develop safely at a lower development investment, have you run any cases to see if there would be a sensitivity to that. That another order of magnitude, for example, which we're getting into the almost never, never land, but they already passed into the never, never land on some of their other developments, according to the other operators initial estimates. So is that a sensitivity issue of (indisc.) capital development?" MR. BANKS replied, "It'll have an effect on the net profit share. It has no effect on the supplemental royalty, obviously. But if you would like us to cook up something like that to see." CO-CHAIRMAN GREEN commented, "And again, this doesn't mean that even if you do one these that it would be logical. It's just to see if there is a sensitivity to it and maybe that's too draconian. Something with enough significance to see if it makes a difference - maybe at 25 percent or so decrease. And I would think probably both wells and facilities. Just to see if it's sensitive to that." MR. BANKS said he would do that. Number 1268 REPRESENTATIVE DAVIES asked if abandonment costs were a big deal in this calculation or not? MR. BANKS replied, "It has an impact on the kinds of taxes that are paid because under -- for income tax purposes, it's a cost that can be charged against taxes before you spend it and it's depleted over the life of the field as oil is produced. So, that's the principal place where it kicks in. It also has a rather perverse effect on the net profit sharing. I say this because according to our regulations, even though they're going to spend this money in 2012, they get to count it against their revenues throughout the life of the field in the calculation of the revenue account and net profit share. So, it's an outright deduction -- it is adjusted by the rate at which the oil is depleted from the field." Number 1334 CO-CHAIRMAN GREEN stated, "Let's say that two years into this, it becomes a 160 million barrel instead of 130, then you have to adjust your amount that you can deduce by the amount of barrels produced over that which will be produced." MR. BANKS inquired, "If in the middle of the field life, you changed your reserves?" CO-CHAIRMAN GREEN said, "Somehow they find something better or..." MR. BANKS responded, "That's right. Those numbers calculated would be lower -- well, per barrel would be lower. The impact it has early on -- as long as the development account -- we can get into net profit share calculations but if there is a development account - in other words, if the net profit shares have not begun to pay, in effect these charges on dismantlement and abandonment are accruing interest. They are accruing interest on the development account in a sense." CO-CHAIRMAN GREEN asked, "The unspent dollars?" MR. BANKS replied, "Yes, sir. That's as I say, it has some perverse effect on the profit share because of that. In our assumption about what the abandonment costs will be in terms of impact to the company's economics, what we focused on is that it's in the cash flow, it is just a number that appears in 2012 and has an impact then on your present value of the prospect. The secondary effect or those other effects are on taxes and profit shares." Number 1416 REPRESENTATIVE DAVIES said, "We've look at in the principal variables that we've talked about are in how much oil is there and the rate of production issues and the price - we've talked about that - and the cost of development, so I think we've sort of covered the waterfront there. But, I guess the argument that BP brings to us as to why we want to go into a deal like this is that they claim, of course, that they simply wouldn't develop under the net profit arrangements in that they indicate that the state -- in that part of the problem is that the state's interest and BP's interest in the waning days of the field are not in alignment. In going through the analysis just in terms of the economic model -- these assumptions that you've made here -- would you be driven to concur with that? Do you see evidence in doing these calculations where as you get out in say the second half of the life of the field that we begin to have divergent interests?" Number 1480 MR. BANKS responded, "Mr. Chairman, I think the answer to that question is they predict that their per barrel funds flow drops off as soon as they to pay net profit shares. I'm sure that will have an impact in one respect, but if there are any possible incremental projects to be done in the field, recognizing that 90 percent of the profits of those would be taken away by the state, it would be a disincentive to incremental production towards the end of the field life. With respect to how that funds flow behaves, I believe that the company could, although my conversations with even our own accountants are not completely in agreement with this, it seems to me if you can anticipate that you're going to have an obligation to pay the net profit share towards the end of the field life, they'll figure out a way of attributing that to the early production somehow; in the same way the abandonment costs are attributed to every barrel that's produced. Now, I'm not an accountant so I don't know what the rules of thumb are for that kind of write down, but it seems to me that that would be a capable thing for them to do. On the other hand, I think you should also ask BP for a more thorough explanation of how that works." Number 1558 MR. BOYD interjected, "Mr. Chairman, I just want to make sure that the committee is clear that we're not making any representation of what BP may or may not (indisc.) field life. But Kevin's question was theoretical -- I mean the answer is really theoretical. What someone may or may not do based on a set of circumstances -- BP has said they would not do it. I can't represent that they will or will not do it, neither can Kevin Banks." CO-CHAIRMAN GREEN said he understood that. Number 1579 REPRESENTATIVE DAVIES said, "I'm not asking that. I'm asking if you look at this analysis, do you see evidence for our interest being misaligned with theirs. That's really what I'm asking." Number 1584 MR. BANKS responded, "Well, the model will show under net profit shares that their revenues are significantly cutoff in the last three or four years of production. It's simply because the net profit shares are being paid at that point." Number 1591 REPRESENTATIVE DAVIES questioned, "But isn't -- I guess -- almost by definition, isn't it also true that at that point in the game they've taken all their costs off and that these are pure profits basically to them and to the state at that point? I mean there's no, except for the continued operations costs, there's no further capital costs to be attributed to the project?" MR. BANKS said, "The way we've modeled it, we have no incremental capex expenditures out there in the field life, you are right. They have earned a return on capital expenditures equal to the prime rate and whatever value the development account had when they acquired the leases from Amerada Hess." Number 1633 REPRESENTATIVE DAVIES asked, "Can you tell me at that point in time how the return to BP, according to these kinds of calculations that you've done, how the return to BP would compare to the operating cost. In other words, if you considered this as an investment and you had the operating cost to be an investment, we have to put up $1.00 a barrel, what is the return to BP on that dollar investment?" MR. BANKS said, "I believe BP has done an analysis like that, Mr. Chairman for the Senate Resources Committee and have shown that their rate of return is something in the order of 10 percent. I think that's the answer to your question. By the way, operating costs are deducted from the revenues that are calculated in the net profit share, as well." REPRESENTATIVE DAVIES said, "I understand that but I'm trying to get a kind of `apples and apples' comparison. If you're in this circumstance and you're BP, and ask, `Does it make sense for me to continue to put this money out in terms of -- considering the operating costs and investment. This may be kind of an unusual way to look at it, but I'm just trying to get some sense for how misaligned we are." MR. BANKS remarked, "I think I'd like to punt, Mr. Chairman." CO-CHAIRMAN GREEN remarked, "Well, that's true. I think that they're asking maybe some questions that -- as long as it's numbers, it's one thing, but if it's philosophy, that's another -- that you get into a situation in that latter part of the life that it would not be to the operator's benefit to make an investment which would then ultimately perhaps would affect the ultimate oil recovery with a possible bizarre, and let's hope it never happens scenario, that the economy would come to such a low rate of inflation that investing in something like this where the inflation rate is fixed would be a better investment than trying to invest in something else with a lower rate of return. Because after all, an oil company is no different that a bank -- they're in business to make money. So if they can get a glob of money and put it in at a rate that exceeds what their normal corporate rate would be -- and that's why I say, God forbid that would ever happen, it could be to their advantage to put it in here. Otherwise, I can't see that it ever would because most oil companies have a higher demand or higher rate of return requirement than they would get in investment here. So then, I guess in that regard, there would be a divergence and I think their corporate president has mentioned that. He has testified to that extent that there would be a divergence of (indisc.) and would not be good." Number 1772 REPRESENTATIVE DAVIES commented, "Mr. Chairman, I stipulated that. I know that's what BP says. I'm just trying to find out what our guys say." Number 1783 MR. BANKS stated, "It would be the same kind of effect if you assumed -- I believe this would be the case -- if you assume in the model that there is no balance in the development account, there's a $262 million assumption in here - that's the size of their development.... CO-CHAIRMAN GREEN interjected, "Plus abandonment." MR. BANKS continued, "That accrues later. But if you assume that it starts out at zero, I think a similar result happens. The cash flow produces a rate of return of just 10 percent. Now is that enough to accumulate investment in a field? And that's the question for BP. As I said, I think I'm trying to interpret your question that in the end of field life, if they are paying the net profit share, the development account balance is zero, they face similar economics. Any investment made because of the impact of net profit shares would be somewhere in the order of 10 percent." Number 1828 REPRESENTATIVE DAVIES stated, "But in investment -- I was talking about the operating costs and (indisc.), but if the company were to make an investment at that point in time, that would also be a capital cost that would come off - it would go back into the development account at that point - that would come out. So I guess one would have to look at whether that - what the tradeoffs would be there." Number 1854 CO-CHAIRMAN GREEN added, "A fixed rate there and an uncertain rate in the future, so it just depends on what would happen." Number 1872 CO-CHAIRMAN GREEN noted, "I know we have several questions of the operator and we will probably -- I don't know how we're going to be able to arrange times, but we do have a lot more questions. Unfortunately, we don't have any more time for this meeting and so we would hope that maybe we can reconvene. In fact, on this issue we won't adjourn, we'll just recess at the call of the Chair and perhaps get in some questions to the operator at that time." REPRESENTATIVE BARNES commented that she had some questions for Jim Baldwin on this issue and asked that he be present at the next meeting. CO-CHAIRMAN GREEN announced the committee would recess the hearing on Northstar to the call of the Chair and move on to SB 198. CSSB 198(FIN) - HOMER AIRPORT CRITICAL HAB. AREA CO-CHAIRMAN GREEN indicated the next bill on the agenda was CSSB 198(FIN). He asked Senator John Torgerson for come forward to present his bill. Number 1930 SENATOR JOHN TORGERSON, Sponsor of SB 198, distributed a photocopy of an aerial photograph of the proposed critical habitat area. He read the following statement: "The Homer Airport encompasses about 1100 acres totally. This particular legislation would take 295 acres and set it aside as a critical habitat area. The primary purpose for a critical habitat area is for the moose habitat for a relatively large herd of moose that winter - when the high snows hit, they come down and winter in that particular area. The bill contains language for guaranteed public access to the area to continue whatever uses have been going on in the past such as fishing, hunting, trapping and other public access to the area. This bill is supported by the city of Homer, by resolution, and also by the Kenai Peninsula Borough Assembly, by resolution. The city of Homer is the local jurisdiction that has the zoning and other authorities that have to do with lands within that jurisdiction. There's also other letters of support in your packet from quite a few other different agencies. We've tried our best through this piece of legislation to maintain a lot of the activities that are currently happening within that area and not put any undue restrictions on things that may take place." SENATOR TORGERSON continued, "One of the reasons that I bring this bill forward is that it does have the underlining restrictions that are on airport property that preclude any development of any kind in height restrictions, building and other things unless it's approved by the Federal Aviation Administration (FAA). So, this is probably the overlining restrictions placed on it because it is airport property are a lot more intense than any critical habitat area that we have in the state as far as any type of development. This just basically sets this aside so that the moose habitat will be protected in that area." Number 2063 CO-CHAIRMAN GREEN referred to the map that Senator Torgerson had distributed and asked if the area being discussed was the black outlined area. SENATOR TORGERSON responded yes. He added, "The original intent of the legislation had two small triangle pieces down here in the lower corner and also the big chuck right here. As you can see, this larger piece is currently all wetlands except for a portion. I don't know how with today's rules on wetlands development, how we'd ever develop that into being anything. That's another reason why that this makes good sense to set this aside; it truly is probably just moose habitat except for maybe a small portion. These two chucks down here, were amended out in the Senate Finance Committee, so they are no longer a part of that, but I couldn't block them out very well." CO-CHAIRMAN GREEN noted there were two other areas and asked if they were still a part of it. SENATOR TORGERSON replied those were the areas he was referring to and they were not a part of it; just the larger piece which would be the north side of the runway. He noted that he had a technical amendment for the committee's review on the boundary change that the Department of Transportation and Public Facilities had recently given him. Number 2126 REPRESENTATIVE BARNES made a motion to adopt CSSB 198(FIN) as the working document. Hearing no objection, it was so ordered. Number 2139 REPRESENTATIVE BARNES made a motion to adopt Amendment 1 on page 1, line 13, deleting "S1/2NE1/4" and insert "S1/2NEl/4NW1/4". Hearing no objection, Amendment 1 was adopted. CO-CHAIRMAN GREEN asked if there were any questions of the sponsor. Hearing none, he asked the wish of the committee. Number 2160 REPRESENTATIVE BARNES made a motion to move CSSB 198(FIN) as amended from the House Resources Committee. CO-CHAIRMAN GREEN noted there were a number of individuals waiting to testify via teleconference on SB 198. Number 2194 HARRY GREGOIRE, Mayor, City of Homer, testified via teleconference that a group of registered voters had circulated a petition asking that they be allowed to vote on SB 198. He noted the voters have more than the required number of signatures and requested that committee members allow the voters to have a meaningful election. CO-CHAIRMAN GREEN asked if Mr. Gregoire was indicating that he wanted to have an election in Homer? MR. GREGOIRE said affirmatively and added, "They have circulated a legal petition by the registered voters of Homer. They have the required signatures and I respectfully ask that your committee allow them to have this election." CO-CHAIRMAN GREEN questioned what would prevent them from doing that on their own right. MR. GREGOIRE said it would be moot if the committee passed the legislation without some stipulation that the voters would be allowed to have an election. Number 2260 REPRESENTATIVE BARNES asked Mr. Gregoire if he thought the people who had sponsored and supported the petition were opposed to this bill? MR. GREGOIRE responded they definitely appear to be opposed to it. He added it's estimated that 1 person out of 10 would be in favor of the legislation; the rest would be against it. REPRESENTATIVE BARNES inquired how many signatures were on the petition. MR. GREGOIRE responded, "In excess of 200. The required amount that had to be on the petition was 163 or 25 percent of the last election." Number 2296 SENATOR TORGERSON said he knew the petition had been circulating in Homer. He stated his direction comes from the city council in this particular instance. This is not a new issue for the city of Homer; there's been a working group around for about the last 8-10 years to try to set this land aside. He stated, "I did check with Legislative Legal to see if we could put an effective date on this bill that would be something that would trigger with the local election. The legal opinion basically says we cannot do that. That would be delegating authority that rests sort of with the legislature to some other body that we don't recognize. So I thought at best, that would be a good way to handle this to just let the election process go. I will tell the committee for your information that the council has overrode the mayor's veto four times on this particular issue and I believe the council is representing the people of Homer; it has been unanimous consent when they overrode this veto so I don't know exactly where else I could get any direction if it wasn't from the council on this issue." Number 2343 REPRESENTATIVE LONG asked if it was municipal or state lands. SENATOR TORGERSON responded it was state lands within the municipality of Homer - within the city limits of Homer. Number 2390 CO-CHAIRMAN GREEN inquired as to the reason for the opposition to dedicating this land as wetlands and leaving it undeveloped. MR. GREGOIRE responded that eventually the city is going to have to take over the operation of the airport from the state. There has been some indication of that in the past and the state now wants to cut over 700 feet of their runway which would turn them into a bush airport. He added, "We have to have the lands on both sides for airport-related businesses. This is not something that has just come up. Our Homer Economic Development Commission has a long list of things that has been passed and approved by the council for the economic development of the airport. It's nothing new." CO-CHAIRMAN GREEN noted the committee had heard testimony that Mr. Gregoire's opinion had been overridden several times. MR. GREGOIRE replied, "Well it has in effect that a year ago when we touched on this subject, I was assured that there would be lands on both sides of the airport for airport related businesses. That hasn't happened and now there's only the south side which has a lake which is floating the whole area over there that needs some work to keep it from making more wetlands out of the whole airport." CO-CHAIRMAN GREEN thanked Mayor Gregoire for his testimony and called Mildred Martin to testify. Number 2415 MILDRED MARTIN testified from Homer that the legislation before the committee was a culmination of over 10 years of work. She had personally been involved with the committee for about four years and in that time, she participated with the first petition which received about 200 signatures in two days. She added, "This legislation enjoys the support of five of the six city council members who are elected and represent the residents of Homer. The legislation also enjoys the support of the Kenai Peninsula Borough Assembly. The proposed critical habitat area comprises over 85 percent of high value wetlands. The lands for future Homer airport expansion have already been withdrawn." She urged committee members to support and to pass SB 198 out of committee. CO-CHAIRMAN GREEN thanked Ms. Martin for her testimony and asked Derek Stonorov to testify. Number 2450 DEREK STONOROV, Vice Chairman, Beluga Wetlands Task Force, testified via teleconference that the task force had been created more than three years ago with a goal of creating the Homer airport critical habitat area. He said, "We believe that only through appropriate habitat protection can we have a viable and harvestable lower peninsula moose herd. Senate Bill 198 addresses future airport expansion, airport safety, airport operations and does an excellent job or protecting the last large piece of moose habitat on the Homer bench. The proposed legislation is actually more restrictive than the 1985 Homer Airport Master Plan which proposed this land transfer in the first place." He noted they had gone through the democratic process on this and he, personally, had gone before the city council on five different occasions. TAPE 96-66, SIDE B Number 001 MR. STONOROV continued, "...committee hearing. At that time, 23 were in favor and 3 were opposed." He recommended quick passage of SB 198. CO-CHAIRMAN GREEN asked Roy Hoyt, Jr. to testify next. Number 011 ROY HOYT, JR., testified via teleconference from Homer that he commenced flying in January 1942; was an air traffic controller for (indisc.) years and was in Alaska and an air traffic facility manager for over 20 of those years. Forty two years ago while in the military, he was involved in a fatal aircraft accident that was caused by a Canadian Goose going through the windshield. He mentioned the recent accident at Elmendorf Air Force Base where 24 lives were lost and said that should be cause for thought. He stated historically there have been problems with birds at the Homer airport. He felt it was irresponsible to have a critical habitat area adjacent to the airport. By creating a critical habitat area, the state is certainly increasing their liability for any aircraft accidents caused by a bird strike. CO-CHAIRMAN GREEN thanked Mr. Hoyt for his testimony and asked Luke Welles to testify. Number 063 LUKE WELLES, Member, Homer Economic Development Commission, testified via teleconference in opposition to SB 198. He said, "As a resident of the city of Homer, I am very much opposed to a critical habitat area being formed within the city limits by state legislation. Some of the 295 acres around the airport are wetlands, but not all. There are several large sections of spruce trees (indisc.) growing on the land around the airport signifying areas which cannot be identified as wetlands. There are myriads of ways to develop in sections this land which could enhance both the airport as a port and the economy for the city of Homer. The land is current zoned as general commercial 2 by the city which indicates the economic potential of this property to the city of Homer. If the state deems this property a critical habitat area, it will ban the citizens of Homer from ever using this property for any economic development. This ban should not occur especially without approval from the people who are affected the most - the citizens of Homer." CO-CHAIRMAN GREEN called on Stan Welles to present his testimony. Number 116 STAN WELLES, Business Owner, testified from Homer that he owns all or a significant part of three businesses and he is opposed to the habitat area. He said, "I'm used to working with (indisc.) and aviation; each are important, each are needed and each have a place but not the same and definitely not at the same time. Holstein bulls and moose have about the same temperament; gentle except when they don't want to be. From a safety and liability point of view, we have enough moose per capita now. Conscientiously enhancing the in-town moose brings implicit liability in the case of personal injury or death. With respect to wildlife management, the browse in the proposed area is only marginally adequate to support the moose feeding there now. Gene O'Dell (indisc.) of the Alaska Department of Fish & Game has proposed a limited hunt - a controlled hunt to further control this moose population. Tourist viewing - not often during the summer. It's too warm; a marginal food supply and too many people. We send our tourists to North Forks road." Number 168 RALPH CLENDENEN testified via teleconference in opposition to CSSB 198(FIN). He said he concluded that the establishment of an uncontrolled wildlife preserve in the middle of the first class city of Homer must be unprecedented; thereby giving the contingency of personal injury attorneys much reason to applaud the legislature's actions in this matter. CO-CHAIRMAN GREEN thanked Mr. Clendenen for his testimony and called on Lynn Whitmore to testify. Number 199 LYNN WHITMORE, Co-Chairman, Beluga Wetlands Task Force; and Chairman, Homer Fish & Game Advisory Committee testified from Homer that he has been involved with the Fish & Game Advisory Committee for about 15 years, so he is familiar with the issues involved. He said, "I don't usually agree with Fish & Game when it comes to cow hunts, but in this case since we have a severe habitat depletion, we now have a cow hunt. This proposed habitat would allow us to utilize our food source which is one of the few remaining for the Homer Bench herd in the wintertime. (Indisc.) funds will be available to a nonprofit corporation made up of representatives from AEA, Fish & Game and Homer Fish & Game Advisory Committee. This corporation could target high use areas of the moose by enhancing browse away from the immediate vicinity of the Homer airport to the far side of the proposed habitat - those areas are shown on drawing you have in front of you - which is where most of the desired (indisc.) already exists anyway. So funds for such a project are already in place through a cash endowment and transfer of mitigation lands for the Bradley Lake hydro electric project (indisc.). This is one of the requirements of the federal energy regulatory commission license." CO-CHAIRMAN GREEN announced that Nancy Lord would be next to testify. Number 247 NANCY LORD testified via teleconference requesting the committee look at the record in that this proposal is part of the Homer Airport Master Plan that was adopted 10 years ago. It went through the entire process of review by the city advisories, the planning and zoning committee, the park & recreation committee, the city council by a unanimous vote, the borough assembly with unanimous support, letters of resolutions in support from agencies and organizations, etc. She noted that Senator Torgerson, Senator Leman and the Senate Resources Committee had made a personal visit to Homer at which time it was widely supported. She urged the committee to pass CSSB 198(FIN)_ from committee. CO-CHAIRMAN GREEN asked Mary Griswold to testify next. MARY GRISWOLD testified from Homer that she lives just outside the Homer city limits on a moose traveled corridor between their summer range and their wintering grounds, along the Homer Bench. She said, "I regularly walk from my house to the Beluga wetlands in their hoof prints and enjoy watching them in my front yard on their search for browse. I am also a hunter and enjoy eating moose meat. Moose are essential to my Alaskan experience and protecting natural habitat is essential to their survival as expanding human residential development replaces their traditional range." She urged the committee to support the Homer airport critical habitat area. Number 316 JIM REARDON testified from Homer that he is a 40-year resident of Homer and has been involved in fisheries and wildlife management in Alaska since 1937 as Professor of Wildlife Management at the University, fisheries biologist for the Department of Fish & Game, board member for 12 years on the Board of Fish & Game and the Board of Game, and outdoors editor for 20 years for Alaska Magazine. He strongly supported CSSB 198(FIN). He said, "In 40 years, I've seen moose habitat in the Homer area disappear. Latecomers don't have the perspective that I have on it. Another point I'd like to make is that Merrill Field several years ago was a three or four mile drive from Anchorage. Now it's engulfed by urban sprawl. Each year several small planes lose power on takeoff at Merrill and have to land on (indisc.-coughing). I'm a private pilot and if I lose power on takeoff, I'd rather land in the trees or the swamp than on a freeway or a house. And this would prevent house and freeway development in the immediate vicinity of the Homer airport." CO-CHAIRMAN GREEN thanked Mr. Reardon for his testimony and asked Jack Cushing to present his testimony. Number 366 JACK CUSHING, City Council Member, Homer City Council, testified from Homer that he is a professional engineer, licensed in the state of Alaska and trained in the area of economic development since the age of 18. He stated, "I believe this is a great idea to put this into a habitat. If you talk about development cost of trying to build anything in this wetland, it would just be incredible. We'd be coming to you guys asking for funds every which way trying to do just about anything in this habitat, or the majority of it. It should be left to the moose." He noted the signatures on the petition are uncertified; they had not been counted by the city clerk yet. He added this habitat has nothing to do with either end of the runway. CO-CHAIRMAN GREEN asked Mr. Lentfer to give his testimony at this time. Number 437 JACK LENTFER, Wildlife Biologist and former member of the Board of Game, testified from Homer that the winter habitat for the moose is severely depleted in the Homer area because of human development. He said this area needs to be protected as winter moose habitat. Also, development is eroding the quality of life in Homer. As an example, the Homer Spit was an essentially pleasing and biologically productive area but it is now being trashed. He noted that the aesthetic and natural value of some of the areas in the Homer area needed to be maintained. He urged the committee to support CSSB 198(FIN). Number 471 REPRESENTATIVE BARNES withdrew her motion. Number 476 REPRESENTATIVE TORGERSON stated, "Mr. Chairman, the Senate Resources and myself who is introducing this legislation took very seriously the concerns of pilots and other people that use the Homer airport or any airport as far as that goes, but this particular bill has three sections in it which prohibit any activity that would enhance the bird population. Again, in Senate Resources, we didn't think that was enough so we put one more section in that says, `Neither the Department of Fish & Game nor any person may create, develop or enhance bird habitat within the Homer Critical Habitat Area.' When Senator Leman went to Homer, that was one of his major concerns was to look at the two out piecings that I showed you on here - the small triangles - that was one of the major reasons they were removed from the legislation was that that was the intent at that time, to enhance - not enhance - but to protect a small group of Aleutian terns that are nesting there. I would also say, Mr. Chairman, there is nothing in this bill that would prohibit the Department of Transportation from going in and doing their normal bird control that they would do in any airport anywhere within their jurisdiction. And if there is an accident or something that relates to that and it can be proven because there's too many birds in the area, the responsibility would fall back on the Department of Transportation for not doing something that they would normally do under normal sense. It has nothing to do with this legislation." Number 570 REPRESENTATIVE PETE KOTT made a motion to pass HCS CSSB 198(RES) out of the House Resources Committee with individual recommendations and accompanying fiscal note. Hearing no objection, it was so ordered. CSSB 199(FIN) - ENVIRONMENTAL & HEALTH/SAFETY AUDITS Number 611 CO-CHAIRMAN GREEN announced the next bill on the agenda was CSSB 199(FIN) and called Senator Leman to present his bill. SENATOR LOREN LEMAN, Sponsor, stated, "Senate Bill 199 is a piece of legislation that will encourage self-audits and that is for businesses to look at their own operations, find out what's wrong, identify them, make the changes so it can improve their environmental response and their health and safety records and go on. It is pro environment, pro law enforcement and more importantly, pro common sense. At a time when government inspectors are not going to be able to be doing full time inspections in all businesses, we need to recognize that we can do things to encourage businesses to inspect their own operations and turn around and make the changes. Environmental and health and safety laws are complex. Large businesses, in many cases, have the technical staff and legal staff to respond to them but what I call the `mom and pop' businesses in Alaska often do not. What this will do is remove some of the fears that those businesses have now so they will be encouraged to do it." SENATOR LEMAN continued, "The bill has two main parts. It provides for limited immunity for those who do the right thing - the good actors and it provides for a privilege which means that the information that you produce as part of this audit cannot be used against you as a road map for prosecution. Those are both worthy ideas; in fact I would say that in the first week of the session when I went and talked to the commissioners whose departments are most responsible for this, we got unanimous agreement for the concept. And still in all the testimony that we've heard in all the committees, they all will come through here and you'll probably hear them say again, `We agree with the concept, but it's the details that bog you down.' Well we've worked very carefully to craft legislation that implements the concept that everybody agrees with. It's the carrot approach rather than the stick approach and I believe the legislation we have before us is good legislation. There is a national campaign and a state campaign to discredit this type of thing - this type of legislation - but I'll just note that 17 other states have legislation like this enacted and 9 other states are in the process of enacting this legislation plus there's legislation introduced in Congress and our Congressman Young is one of the prime co-sponsors of the legislation. I'll note that the EPA, even though they resisted this type of thing initially, has come out in terms of their policy and recognized that this type of approach is good - I mean in concept - they still don't like the concept of the states doing it, but they want themselves to do it. They still have - I guess what I'd call the belt way mentality of controlling - but even the EPA under the current Administration is acknowledging that this type of approach is good." He believed this legislation would be good for Alaska; it would enable us to not only enforce our environmental and health and safety laws, but to do a better job. Number 789 CO-CHAIRMAN GREEN inquired if committee members had questions of the sponsor. If not, there were three people in Anchorage wishing to testify via teleconference. Number 802 KEN DONAJKOWSKI, Representative, Alaska Oil & Gas Association, testified that he works as an audit consultant with ARCO and supports CSSB 199(FIN). Number 817 PETER GAMACHE, Assistant Attorney General, Medicaid Provider Fraud Section, Department of Law, testified from Anchorage that he is responsible for the prosecution of Medicaid fraud. He said, "I have no quarrel again with the concept of self-audits and self- reporting. I think a lot of agencies are going in that direction. Even the U.S. Department of Health & Social Services has a voluntary disclosure program for medical providers. My concern with this bill is that it's so broad it's sweeping, that it may have unintended consequences in the health care area. I'm not addressing environmental concerns or occupational licensing concerns. I'm not even addressing the licensing aspect of health care - whether they be facilities or individual providers. My concern specifically is with the criminal prosecution of Medicaid fraud; an area where very often there's agreement as to the facts, disagreement as to the intent behind the facts. Access to information is critical in proving criminal intent. And wherever you have a provider or facility that's volunteering information, that's entirely inconsistent with criminal intent. My suggestion is that any bill that intentionally could affect medical providers needs to address the law enforcement aspect. The reason being -- we've talked about `mom and pop' providers - they're among the top providers in the medical area now under the state's choice or waiver program, providing all sorts of medical care including home health care, personal care assistants." Number 911 MR. GAMACHE continued, "My point is that absent effective criminal prosecution of fraudulent providers, the lawful, honest providers and facilities can't be protected. And I think this bill fails to address those concerns." CO-CHAIRMAN GREEN thanked Mr. Gamache for his testimony and called Toby Steinberger to testify. Number 932 TOBY STEINBERGER, Assistant Attorney General, Governmental Affairs Section, testified that one of her duties is to represent the Department of Labor before Alaska OSHA Review Board. In her opinion, this proposed bill could affect the state's OSHA program to customize it or possibly jeopardize it. Under state and federal law, our state OSHA program must be as effective as federal OSHA. This bill would make it less effective than the federal OSHA Act. In the mid-1970s, the United States Congress passed the Occupational Safety & Health Act which gave the U.S. Department of Labor the power to recognize workplace safety. It also gave the U.S. Department of Labor the authority to enter places of work and conduct inspections...." CO-CHAIRMAN GREEN interjected there was a time limit for testimony and inquired what her attitude was on self-audit. MS. STEINBERGER responded, "Well, what would happen is under federal OSHA, which we must be as effective as the federal, is that our funding could be jeopardized if we're not as effective as the federal program." She added the U.S. Department of Labor can approve state OSHA programs. The state OSHA programs, which we are one of, must be as effective. Under federal law, the U.S. Department of Labor can conduct inspections. That means they can document - that means they can have access to, under this law, state OSHA which we must be as effective including in our inspections. We will be less effective (indisc.) audit. She said this would be very important in our prosecution of the wilful cases. She discussed the importance of testimony and her belief that a document is an excellent trail of evidence. An audit can be very helpful important in proving (indisc.) a wilful citation. She added that federal OSHA does not allow immunity for anyone and we would be giving immunity for the violators. CO-CHAIRMAN GREEN noted that Mr. Bundy was available to testify. Number 1144 ROBERT BUNDY, United States Attorney for the District of Alaska, testified that he has lived in Alaska for over 25 years. He had been the District Attorney in Nome, Assistant District Attorney in Anchorage, worked for the Attorney General's Office in the Anti- Trust Enforcement and White Collar Enforcement areas, as well as Chief Assistant District Attorney in the Anchorage District Attorney's Office. He had also been a partner in a large law firm for over 10 years in which he litigated both with, in behalf of and against, law corporations in the natural resources and environmental areas. He stated, "It is with that background that I come to discuss this with you, mostly as a citizen of the state of Alaska. That I happen to work for the Department of Justice, I think is beside the point in the things that I have to say." Number 1196 MR. BUNDY continued, "The question that strikes me as I read this bill, is exactly why are we facing this - what are we looking at - is something broken that needs to be fixed? I can tell you that based upon a speculation that certain businesses may conduct more audits in the future, we are balancing that against the absolute certainty and guarantee that this bill is going to create enormous problems in all types of environmental and health and safety litigation which is going to drag things out and make them more expensive and make it increasingly difficult, if not impossible, to enforce some of the most critical environmental and health and safety laws that we have in this state. The privilege as a portion of the bill, is an example. For instance, it expands the privilege of these audit things far beyond anything that we see in any kind of privilege that exists in the law today after hundreds of years of fine tuning the law of privileges as it now exists in our law." Number 1256 MR. BUNDY further stated, "The Fifth Amendment privilege which is probably the most important privilege that we have - or one of the most important privilege - doesn't even approach the breadth of this thing. First of all, the Fifth Amendment privilege does not apply to corporations. Obviously, this would apply this to corporations and all kinds of business entities. The reason for the failure to apply, or the decision over the many decades that we've had this, to apply it to corporations has simply been that corporations are different than individuals. A privilege such as this is a personal privilege to individuals to protect them against the government. Large business entities have a much larger role in the health and safety of people and in what they can do and what they're capable of doing and in all of the lawyers, accountants, and everybody else they have that can look after them." Number 1300 MR. BUNDY said, "The privilege also does not apply to documents that are not compelled testimony. For instance, the privilege applies if you were to subpoena somebody to your committee and they would say `I'm not going to testify and answer your questions' it would not apply if you told them to bring with them documents that they created on this subject matter. That applies even in the personal - the individual - not a corporation because documents are important evidence and have been recognized by the courts for a long time that they're important evidence as to a whole variety of important considerations such as intent, knowledge and all of the other things that must be dealt with. The fact of the matter is, balanced against this extraordinary expansion of the privilege - of the various law of privilege - is the speculation that somebody may conduct more audits. I submit to you that businesses, at least the ones that I have dealt with in litigation, have a tremendous incentive already to conduct self-audits and the biggest incentive they have is the possibility of criminal and civil prosecution. If a business were to come to me and say `What can I do to protect myself most from the possibility of criminal prosecution or civil proceedings by some governmental agency - state or federal,' I would tell them `You need to look and see what your business has been doing - what has occurred and do what you need to do to fix it right now.' That's the kind of advice that these companies are getting right now." Number 1388 MR. BUNDY commented, "The statistics if you look at it are that environmental audits and health and safety audits are increasing at an incredible number rather than decreasing or remaining the same. That doesn't indicate to me that there needs to be additional incentive. And the point is too, is that under this bill, the companies that would most benefit by this are the ones that already have the most incentive to do it. The small `mom and pop' organization - the small company - they're not going to be able to afford the kind of intensive labelling of documents and audits that this bill the way it's presently constituted will protect." Number 1435 MR. BUNDY concluded, "This bill is a litigator's dream. This should be the criminal environmental defense bar relief act. This thing will allow a decent litigator, almost a Mr. Potatohead if the truth be known, to be able to slow down, (indisc.) and delay environmental enforcement litigation almost indefinitely. If you go through the terms that are used describing the documents, describing when they're privileged, when is a document related to an audit report..." Number 1481 CO-CHAIRMAN GREEN asked Mr. Bundy what his response was to the fact that there is a movement to do this in that several states have already done it and others are in the process. Number 1490 MR. BUNDY replied, "Many of these bills were submitted to the various states, all approximately at the same time, often went through without much consideration. In the most recent experience among the states, once the National District Attorney's Association and the various prosecutions had figured out `My gosh, what's going on here' and have testified and brought their views and Maryland and Florida, the most recent states to consider it, have rejected this particular bill. The reason they rejected it is for the many reasons I'm sure you've already heard about how difficult it would be to make a difference." Number 1524 CO-CHAIRMAN GREEN asked if it was Mr. Bundy's view that we should be punitive or we should be corrective. If we're corrective, it seemed to him that self-audit would lead to that as quickly or more quickly than a punitive approach of fining. Number 1534 MR. BUNDY said, "I think you're exactly right but I think that the thing to remember is that right now already built in to the prosecutorial discretion, the policies of the EPA, and the policies of the United States Justice Department and I'm sure policies of the state prosecutors as well -- having been one I understand how prosecutors work -- is that when a company comes to you or an individual comes to you and says, `I've made a mistake, I've found my mistake and I've corrected it' the chances that there would be any criminal prosecution to begin with are small. The chances that any penalty imposed if there were any kind of prosecution or civil proceeding would be much smaller. The point I'm trying to make is that there's already a terrific incentive built in for people to come forward." Number 1587 CO-CHAIRMAN GREEN said, "It's seems though it's that small clause that this has got people concerned to actually admit `Hey, I've got a problem here - I realize that' and then be wide open for you to come back and say `Oh man, thank you very much.' It seems like that's a concern." MR. BUNDY responded, "I guess as a theoretical concern, my question is can anybody point to a single instance in which that's ever happened?" CO-CHAIRMAN GREEN said there have been several pointed out in where this - at least one place I know that the source of this kind of legislation - I remember the National Energy Council and that was touted there and I think from there it spawned to several states. Texas cited several examples where they had been hammered." MR. BUNDY commented, "I think if you look in Alaska, I bet you won't find one and I bet if you look in the United States Department of Justice, these are the two agencies that are going affect the people effected by this bill, I think you won't find any there either." CO-CHAIRMAN GREEN remarked, "Good point." Number 1648 REPRESENTATIVE AUSTERMAN inquired who all was affected by this bill. MR. BUNDY responded, "Affected by the bill presumably, are the state agencies - the Alaska Department of Law and the various state agencies, the DEC, the - I guess what we heard - OSHA, the Health & Social Services on the Medicaid side. Also affected are people that may have been injured in an environmental thing because of the privilege portion. Unlike the way it is now in the ordinary rules of discovery when somebody has a claim whether it's for injury to their property or to their person or for abated nuisance or anything else, they are entitled to find -- the parties exchange information so there can be some reasonable resolution so people can get to the truth. This would deny citizens of the access to the information that they can get now. And I don't know that they're abusing now." Number 1711 REPRESENTATIVE AUSTERMAN mentioned the seafood industry and the processing plants and asked if this bill actually made it easier for them to do self-audits and clean up their stuff? MR. BUNDY responded, "It's no easier for them to do so and I submit to you that they already have a tremendous incentive to do that. What this does is this allows -- against a small, at least arguable increase in the incentive to do so which I don't honestly think is there but which other people in good faith suggest it is -- is against the ability to use the bill the way it's set up for people that have been violators - consistent violators - to hide behind and avoid any ability of either citizens or the state to hold them accountable." Number 1773 CO-CHAIRMAN WILLIAMS asked Mr. Bundy to go over that again. MR. BUNDY stated, "The point I'm making is that on one side you've balanced -- if this bill is passed, it may be true and I personally doubt it but others whom I believe are speaking in good faith, think it is true -- more audits will be conducted. The truth of the matter is that the Colorado Attorney General has recently found and it's one of the states that was the first to pass this, has found there have been no more reports based on audits which either means no more audits were conducted, the audits didn't find any environmental harm or the audits were conducted and nothing was disclosed. That being the case, on the other hand that's balanced against the very real possibility in situations that are set up by this bill for under the rubric of audit and disclosure certain chronic violators to void responding to either citizens or to state agencies to stop their ongoing efforts. There's so many questions about what it takes to get immunity. The terms are so broadly defined and so loose and so, I submit, vague that this will result in years of litigation - roomsful of documents. It's just, like I said, a criminal and civil defense lawyer's dream. And I was one for many years and I can guarantee you, I can think of many, many ways to take advantage of each and every one of these provisions." Number 1884 CO-CHAIRMAN GREEN said that Mr. Bundy had referred to the chronic abuser and asked if the chronic abusers were being prosecuted now? MR. BUNDY replied, "Yes. I can think of a couple of instances right now that we have under investigation that - and these are organizations that have absolutely the resources to hire as many lawyers as they need to figure this out - that had this bill been in effect at the time, that we would be effectively precluded from proceeding with our investigation and any potential penalty against these people." CO-CHAIRMAN GREEN asked, "It's your opinion then that the only recourse would be that they would have to continue to self-audit and show what they're doing and get some reasonable clearing...." MR. BUNDY said the self-audit can be anything. It can be oral. All they have to do is send a notice under this to the affected department, whatever that might be, indicating they are now auditing and our audit will start on January 1 and conclude in December. He added, "There are a million ways -- you may say, `Well, maybe nobody will believe that' but that's just another piece of litigation that's going to go in." Number 1969 CO-CHAIRMAN GREEN asked, "Would it be your opinion if there were three violations - three types of violations by manufacturer X and they self-audit on one of those that the DEC inspectors or the OSHA inspectors would still not be available to find two other violations and fine them on those basis?" MR. BUNDY said, "The problem with that is that it is going to be very difficult draw those lines in any particular way and any document that might be marginally relevant to the other two that was disclosed in the first one is going to be said to have created both a privilege and some kind of immunity." REPRESENTATIVE OGAN asked, "What part of the bill do you like?" MR. BUNDY responded, "Not much." Number 2085 JANICE ADAIR, Director, Division of Environmental Health, Department of Environmental Conservation, testified, "As the sponsor of the bill noted, we too think that the concept of the bill is worth pursuing but we do have some concerns as to the details of how that concept has been delineated in this proposed legislation. Representative Austerman asked who this bill applies to and that is actually one of our concerns. Environmental health and safety laws (indisc.) the bill specifically says are to be broadly construed. We interpret the bill as applying to the state as a landowner, DNR and DOT, to all of our regulations and you would expect some of those - air, water quality - but also our seafood processing requirements and since those are based on voluntary self-audits under the federal hazard analysis critical control point plan that was adopted by this legislature last year in House Bill 208, we don't know if we would be able to adopt that program if this bill were in place. It is a concern; it has something I have had talks with the AG's Office about and we just don't have a good handle on that yet, but that is a serious concern. Other kinds of food processing also operate under voluntary audits - under their own (indisc.) type arrangements that are not subject to any kind of legislation like HB 208 with seafood processing. And as we read this bill, we would be unable to obtain that documentation. So we do have concerns about the broad applicability of the bill. And that is the basis for the fiscal note, by the way, for DEC because we do think that the courts would ultimately make that decision." MS. ADAIR continued, "How the audits are done, who can conduct them and then the scope of the audit report are all very problematic. Environmental audits are still really relatively new management tools. Some companies - larger companies, particularly those who operate in Europe have been doing them for awhile. The European Union, as a means to kind of level the playing field, is adopting international standards. There's an organization called the - the letters don't fit - the abbreviation is ISO, but it's the International Organization for Standardization so they don't have their letters quite right but they have adopted standards for management standards. They started with technical standards so that there would be a level playing field; there's 111 countries that participate in the ISO, the United States is one of them, they then went to their 9,000 series which adopted other kind of management standards (indisc.) is one of those and now they're working on environmental standards, their 14,000 standard series and those do include standards for how audits are done and who may do those for environmental laws. And you don't see any of the aspects that the ISO believes are important in getting a credible audit done in Senate Bill 199." MS. ADAIR further stated, "The DEC does work with companies that want to do audits; we have a pit stop program and I did provide that to you in the packet of information I gave you, where we will go in to car shops through our pollution prevention office and help them devise an audit standard. Then help them do the audits against that standard and figure out whether or not they're in compliance and we do not take action against anyone who does discover something as a result of that and voluntarily reports it to us." Number 2404 CO-CHAIRMAN GREEN announced the House of Representatives was going into floor session and recessed the House Resources Committee meeting to the call of the Chair for HB 548 and CSSB 199(FIN). TAPE 96-67, SIDE A Number 001 CO-CHAIRMAN GREEN reconvened the House Resources Committee at 4:10 p.m. He announced the committee would consider House Bill 548 at this time. HB 548 - NORTH STAR OIL & GAS LEASE AMENDMENT Number 027 ERIC LUTTRELL, Vice President, Exploration and Development, BP Exploration, Alaska, said he was available to answer questions and if time allowed, he would discuss the material that had been distributed to committee members. CO-CHAIRMAN GREEN recalled that Representatives Barnes and Davies had indicated in the earlier meeting that they had questions of the operator. Number 105 REPRESENTATIVE BARNES said her first question had to do with the purchase of these leases from Amerada Hess. She wanted to know, specifically, if BP was not aware of the conditions set forth in the leases at the time BP bought them from Amerada Hess. Number 145 MR. LUTTRELL responded, "When we acquired the leases from Amerada Hess, we were aware that there were net profits (indisc.) on the leases." REPRESENTATIVE BARNES asked, "At that time, did you believe that they were economically feasible to develop under the scenario set forth in the leases?" MR. LUTTRELL replied, "At the time we had an inkling that we might be able to make them economic. We did not have economic runs at that time." Number 164 REPRESENTATIVE BARNES inquired, "Meaning that you didn't presume to change the leases at that point or ask for changes in the leases." MR. LUTTRELL stated, "We bought them with the risk that we might have to ask for a change. We did not have that planned at the time we bought the leases." REPRESENTATIVE BARNES questioned, "I guess since this has never been done in the state of Alaska or anywhere else in the world that I can find, did you think it was something that the legislature would do or did you think it had to come before the legislature?" MR. LUTTRELL replied, "As a matter of fact, we were aware at the time that we bought it that there was already a precedent within the state of Alaska for an exchange between net profits and royalty." REPRESENTATIVE BARNES inquired what that was. MR. LUTTRELL said, "That's a precedent set at the (indisc.) Island case between the Department of Natural Resources (DNR) and Exxon Corporation. So we were aware that at least there was an opportunity to make an exchange. The conditions were slightly different, but at least an exchange had been made." Number 298 REPRESENTATIVE BARNES asked Mr. Luttrell to explain what those differences were. MR. LUTTRELL remarked, "I think it'd be better if you were to ask that of the DNR because they're very technical. It has to do with -- DNR, I think believes that it's easy to do at the time of unit formation and more difficult to do at any other time. The way the read the regulations and the law, they can make that exchange at the time of unit formation, but they would not be able to at other times." REPRESENTATIVE BARNES remarked, "So this situation then is different." MR. LUTTRELL responded, "It is different." Number 350 REPRESENTATIVE BARNES inquired, "If you were not able to make these changes in the leases, what did you think you would do at that time if you were not able to make those particular changes." MR. LUTTRELL replied, "I think I understand the question. The way I would answer the question is that we made what I would call a `risk investment.' We took the leases - we acquired them from Amerada on the thought that we might be able to make an agreement with the state. What we would do if that was not successful, is something which we hadn't done a lot of thinking about. It's simply, we took a risk investment." REPRESENTATIVE DAVIES stated, "Mr. Luttrell, in your responses to some questions that the Senate committee put forward, you'd indicated that you had requested permission from Amerada Hess to provide information to the legislature about the purchase price and that would be under some sort of confidentiality agreement. Did you make that request and have you heard anything from Amerada Hess?" MR. LUTTRELL responded, "We did make the request from Amerada Hess. We have the authority to reveal that information to the legislators in a closed session." REPRESENTATIVES DAVIES inquired if any such discussion had taken place. MR. LUTTRELL replied, "The Senate has not chosen to go into Executive Session to ask that question." REPRESENTATIVE DAVIES inquired if it was Mr. Luttrell's understanding that it was a possibility at this point in time. MR. LUTTRELL responded affirmatively. REPRESENTATIVE DAVIES said, "I was just trying to do some quick figures here. Also, in that same correspondence, you had indicated that you -- and I'm assuming that this is in the context of Northstar although in the sentence it just says `In Alaska we look to make about 3.25 per barrel on our capital investments of 3.50' and I'm just trying to understand how that relates to -- if I multiply the 3.25 times 130, I get numbers that are larger than what are on these graphs and I'm just wondering how I relate those to...." MR. LUTTRELL responded, "What you're referring to is a paragraph that has to do with the relative value to BP of the Venezuelan investments and the Northstar investments -- I think that's what's you're...." REPRESENTATIVE DAVIES responded that was correct. MR. LUTTRELL continued, "In order for you to make the calculation I think you want to make there, you need to net the barrels from 130 down to what we would get relative to the royalty shares." REPRESENTATIVE DAVIES asked, "Take the royalty shares out?" MR. LUTTRELL commented, "I think if you do that, you'll find it. One other thing you need to be careful about is that the graphs you're looking at there are in revenue and I think the number you're looking at is in income and they're similar, but they're not identical." REPRESENTATIVE DAVIES asked if revenue was different than profit? MR. LUTTRELL replied, "Revenue is different than profit." REPRESENTATIVE DAVIES commented, "You'd expect profit to be smaller than revenue." MR. LUTTRELL responded, "Different. Similar but different." Number 630 REPRESENTATIVE BARNES asked Mr. Luttrell to explain the difference for the record. MR. LUTTRELL stated, "I actually don't feel qualified to explain the accounting of why revenue is slightly different than income, but I know it is and I will bring it back as a written document, if that's alright with you." Number 659 REPRESENTATIVE DAVIES said, "I guess the other question I had that related to this morning's discussion, Mr. Chair, was -- which I think is actually dealt with in the handouts that were distributed from BP and they have to do with the issue of alignment and misalignment and whether -- actually I think these charts are consistent with my understanding of what BP had testified earlier about, although they go into it in considerably more detail about the issue of alignment between the state of Alaska and BP and I guess maybe I would just ask that you first -- sort of a two part question -- one is, were you basically in agreement with the presentation that we had this morning in terms of the finances as the state indicated they were, and secondly, if you would like to expand some more on the issues of alignment." MR. LUTTRELL remarked, "As best I can tell, we're comfortable with the state's representation of the economics that were presented this morning in terms of their model of our model, in effect, as a common model and right now we're not running any conditions where we're not getting the same answer, if that's the question." REPRESENTATIVE DAVIES said, "That was the first part of the question. Let me just ask it bluntly. There were some numbers that the state used that weren't your numbers and I'm just asking you to give us some assurance from your point of view that they were fairly representative of the overall agreement." MR. LUTTRELL said he would be more comfortable if Representative Davies would give him an (indisc.) example. Number 817 CO-CHAIRMAN GREEN asked if Representative Davies was referring to field size and projected revenues and things like that? REPRESENTATIVE DAVIES said he was concerned about things like the discount rates, the income tax issues, the ones that were redacted from the...." Number 836 MR. LUTTRELL interjected, "When the state presented the model this morning, it put numbers in there to protect the confidentiality of BP. If you were to look at the numbers that have been presented by the state and BP for the value to the state of things like royalty, severance, supplemental royalty and look at the model presented today, you'll see the numbers are fairly similar. Now that simply means that the assumptions the state used are similar to the assumption that was used in the negotiation. They're not exact but in the rounding error of the kind of numbers we're working, I would consider them to be very similar." Number 883 CO-CHAIRMAN GREEN said, "While we're not sophisticated enough on this committee even to know in minute detail but in direction or relative comparison, you would find -- or I think your answer to Representative Davies' question was that `Ya, certainly in that broad spectrum, you'd expect to see maybe even plotable numbers within reason." MR. LUTTRELL stated, "To answer the question another way, I did provide both of you today, Mr. Chairman, copies of the slides that are now in front of you and for all intents and purposes, it's my belief that if you were to plot the model on a graph like that, the lines would overlay for all intents and purposes. There is nothing in the model as presented to you with BP specific numbers out of them, that would give you a different result, if that's the very specific question." CO-CHAIRMAN GREEN remarked, "And I think, Representative Davies, that we'll be able to do that when we get these runs back, that we'll be able to say that, `yes, this trend graphically is the same sort of thing we would expect to see from that run.' Whether the numbers are exact is not the issue." Number 962 MR. LUTTRELL commented, "Given the scale of those plots, they would plot on top of each other." Number 972 CO-CHAIRMAN WILLIAMS brought up the local hire issue and asked Mr. Luttrell what he could tell the committee regarding how BP would go about the local hire issue on their capital project. MR. LUTTRELL replied, "One of the things that we were very conscious of in the conversation about Northstar and local hire was we did not want to solve a perceived problem of local hire on the part of the oil companies which actually have a very good record of local hire and local employment, on the backs of Northstar. Clearly, they are related issues. Clearly, we understand it's very important to the state of Alaska, the citizens of Alaska and this legislature. If we were to set a target of 90 percent local hire on Northstar, what we would think would happen actually is you'd see people moving across the boundary and some other projects would lower. So it is a problem that is something which we are working very diligently to improve, both ourselves and our contractors on a general basis. I'm sure that's helping you specifically but we recognize the concern of the citizens and the legislature and have committed ourselves to improving our record. That's specifically in the areas of training and in the areas of advertising and making sure everyone has an opportunity to get these jobs. And ultimately, publicly indicating what our record was and how it's improving." Number 1080 CO-CHAIRMAN GREEN remarked, "Well, I think one of the things - I dare say I speak for the committee, but I think I speak in the approach the committee would like to see - is that you have a project and there's some things that could help you and that could help us, but one of the things that really is in the `help us' category is to not only try and get as many Alaskans - people living here now - hired, but I've said this several times and probably will continue to say it as long as they keep bringing me back here, but here's a golden opportunity for the state to get involved in a ramp-up, as it were, for module construction and to me, that is a really key ingredient for the future of this state to have that capability for not only Northstar or heavy oil or the next discovery and I hope there is several of those next discoveries, but also for the Eastern Rim that we might be able to be a staging area for places like Russia and maybe even China. So that really looks good to us so what we're hoping to see from BP would be some commitment that says, `Yes, we will help you kick that fledgling opportunity off' with local people." Number 1169 REPRESENTATIVE BARNES asked if Mr. Luttrell had read the opinion by Mr. Baldwin? MR. LUTTRELL responded, "Yes, but I haven't read it today." REPRESENTATIVE BARNES asked if he was fairly familiar with it? MR. LUTTRELL noted he was reluctant to say he was familiar with it because he didn't have it in front of him. REPRESENTATIVE BARNES stated, "Mr. Chairman, let me first of all say that I don't always agree with Jim Baldwin but sometimes I do and in this instance, I have read this several times and I've read this piece of legislation several times and I do not believe this piece of legislation does in any shape, form or fashion what Jim Baldwin says in this opinion that we must do to show a correlation between changing the net profit sharing from 89 percent to the royalty arrangement - the supplemental royalty arrangement in this legislation. Now let me tell you why. Under his opinion and it's lengthy, what he says is - very clearly over and over and over - that we must show a cause and effect as to how this piece of legislation that is before us relates to changing the terms of a lease. And I submit to you, if you have the legislation before you, you'd please turn it over to the back page and what he says is that as long as we can clearly show that Alaska - the people of Alaska, the state of Alaska - is benefitting from this (indisc.- paper shuffling). Now then, if you were to turn on page 2 on line 9, number 8, it says `BP Alaska, Inc. has committed to hire Alaskan residents and contractors to fabricate modules for the unit in Alaska' and I want to tell you that says absolutely nothing. Nothing. There is nothing binding any where on you. Absolutely nothing binding. And then if you look on line 11, number 9, it says, `the timely development of the unit may result in increased state revenue in future leases.' The word `may' is there and even the most freshmen legislator here knows that `may' means nothing." REPRESENTATIVE BARNES continued, "Then if you look down at number 10, line 13, it says, `the timely development of the unit may result in technological breakthroughs and other cost savings.' Again, we have the word `may' that means absolutely nothing. And I've got real serious problems with this and I have been told, and that's why I asked Mr. Baldwin to present his body here, that officials of BP have said they would accept no changes in this legislation. This legislation is not the agreement that you have with the DNR. This legislation is the piece of legislation that's a contract between this legislature and the people of the state of Alaska. And when we pass it from this body, there had better be something binding in it or we're going to all end up in court under the opinion written by James Baldwin. Now, I'd like to hear your comments." Number 1388 MR. LUTTRELL said, "Representative Barnes, I'm not qualified and I know you have the intention of asking Mr. Baldwin the legal issues and I would request that you do that. BP's commitment is the conversation that we had had with the legislative leadership as well as the Governor about two months ago. Our commitment here was going to be a public commitment to fabricate modules in the state of Alaska and hire Alaskans and that seemed to be, at that time -- the Governor was comfortable with that and the legislative leadership seemed to be comfortable with that -- and that's how it ended up on the agreement. It is our commitment to do this and I'm sure you can bring up any number of contractors who are currently working with us in our alliance and they will tell you that's how we're behaving is though these modules will be built in the state of Alaska. It's how we're designing it to do; it was being designed specifically - my team is out there doing that right now...." Number 1442 REPRESENTATIVE BARNES interjected, "If you've got all these commitments, then you won't mind us nailing it down real tight in this piece of legislation, will you?" MR. LUTTRELL responded, "Our concern about rewriting the actual agreement between BP and the state of Alaska, which is one option that certain parties have wanted to do, was that once you open up that pandora's box, Lord knows what that agreement is going to look like when it finally comes through the legislature. It's just very difficult for us to enter into a conversation which says we can amend it here and amend it there and then ultimately have something that BP would be willing to sign. It's a very difficult thing to negotiate with 60 people." Number 1475 REPRESENTATIVE BARNES stated, "I don't in any way see that you're negotiating with the legislature. I see that you're telling the legislature - you're putting whatever facts you choose to put on the table before us, and based upon the conversations that we're having, we're to approve a piece of legislation. That piece of legislation is not the contracts and it does not necessarily mean that that piece of legislation has to be renegotiated as part of the contracts. What it can say and clearly say is `unless such and such happens, then this is not in effect.' And that doesn't mean that you have to renegotiate but what it might mean is that you had to come up with an amendment with the commissioner of the DNR because we sometimes amend things and you know, we are rarely ever given anything that says `folks, you can't amend this' and the only time I'm aware that there's ever been anything before us that says `folks, you can't amend this' is in the case of royalty oil and once those are negotiated, we have the opportunity to vote up or down on those. And every time that we have had those since 1979, although today I'm a peon, I was in the presiding officer's chair every time those happened, so I fully understand what's at risk here and how it is normally done. This is very different. This is not a contract; it is a piece of legislation - very different." Number 1560 CO-CHAIRMAN GREEN remarked, "Thank you, Representative Barnes, especially for that history and having been peripherally involved back in `79 and subsequently in the `90s, you're right that those were contracts arrived at and approved by the legislature. But in that same document that Mr. Baldwin talks about where in some cases net profits has been considered royalty by both the federal government and the state government and therefore could be construed to be within the purview of the commissioner of natural resources to do the royalty changing as one of his charges, that he goes on to say it would be better if the legislature condoned it with a piece of legislation. Unfortunately, there were very few people here when Jack Chenoweth who is legislative legal advisor to us, gave some testimony that he felt that as long as the legislature would change over a geographic area that would apply to more than one specific location, that was a good idea. However, this is specific to an operator and it was Mr. Chenoweth's concern that that may not pass muster as far as the legislature coming in and modifying that. I don't know whether you've had privy to any of that testimony or not." MR. LUTTRELL stated, "Mr. Chairman, if you could get me a specific question, I'm certain we would be willing to respond." CO-CHAIRMAN GREEN commented, "Well, it was that -- that this project that we're looking at -- since it's specific and not general that we may have trouble with the Constitution on the legislature doing something like this." Number 1667 REPRESENTATIVE BARNES stated, "In the opinion of Baldwin as well as the opinion I have from Chenoweth, it gets to the question of special legislation when general legislation is that which we're supposed to pass. But if you pass special legislation, you've got to show it as a correlation in a bigger scheme of things and they attempted to do that I think in this when they used those words `committed' and `may.' It's just that I don't think they nailed it down. Also, in this agreement, Baldwin is very specific and that's why I need him here, that these things have to be nailed down tight as to what the effect of the legislation will have on the people of the state of Alaska and what we are, under the public purpose section, getting from it. And I think it has to be very, very tight or it will never stand a legal challenge. And when we walk out of here as a legislative body and get beat to death with this, it had better have some benefit to the people of the state of Alaska that's nailed down real tight and that's why I need Mr. Baldwin over here." CO-CHAIRMAN GREEN remarked that unfortunately he was out of town. Number 1717 CO-CHAIRMAN WILLIAMS stated, "I guess, knowing how complicated this agreement was to put together by the DNR and your office, we're not the experts on this. It would be very difficult for me to understand all that you've put before me. But information - and not having this type of information before us and having the time to study these issues - I think maybe what we should be talking about instead of special legislation, is maybe we should be talking about a resolution. I think what we're doing here today is gathering information, talking to people at BP, talking to the Administration and finding out, without really getting into detail, how far off we are. You've got our feelings on the issue of local hire - I think that has been said enough times, I think maybe if we came up with a resolution saying this is what we'd like to see, maybe that what we should be dealing with right now. I'm glad the Governor did bring this before us so that we could at least say that `Hey, I talked to the BP people.' I'm not an expert in oil but I think I've seen enough deals and talked with enough people to understand what is going on here and we're not just trying to push something under the rug or the Administration has done their job in making sure that the state is protected. I think what we're doing here today is reassuring you how important it is that we do have local hire. I understand all the problems and things that you have to go through just to keep within your ranges that you put here before us -- you're putting 444 million at the top and the base at 350 and the 305, I think, at least in that range it's very difficult. These are the ranges that you're looking at in order to make this project a viable project, is that right?" MR. LUTTRELL responded, "Yes, Representative Williams, the information that you're looking at there is at the table of input to the model that we and the DNR have put together and we're comfortable those are good representations of the possible outcomes of cost and (indisc.) reserves." CO-CHAIRMAN WILLIAMS asked how long BP and the DNR had been negotiating these? MR. LUTTRELL replied, "The detailed negotiations started before Christmas and they were in earnest early in the year. But they basically started out where we gave them all information that we were aware of about the field. It was a complete open exchange of information." CO-CHAIRMAN WILLIAMS commented that he had seen logging companies take over a job that to another company looked like it couldn't be done, and because of expertise and management were able to make it work. He added, "Perhaps that's where we are with BP today on the Northstar project." The legislature doesn't have the time to review this and raise technical questions, but he thought what they needed to do was get around the edges and see if it is done in an (indisc.) manner. He said, "We've been working to get the oil field open. I think it's better for the state of Alaska if we do and we try to work in that sense." CO-CHAIRMAN GREEN said he concurred that there was a built in problem with the legislature getting into the details because first of all, there's proprietary information that is actually exchanged between the Department of Revenue and the operators that the legislature won't have privy to. So the legislature couldn't get too detailed except by analogy and he thought that's what BP has tried to do with this and the model this morning in which they put in some almost, but not quite figures that kind of puts the legislature on the outside looking in. He almost agreed with Co- Chairman Williams in that it was perhaps where the legislature should be anyway. CO-CHAIRMAN GREEN asked if there were any other questions for Mr. Luttrell. Number 1985 REPRESENTATIVE DAVIES said, "I have one last question that relates to the sort of category of assurances that BP can make to the state of Alaska or to the citizens of the state of Alaska in connection with this. It's an issue that we've talked about before but I'd just like to have a response on the record. There are a lot of people in the Fairbanks area who asked the question `Why should we make any other deals with the industry until we get some commitment on the gas pipeline issue' and there does seem to be a lot of connection in people's mind on these issues and I wonder if you could comment on that." Number 2024 MR. LUTTRELL responded, "BP and the other operators continue to work diligently to find a market for North Slope gas and to work the cost issues and it's something which they are doing. It's not something which I'm part of; it's in a different part of the BP organization. Beyond that, I don't know what else I can say to you. It is something which we are positively working toward to make work for the state of Alaska and for ourselves." Number 2051 CO-CHAIRMAN GREEN inquired, "Along that same line, are you aware that last week we were visited by - I think it was on Wednesday - we were visited - several offices were - by a representative from the Japan Oil Company or Oil Company of Japan who is housed on the East Coast with another office in Houston. That representative indicated to us that the window of opportunity, as it were, for selling North Slope gas coincided much more closely with the Yukon Pacific presentation than it did with the operator's presentation by as much as eight years. Now I know this is not what you're here to testify on but since the pipeline...." MR. LUTTRELL interjected, "Mr. Chairman, I'm not aware of the visit from anyone." CO-CHAIRMAN GREEN remarked that he had some written information coming and would make that available to the operators. He comment that time is short - if that window is what we're talking about, time is very short. Number 2093 REPRESENTATIVE BARNES commented that she had a letter from the president of China Petroleum indicating they are still very interested in buying our gas and that they're also very interested in joint venturing the pipeline and they want to know what's happening and what we can do to expedite it. Number 2117 CO-CHAIRMAN GREEN said "There has been, at least conceptually, an amendment that may or may not get proposed by this committee - we have made a copy available to you - that covers essentially and in effect what it says is that there would be a strong emphasis to the point of actually saying `this is what we, BP, have done to try and hire locally' while we can't specify local hire because of a federal decision, but then it goes on further to say that the contracting for construction facilities would be done in-state. That is really putting the nail down deep. Do you have anything that you'd like to say on that now or would you rather wait to see -- that may or may not actually even be offered as an amendment, but...." MR. LUTTRELL responded, "Mr. Chairman, there was an amendment put into Senate Resources to amend the actual agreement and we publicly stated at that time that we could not actually accept an amendment to the actual agreement because it was effectively reopening the negotiations. To the best of my knowledge, the amendment that I've seen from your office is an amendment to the actual agreement. It looked to me in reviewing it, that much of what was in that amendment could become actually part of the findings section and actually be quite valuable as part of the findings section and which I would think actually the committee would want to do, but to be part of the actual agreement would require a lot of work." CO-CHAIRMAN GREEN noted, "Well yes and just for the record, that amendment wouldn't do anything as far as reopening the agreement you've got with the DNR; it would only be a commitment in effect - almost a side agreement because it doesn't get into the whether or not this is a good thing as far as changing the royalty schedule or anything like that. It just says that you will make your doggonest effort to hire locally and that you will commit to construction. That's, of course, still subject to the fact that you even have a project here. I know this has not gone through sanction - it hasn't been sanctioned yet so you can't very well commit to something you haven't even gotten approval for." Number 2227 MR. LUTTRELL stated, "Mr. Chairman, let me be real clear about this. On the basis of the agreement that we negotiated with the Department of Natural Resources and now in front of you for approval, I went to London and got specific approval to indicate that sanction would take place. We cannot actually ask the board for sanction until I have a class 2 cost estimate, but BP is convinced that class cost estimate will be of enough quality that we will not make the decision, if you understand what I'm saying." Number 2262 REPRESENTATIVE DAVIES asked, "Mr. Luttrell, so is it still your position that there's no possibility for any opening of the contract at all?" MR. LUTTRELL replied, "Representative Davies, I think you can understand why we have said that all along because of the difficulty of not knowing what the agreement will ultimately reach when it's passed, whenever it happens, from the legislature. So, our sense is that to (indisc.) we were asking the legislature to live with the agreement that we got and decide whether that's the agreement you can agree to. If not, we'll have to go do something else. But if we try to make amendments to that agreement, I'm afraid what's going happen ultimately is that I won't be able to sign it and then we won't have anything either one of us can live with." Number 2288 REPRESENTATIVE OGAN stated, "On that point if I may. Seems to me that if we -- your last statement that you said if we don't have something we can sign, we don't have anything but if we open up the agreement, you're afraid we won't have anything - seems to be one in the same." MR. LUTTRELL responded, "It comes across as one in the same. If we start amending the agreement then I have to go back and decide whether it's something that I can agree to and sign and I'm very much worried that the language will be such that we won't be able to do that." Number 2317 CO-CHAIRMAN GREEN stated, "Well it's possible and this kind of brings in what you've heard from Representative Williams and from all of us, that in order for the legislature to condone this activity, that we might have to actually see contractual obligation. Otherwise, it may be the view of the legislature that we stand back and maybe make a resolution and allow the Administration to continue with the agreements that have been made without perhaps having passed legislation to that effect. I mean, I don't know where we are but those are things that have been kicked around. I can understand your position not wanting to open the negotiations and I hope you can understand our position that unless we can get a commitment that there is something more than the speculated benefit to the state because we'll get more or we'll get almost as much or depending. And with the open end on the sensitivities that we've talked about that if it's bigger than we think or the prices are higher than we think or the development costs are lower than we think, that we're giving up a potential out there that may be almost too much to swallow. So unless we could get a contract that says, `Well ya, but you'll also get guaranteed construction and training and that sort of thing' we may be in a real tenuous position over the next couple weeks." Number 2379 REPRESENTATIVE BARNES asked if that wasn't what Jim Baldwin's opinion said? CO-CHAIRMAN GREEN thought so. REPRESENTATIVE BARNES said, "That's exactly what I think and he works for the Administration who gave us this piece of legislation. Again, I want it made very clear that this is not a contract; this is a piece of legislation. It's very different from the contracts on royalty oil that we've had in the past." CO-CHAIRMAN GREEN asked if there were any other questions. He thanked Mr. Luttrell for his testimony. He said, "We're hopeful that we're not causing you to be cross-threaded with the Senate. I hope we're not sending you mixed signals." Number 2434 CO-CHAIRMAN GREEN announced the committee would continue to hear testimony on CSSB 199(FIN). He asked Janice Adair to come forward and continue her testimony. REPRESENTATIVE BARNES said she would like to ask Ms. Adair a question that pertains to another bill. REPRESENTATIVE BARNES commented, "Ms. Adair, I've had occasion today to read a second memo - fiscal note, that you had put out after a bill left this committee and on the record, is it not a fact that a member of the legislature called you into their office and demanded you write that fiscal note." MS. ADAIR said, "That is incorrect." REPRESENTATIVE BARNES asked, "Did you discuss writing this fiscal note with a member of the legislature before you wrote it?" MS. ADAIR replied, "Yes, but that was after it was brought to the commissioner's attention... TAPE 96-67, SIDE B Number 001 REPRESENTATIVE BARNES stated ..."such as it was. Is that not a fact?" MS. ADAIR replied, "I was asked that question. That's a fact." REPRESENTATIVE BARNES questioned, "And you based on that revised fiscal note after it had been scheduled on the floor?" MS. ADAIR responded, "Not based on that conversation, no. I have talked to this committee chairman, I have talked with the bill sponsor and apologized for that; it was a mistake. I was misadvised by our staff and I feel as bad about it as anybody. I've never been in that position before - didn't really quite know what to do about it." REPRESENTATIVE BARNES commented, "Mr. Chairman, just for the record. I overheard a conversation - I wasn't trying to listen - where a member of this legislature told other legislators about the conversation with Ms. Adair and the fiscal note on this bill and this legislator's feelings on it and how this new fiscal note appeared." MS. ADAIR replied, "I do think it's important -- I got a call last night from our commissioner that the person who had been - Susan Braley - had been advising us on the technical aspects of the bill was trying to get a hold of me about her - she had some renewed concerns. I thought it was technical; did not realize it was fiscal. I found out about them this morning but that had already been relayed to the member of the legislature to whom you refer and I kind of came in in the middle of a conversation. I did not know about it before then, but she did do an analysis of how she came - our staff person - how she came to that decision and I think it's based on what they had to say is legitimate. I think it was just the timing - I agree it looks odd, but I don't believe that she was set up to do that." Number 076 REPRESENTATIVE BARNES continued, "Mr. Chairman, just on a -- and I'm sorry to do this but it's too important as far as I'm concerned. Ms. Adair, how long has it been since we had a water quality bill on the floor in this legislature?" MS. ADAIR replied, "I honestly don't know. I honestly don't know." REPRESENTATIVE BARNES asked, "Would you check?" MS. ADAIR replied, "Sure." REPRESENTATIVE BARNES continued..."and see if we haven't had a water quality bill within the last couple of years that had a fiscal note on it that should have provided some (indisc.) that water quality bill that we had before if you weren't given staff to do that with under the original bill." MS. ADAIR said, "I'd be real happy to look." Number 100 CO-CHAIRMAN GREEN stated, "Thank you. Again, this is coming as a surprise, but you were not threatened by any member of the legislature to either build or to elevate a fiscal note. Okay, good. I hope to heavens that's the truth." MS. ADAIR commented, "The timing, as I said, was very unfortunate. These things happen -- mistakes happen and the timing was just unfortunate." CO-CHAIRMAN GREEN remarked, "Understood. And there was a lot of confusion to say the least." MS. ADAIR stated, "A lot of confusion and I think that because the bill after it was all amended, you know, it moved out right away and the staff didn't have a chance to really read it and contemplate and think about it. And when you're dealing with people who are new to dealing with legislation, the immediate impacts are not seen. It takes them awhile to kind of cogitate about it." CO-CHAIRMAN GREEN commented, "I think that bill had some bad hooks on it anyway because if I recall, that's the bill that we could not add up to eight. We had five and four and got eight." MS. ADAIR remarked, "The bill seems to have some problems. So, what we will be doing is we'll withhold our fiscal note until it gets to the Senate. We'll issue the fiscal note when it gets to the first committee of referral on the Senate side rather than issue it now in the House. But I wanted to let you know, as I did this morning, as soon as I found out that there had been that mistake that -- I know that you adopted amendments with the intention of zeroing out the fiscal note; certainly that's what we all thought was the impact, and we were wrong." CO-CHAIRMAN GREEN remarked, "For the record, I laud your candor and I thank you very much for that." MS. ADAIR said she felt real bad about it. CSSB 199(FIN) - ENVIRONMENTAL & HEALTH/SAFETY AUDITS Number 181 CO-CHAIRMAN GREEN said the committee would resume testimony on CSSB 199(FIN). MS. ADAIR said, "I think where we left off is we were expressing our concern with the scope of the audit reports, how the audits are done and who can conduct them. I was explaining that there is an international organization for standardization that is developing standards for - not required standards, but guidelines for how to do credible audits with the idea that proper management systems, proper management standards can lead to actually more reliability in producing goods and services and in that you can level the playing field is everybody is sort of doing the same thing. This is something that is particularly important in the European Union where they are trying very hard to kind of bring all those countries together. We do try to help companies develop audit standards. We agree that doing a self-assessment is a very good idea. The more you know, the more you can change or adjust to come into compliance. It's usually those companies that try to hide what's going on from themselves that end up with having compliance problems." MS. ADAIR continued, "There are no generally accepted standards for audits but there are, I think, some generally accepted standards for how audits should be done and the relationship between an auditor and the company being audited. That's not to say that the auditor should always be a third party or an outside employee, but if you're asking someone to come in and give a critical review of how your operation runs, it may not be the best situation if that person reports directly to the person who has responsibility for how that operation is running if they are going to really be honest and critical on it. This legislation allows audits to be done basically by anyone; they can be done randomly; there's no vision that they be done in any structured way and we think that's very important. Particularly if there's going to be an immunity attached to what those audit findings are." Number 274 MS. ADAIR explained, "The definition of audit report is extremely broad. I think it takes up nearly a page of the bill and it includes the corrected action plan. The way that the situation would work is a company would notify any department that would be impacted by whatever the scope of the audit would entail of their intent to do an audit and then we would not hear anything from them again unless they found a violation - they would let us know that perhaps. And that is part of the public record. But how they intend to correct that violation is not. It is confidential. The public can't review it; your citizen councils, community councils can't review it to make sure that they agree. It just becomes a secret document and we find that very problematic. The bill does require that the facility cooperate with us in investigating the issues disclosed, but then we can't ask for the audit report and that includes the corrective action plan. So there's not a real good connection there." MS. ADAIR continued, "By the terms of the legislation, the privilege is not limited to just a critical self-analysis of past events. You can - a company would be able to look at what they're doing, try to determine whether or not it could cause a violation prospectively and decide that gee, ya it does, but we're going to continue to do this. All that documentation would be privileged. It would show a state of mind if we wanted to pursue - if something did happen and you wanted to show that they understood, they knew what was going on, the document would be privileged, however. In federal courts that have recognized a critical self-analysis privilege, they limit it to an analysis of past actions. So if you have an event and you're trying to figure out how to prevent that thing from happening again, you might do an audit of your operations to see how you can prevent that violation from occurring. And that's very different than something where you're looking at something prospectively and we find that to be problematic." MS. ADAIR stated, "We also believe that protecting criminal actions through a privilege or immunity is bad public policy. There are laws on our books that make certain actions a crime. The DEC or any agency does not really make that determination. We refer things to the Department of Law and the Department of Law then uses its prosecutorial discretion to bring a case or not. So we have a real problem with immunizing or holding or applying the privilege to anything that deals with potential criminal actions. We think that the privilege is also unnecessary. As I stated earlier, I think, we do provide a limited immunity when people self-report violations to the department. We do have a program through our pollution prevention office that helps people do audits if they don't know how and most small companies don't. If you look in the yellow pages of the phone book, you're not going to find environmental auditor or auditors in the yellow pages. There's just not a lot of people out there that do that. Larger companies - it's something that they have developed internally and they do have a pretty good system, most of them. But this is something that is still very new for the smaller companies. So we think it's very important for the department to be proactive and help these companies develop these programs. We, in fact, had a provision drafted for our air regulations that would have provided a limited immunity for inspections that were done by the certified inspectors in the air program and we removed that for the public notice draft because of this legislation. We wanted to see where this legislation was going to go. But it is something we're talking about internally. We believe that having an immunity in limited sense for people who self-report give us ability to do some guidance on how you do an audit makes good sense and it is something that we're looking at developing kind of a standard for all of our regulatory packages that we might need to adjust based on whatever the program may be, but they would get that through regulation. It wouldn't be a privilege - privilege makes a document secret - no one can get it. You can't get it, the courts can't get it, we can't get it and it just doesn't seem to really correspond with the kind of a good neighbor policy that we try to develop with not only between us and industry, but industry and the people that live around those facilities." MS. ADAIR remarked, "The EPA testified that this legislation could negatively impact our delegation of federal programs and that was also the issue for the Department of Labor's attorney that she was mentioning for the state OSHA program. That's a delegated program much like DEC's air program and solid waste program. EPA has said that -- in order to delegate a program, we have to be able to demonstrate that we can enforce the law and they want to have that so that everybody is treated the same. If the you operate here or if you operate in Idaho, the laws are treated the same and the citizenry is protected the same. So, EPA has taken a very cautious approach to this kind of legislation and has gone on the record as saying that certain elements of it do give the very good probability that delegation of the programs would be impacted. What they did in Idaho - Idaho passed a similar law, although it deals only with environmental rules, and their Title V delegation package was pending before EPA at the time. EPA had noticed their intent to fully delegate the air program and after Idaho passed this law, they amended that notice to give them interim delegation only until Idaho goes back and fixes its law. So I think they've got two years to make the changes and then EPA will start the process to take the program over in Idaho. And we think that's very serious." Number 568 CO-CHAIRMAN WILLIAMS asked if the department was currently contracting out any type of services, such as inspections? MS. ADAIR responded the department doesn't do that at this time. She added, "We had a program - we were looking at doing something like that, I believe it was in waste water and there is a legal problem with the department contracting out for what is considered its discretionary responsibilities and Marie might be able to answer that more fully, but it's something that I don't believe we can legally do." Number 596 CO-CHAIRMAN WILLIAMS inquired, "With the declining revenue and the problems we're having in that area of being cutback, is this an area that you would be maybe contracting this type of auditing services. I know that there's some people that worked for DEC that are now working for the private sector. Is the department willing to look at something so that we can do some of these audits by outside people - private sector people?" Number 629 MS. ADAIR replied, "The department doesn't do audits now. We don't go in and audit companies, I mean, yes, we will do inspections to ensure compliance with our laws and that's something that, as I said, we really can't contract out to do audits. Let me digress for just a second. There are a number of DEC employees - past employees who have gone to work for environmental consultants and I don't mean to identify any of them in this story, but the environmental consulting field is very interesting. There's a number of them that are (indisc.) - they really know what they're doing and then there's -- this is a completely unregulated field, really anybody can hang up their shingle and call themselves an environmental consultant. We've had cases where -- a quality assurance program plan is something that we require if someone's going to do a contaminated site cleanup - you have to tell us about your chain of custody and how you're going to go about testing for the contaminant and monitoring it, so we know that you know what you're doing. We've had consultants come in and take other consultant's quality assurance program plans from our files because they're public records, copy them and simply change the names and then submit them as their own. The way that we find that is because they miss some places and they don't get all the name changes in there right. So, it causes great concern when we know there are consultants out there that would stoop that low. But then you say, `And now we want you to go out and do audits of these companies' and then we're going to provide these companies not only with immunity, but we're going to hold all those documents privileged and no one can ever see them to know what's in them. So we somehow have to get a handle, I think, on how audits are done and making sure that there is an appropriate relationship between the auditor and the auditee. I think this is an avenue worth exploring. You don't get it in this legislation in my opinion." Number 725 CO-CHAIRMAN WILLIAMS said he understood there are auditors and there are auditors, but inasmuch as most companies want assurance that their audit was done correctly, an auditor will have to be credible or won't be in business very long. Number 761 CO-CHAIRMAN GREEN noted he had just been informed that Eileen Maclean had passed away and the committee would take a moment of silence. Number 797 REPRESENTATIVE DAVIES asked Ms. Adair to briefly outline the department's current policy on limited immunity. Also, he inquired if she was aware of any case in which DEC was involved where anyone was prosecuted based on information that came to light as a result of an environmental audit. MS. ADAIR replied, "I'll answer the last question first because it's easiest - no. What our policy is right now and I gave you a little brochure in our packet of our pit stop program and that's probably the most formal that we get about it - but we just generally have a policy that if someone comes in to the department and self-reports a violation that they discovered, and they don't have to necessarily say that we performed this elaborate audit, but they self-report a violation and there's not been any harm to another person, it doesn't appear that they intended to do it -- you know they are telling us about it and they're doing everything they can to correct it or in some cases they have already corrected it - then we don't pursue any penalties of any sort. Now if it's a contamination issue - and this is another thing that gets wrapped up into this and Mr. Chairman, I'm sure you'll be most interested in this - this also would impact how we use the response fund and then our ability to cost recover for the response fund. Because as long as this documentation is kept from the department, if it's contaminated, it still has to be cleaned up. And if we can't get the information to show who the responsible party or parties are, then the state is likely going to end up on the hook or a municipality if they have to take a property back because of failure to pay property taxes. So we would see a potential increase in the use of the response fund to clean up contaminated sites where we couldn't find the responsible party. Now in a case like that right now, if someone comes in and self-reports contamination, they still have to clean it up. That in our mind isn't a penalty; that is simply restoring the environment. There's not a monetary penalty or anything like that that's added on top of that." Number 951 CO-CHAIRMAN GREEN said, "You've indicated that under the current system if somebody does come in, you help them clean up, you make sure it's cleaned up properly but you don't hammer them. If you were to go to regulations to accomplish essentially what this bill would try and do, would there be an immunity involved or would it just be kind of a `well, trust us' type thing?" MS. ADAIR replied, "Mr. Chairman, we did provide you with a copy of a draft amendment to this bill that we had prepared several months ago, I think almost by now, that we think captures what our policy is. So I would see any regulations that we would do to be very similar to that amendment or committee substitute or whatever it is. But we would likely set out the standards for what we would consider a voluntary report of a violation and under what circumstances we would forego any penalties or administrative action. As I said, where there was contamination or some kind of harm done, that would be something separate. You'd still have to take care of that. And any place where the federal law, because of the program delegation, would preclude us from doing that and that is something that's in our amendment that we did. We'd probably have a little bit more flexibility in a regulatory sense to do something like that because regulations are usually more discretionary. But we really wouldn't want to jeopardize program delegation through an immunity provision and I think you can understand why. You don't want to have two sets of rules that people have to follow - the state and the feds - two permits to get and all of that; it doesn't really make sense." Number 1040 CO-CHAIRMAN GREEN inquired, "And then the regs - then you would bypass this concern that I think is a just concern that there wouldn't be any public oversight. There would still be the existing oversight that you have now." MS. ADAIR replied, "Mr. Chairman, that's correct. We would not provide for any kind of privilege, of course. And then the regulation development process would be subject to the Administrative Procedures Act and would be out there for public comment and we would be able to look at the whole range of issues. One of the problems with this bill is that there are no issues to point to to say this is what we're trying to fix. And so as a result, the language of the bill can be -- it's very broad and there's a lot of things we don't really know what it means. We don't really know how it would apply because we don't have any examples to point to. It makes it very difficult; although we know there will be a fiscal note. It makes it very difficult to understand the full ramifications of the legislation." Number 1093 CO-CHAIRMAN GREEN commented, "I think -- we heard this morning from the federal government that while other states have enacted the same or similar legislation, there are some problems with it and that maybe we would find that same problem -- we can't go to other states and say we'll model ours after yours, like we do in some legislation." MS. ADAIR responded, "Mr. Chairman, that's what we've found, too. My review indicates that only Texas has included health and safety laws in the audit bills and they don't have a delegated OSHA program either. So they're not the same as Alaska. All the other states have only environmental audits. I did call around to some of the other EPA regions just to see what their experience was. A lot of them don't have any experience yet because the bills are still too new but we have recently learned that in Colorado and Oregon it really isn't working like they thought it would work." Number 1157 REPRESENTATIVE OGAN said, "Kind of on a different line -- looking at a letter written to Mr. Robert Bundy by Senator Loren Leman -- are you familiar with the letter?" MS. ADAIR replied that she had not seen the letter. REPRESENTATIVE OGAN said, "He brings up some points in here I'd like to ask you to comment on. It says that under EPA's new policy, violations reported must not have -- they have apparently a -- violations that are discovered through self-audit and promptly reported to the agencies - similarities to what this bill does -- violations reported must not have resulted in serious harm to the environment, repeat offenders are excluded, regulated entity must correct the problems, take steps to prevent future reoccurrence. Do you concur that that's part of this bill?" MS. ADAIR replied, "No, I don't. I don't think the bill is drafted very well and I mean I could take you to the section like on the repeat violations -- it's only repeat violation if it's in the same facility. You could have an operator - and we do have operators that do this - a dirt mover is a very good example because they move around. If you go from facility to facility, you can have the same violations a whole bunch of times as long as you're in a different facility, it doesn't count against you. So it hasn't really -- repeat violators really haven't been addressed in this bill." Number 1277 REPRESENTATIVE OGAN remarked, "Well, his assertion is that SB 199 actually is stricter in some respects. Immunity is available only if a business first provides notification to the agency of its intent to conduct an audit, the EPA has no such requirement. In addition, EPA offers a 75 percent reduction in penalties even if the reported violations were not discovered through a self-audit. In contrast, immunity in SB 199 is allowed only for violations that arise from a self-audit. Would you care to comment on that." MS. ADAIR asked if Representative Ogan could repeat the first issue. REPRESENTATIVE OGAN responded, "The first one is that immunity is available only if.... MS. ADAIR interjected, "...only for things that are reported as a result of the audit. I do believe that is in the bill. I think that's correct. And the second part was..." REPRESENTATIVE OGAN said, "Immunity is only allowed for violations that arise from a self-audit." MS. ADAIR replied, "I believe that's correct, also." REPRESENTATIVE OGAN inquired, "So you would still have the ability to check up on these people even though they didn't have a self- audit?" MS. ADAIR stated, "We would still be able to inspect. We would still be able to have involvement with the company. When you take the privilege and the immunity together, that's where the problems start to occur because the privilege takes all of this documentation and keeps it from any kind of review by anyone. So while the violation may be the result of an audit -- may have been discovered as the result of an audit and reported, there's no way for the agency to go in and look at the documentation. And to the extent it is revealed to us, we have to keep it confidential. So then there's no way for the public, who may have a keen interest in whatever the violation was, to check to see if their interests are being taken care of - if we're doing our job." REPRESENTATIVE OGAN asked, "What is the information that agencies routinely use in enforcement proceedings that will be denied to them if a self-audit privilege is enacted in Alaska." MS. ADAIR replied, "We look at the definition of the audit report. It includes photographs, drawings, legal analysis, field notes, records of observations, laboratory analysis, maps, charts, graphs, surveys, other communications associated with other audits, memoranda and the corrective action plan. So if you have a company that's trying to hide something - and there are companies out there that are like that - if they're trying to hide something, they do an audit, they just scoop up all this information, they stamp it confidential as part of their audit document, and it's gone from any kind of public review. So, it's hard to answer that question real directly because the possibilities are so broad what could be privileged under this bill that we would otherwise routinely get. We do -- I know that the Department of Law, on our behalf, when we are trying to figure out contamination issues, we will ask for an audit through the discovery process - or the Department of Law will so that we can try to figure out who the responsible party is if an audit is available - if they've done any." Number 1527 REPRESENTATIVE DAVIES asked if Ms. Adair was familiar with the EPA policy with respect to self-audits? MS. ADAIR responded yes. REPRESENTATIVE DAVIES commented that it's his impression from what he's read that one of the essential elements of the EPA policy is disclosure. He asked Ms. Adair if she knew what that entails? MS. ADAIR replied, "Well, the EPA policy doesn't have the privilege and I think that's a very important distinction. As I understand the EPA policy, they won't routinely ask for an audit when they're doing an inspection, but they may ask for it if they believe that it's important to determine compliance. And the reduction in any penalties that may be offered by the Department of Justice do depend on a voluntary disclosure of the violations that may have been found as a result of the audit -- that the facilities come to EPA and say, `This is what we did, this is what we found, this is what we're going to do about it' and give them the documentation that goes along with that." REPRESENTATIVE DAVIES inquired, "So the disclosure in that context doesn't have to do with the audit itself, but with the violation." MS. ADAIR responded, "It's my understanding that they get the audit also - they get the documentation." REPRESENTATIVE DAVIES added, "Because there's no privilege attached to it." MS. ADAIR replied that was correct. REPRESENTATIVE DAVIES said, "Mr. Chairman, just for the record it would seem to me that that would be an important part -- I mean that's one of the problems that I see with this is that we don't have the information that's shielded whereas in a process where you're encouraging openness and working with people, you'd want to have the information on the table." CO-CHAIRMAN WILLIAMS thanked Ms. Adair for her testimony. Number 1663 NANCY WELLER, Division of Medical Assistance, Department of Health & Social Services, said the department was concerned about SB 199 for many of the same reasons that the DEC had expressed because the definition of the environmental or health and safety law is so broad that it could negatively impact a lot of the functions the department performs in relation to the Medicaid program. She said, "The Division of Medical Assistance, in administering the Medicaid Program, is charged with licensing and certifying health facilities and ensuring that payments to providers are accurate, and linked to services that are actually rendered." MS. WELLER further stated, "The division certifies health care facilities under our contract with the federal health care financing administration. Facilities and health care providers who are certified are then allowed to bill both Medicare and Medicaid for services provided. The surveyors look not only at the physical plant of the buildings but at all of the financial and patient care records to determine if care being provided is done in a safe environment and if everything is correctly documented. The entities are encouraged to do self-audits and reviews but if these records are kept from the state, potentially life-threatening situations could go undetected." Number 1740 MS. WELLER continued, "The division also conducts active programs of surveillance and utilization review and audits of health care providers to assure that payments for health care services are correct. As required under federal law, a provider fraud unit exists in the Department of Law, and you heard from them earlier today. Cases involving providers misconduct and fraud are very time consuming and costly for the states to pursue. The audit privilege under SB 199 would create the perfect avenue for a dishonest person to conceal illegal activities by preventing access to the very records necessary to verify that services were correctly provided and billed, or by proving the provider's mental state in order to prove that fraud or program abuse had occurred. Additionally, a provider could claim an audit privilege which would prevent the division from imposing sanctions relating to program abuse. One of the sanctions we have in our sanction regulations allows us to recoup money that was illegally paid to a provider. We are required under federal law to return any money that was illegally paid within 60 days of discovering the illegal payment. If someone were to take an audit privilege and we could never collect the money, we would have to pay back to the federal government money that we would never be able to collect." MS. WELLER explained, "The Medicaid Rate Advisory Commission within the department also shares similar audit concerns about this bill. The commission is charged with setting rates of payment for health care facilities. The commission auditors rely on access to facility records, self-audits and cost reports in the complex rate setting process. If they have lack of access to any of the numerous documents necessary to determine that rates are in compliance with the federal `Boren Amendment', to assure that payments are related to economically efficient operation, it would add much greater complexity to the rate setting process." MS. WELLER concluded, "The Department of Health & Social Services believes that in order to protect the public's safety, the investment in the Medicaid program and to guarantee the health and safety of all Alaskans who receive care in health facilities, that any activities related to the Medicaid program should be excluded from the definition of environmental and health and safety audit." Number 1873 CO-CHAIRMAN GREEN thanked Ms. Weller for her testimony and asked if there were any questions. Number 1923 MIKE PAULEY, Legislative Administrative Assistant to Senator Loren Leman, advised the committee he wished to comment on some of the testimony he had heard. He said, "In our view, much of the testimony stems from basic misunderstandings of what the bill does and does not do. But what I'd first of all like to address is the issues raised this morning about why is this bill even needed. It was suggested that companies are already doing self-audits so why pass an incentives bill. The reason for approving legislation such as SB 199 is that it will encourage more companies to conduct self- audits and it will help improve the quality of audits that are already being performed. Last year Price Waterhouse conducted a survey of 369 companies nationwide, which represented 14 different manufacturing and service sectors of the economy. It was found that 75 percent of the companies now perform some form of self- auditing, but it's useful to note that two-thirds of those companies stated that they would expand such programs if penalties were eliminated for problems that the companies themselves identified, reported and corrected. In addition, 20 percent of the companies that do not perform audits stated that they feared the audit information could somehow be used against their company. This fear is unfortunately validated by the experiences of companies that are performing audits: 25 percent reported that outside third parties had attempted to obtain their audit data and 15 percent reported that those attempts were successful. An additional 12 percent said that audit reports had been used for enforcement purposes against them. Clearly, many companies question why they should go above and beyond what the law requires by conducting expensive audits, only to discover problems that will lead to penalties and other punitive actions. Too many companies simply choose not to search for problems; it's the attitude that says, `I'd rather not know.' But a compliance problem that goes undetected and unnoticed by management is still a problem. And we ought to measure the success of our environmental laws not by how many court cases have been filed or how many fines have been handed out, but by how many regulated entities are conscientiously complying with the law." MR. PAULEY further stated, "Regulated entities understand the need for self-audit incentive legislation and that's why SB 199 has been endorsed by the Alaska Oil and Gas Association, the Alaska State Chamber of Commerce, the Alaska Miners Association, the Alaska Forest Association and many other groups. These groups and businesses represent the vast majority of private sector employment in Alaska. I might also note that last week the Alaska Municipal League lent their endorsement to this legislation." MR. PAULEY continued, "But a second factor is that in addition to encouraging more companies to perform audits, we think that SB 199 will improve the quality of audits that are already being conducted. This is because the privilege provision in the bill makes businesses more comfortable using frank and unambiguous language in the audit reports. Many of the audit reports that are now being produced employ vague and indirect language out of fear that the report might somehow be compromised. For example, I have brought here today a popular textbook which guides companies in the art of self-auditing. It's called `Environmental Health, and Safety Auditing Handbook' written by Lee Harrison and the book is full of admonitions about how your audit report shouldn't be too specific about what you actually find in case someone actually gets a hold of it. Just as one example, there's a quote here to the effect that says, `The possibility that audit reports could become public or be disclosed to potentially adverse parties should also shape the language auditors use in their reports. It is usually unwise and unnecessary to opine in an audit report that a given activity or condition is illegal or a violation; rather auditors should identify applicable requirements and summarize conditions noted in the field. Thereafter in a separate written or oral communication, legal counsel can assess whether a violation has occurred.' The sponsor of SB 199 believes that the audit documents ought to be frank and get straight to the heart of the problem, as opposed to using vague and ambiguous language. We're not interested in sanitized documents that are written in legalese and which are of no use to anyone. Protecting audit reports through privilege will encourage the use of honest and straightforward language." Number 2279 MR. PAULEY said, "The second area I want to address is the immunity and privilege provisions. It's been suggested that they are overly broad and that they are somehow going to offer a haven for bad actors. On the contrary, we'd argue that there are numerous caveats and conditions set on the immunity and privilege provisions in this bill. We like to think SB 199 is less like a haven and more like a minefield for bad actors. Let me explain. Regarding the privilege provision, the privilege does not apply to any information which is already required to be reported to agencies or otherwise maintained as part of an existing law, regulation or permit. If you're required to report it, if you're required to maintain records on your premises about certain activities under existing law, you cannot invoke privilege for such information or for such documents. The audit privilege can't be invoked for information that a regulatory agency obtains through its own observation or sampling or monitoring. The privilege also doesn't apply to information received from a whistleblower or third party." Number 2363 MR. PAULEY said, "Under the CS that is before the House Resources Committee, there is also a provision that allows an audit report to be reviewed by a judge if there is a valid suspicion that the audit was conducted for a fraudulent purpose, such as an attempt to shield information needed for an ongoing investigation. It it's determined that the audit was conducted for an invalid purpose during the in camera review by a judge, the privilege is lost. The privilege also does not apply to records and information that are already developed or maintained as part of a regular business practice such as inventories of supplies or materials; if it's something that you already do as part of a normal accounting procedure, you can't claim privilege for that. It's not protected by the audit report." MR. PAULEY continued, "On the immunity, this also has strict limitation and these limitations are in some cases even stricter than the EPA's new policy which was promulgated last year. You're only eligible for immunity for violations that arise from a self- audit report. You must have provided notice to the appropriate agency of your intent to conduct an audit or else immunity will be invalid. Disclosure of the.... TAPE 96-68, SIDE A Number 001 MR. PAULEY continued..."substantial on-site injury or substantial off-side harm. No immunity is available for violations that had already been detected by an agency or already subject to an investigation. No immunity is available if it is proven that the regulated entity knowingly committed the violation. This bill only applies to unintentional violations. Furthermore, immunity is not available for any persons that have a history of noncompliance. So in conclusion, there's a lot of conditions placed on the immunity and if even one of them is violated, the immunity is lost. These exceptions constitute a minefield which will kill or maim any bad actor that seeks to use this bill as a shield for improper conduct." MR. PAULEY stated, "Another issue I'd like to raise is litigation. It was suggested this morning that this bill is a lawyer's dream; that there will be no unemployed lawyers in the state of Alaska after this bill is created because of litigation that will spawn. First, I cannot deny the possibility that if this bill is enacted that it might be tested in the courts. Most laws that really matter in people's lives eventually get tested in the court. The Alaska and Federal Constitutions have probably been the subject of more litigation than any individual statute that comes to my mind. Civil rights laws have generated enormous litigation. Nevertheless, I doubt that many of us would question that these laws have served us well. Having said that, it is useful to note that one-third of the states in the Union have adopted self-audit laws. We are not aware that it has resulted in an explosion of litigation in those states. Furthermore, there are existing privileges in Alaska, such as the attorney/client and work product privilege, and the sponsor is not aware that any of these privileges have generated an obscene amount of litigation. With the Chairman's permission, I would like to just share with the committee an existing privilege that is in the Alaska Statutes under Title 18, Chapter 23. This relates to protecting the proceedings and records of physician peer review panels. All 50 states have these laws on the books. The law recognizes that a public interest is served by maintaining confidentiality for the proceedings of a physician peer review panel. The concept here is that if the minutes or other documents from a physician peer review panel were disclosed, few doctors would be honest in their assessment of their own performance or the performance of other doctors. Thus, it's been recognized that a public health interest is served by establishing the privilege for these proceedings." MR. PAULEY explained, "The premise of SB 199 is no different. We argue that the public interest in environmental protection and safe work places is ample justification for extending a narrow, qualified privilege for self-critical analysis in these areas. The detractors of SB 199 argue that the privilege is an untested, radical and dangerous concept. On the contrary, we have privilege laws on the books already. They have worked. They have not been abused. The end result of these new applications would be a cleaner environment and safer work places. That is a goal in which we should all be able to agree. That concludes my remarks on the testimony this morning and just with regard to testimony we've heard in the last hour, I would only say that in response to Ms. Adair's concern that the audits should be limited to retroactive analysis, in the CS that's before the committee, the definition of self-audit report - some language has been added that states that the self-audit can only apply to current or past compliance with laws. So the prospect of having an audit determined to plot a future course of action of noncompliance and figuring out whether it would be profitable to the company to be out of compliance with the laws, that possibility is far-fetched, as we believe it is, has been excluded by the new definition in the bill." Number 349 CO-CHAIRMAN GREEN commented, "You mentioned that if a company has a history of violation, then they can't fall under this, and I'm thinking how would that be interpreted do you think, for a company like a North Slope oil field operator who may have developed a plethora of potential pits, where they use gravel as the berm around it, and they would fill with rain water or snow and then the snow would melt and seep through the gravel and because there is a law that says you can't have leaking pits, they were cited and they were cited many, many times because they were leaking rain water out of these pits that they've never used. Now would that mean that under this law that if that company came in and self-audited for a leaky pit that they couldn't use the immunity that they just told on themselves?" Number 425 MR. PAULEY responded, "Chairman Green, that is a legitimate concern and one that has been wrestled with a lot. The best I can do to answer it is to refer you to page 8 of the CS, if the members have that - Version 9-LS1312\O, which is the House CS - but on page 8, line 8, letter (h), it says `the immunity under this section does not apply if a court or administrative law judge finds that the person claiming the immunity has on or after the effective date of this Act, one repeated an unreasonable number of times or continuously committed violations that are the same as or similar to the violation for which immunity is sought under this section and not attempted to bring the facility operational property into compliance so as to constitute a pattern of disregard of environmental or health and safety laws.' So I think the key word here is the word `and.' Not only is it the repeated violations considered but also you would have had to have a record where you hadn't attempted to correct that. So, the bottom line answer to your question is that I think that they - with the information I have and as you've described it - I think they would be eligible for immunity so long as they had attempted to bring themselves into compliance. There were a large number of violations, but unless they had just ignored that and not taken any efforts to correct it, this would not be a problem." CO-CHAIRMAN GREEN remarked, "And that was the case - they didn't because they weren't leaking anything but snow melt and rain water. So it wasn't anything that created a problem; they weren't impounding anything that nature didn't impound. However, they were in violation because the law said you will not have pits that leak, even though you're not using them." MR. PAULEY interjected, "Regardless of what they're leaking." CO-CHAIRMAN GREEN said that was right and they were cited. MR. PAULEY responded, "I don't know if I have the answer to that other than that maybe the regulation -- I mean if there's poorly written existing laws and environmental regulations, this bill is not going to solve that problem. It addresses how they're implemented and how they're enforced but in that case, it sounds like it's just an ill-thought out regulation." CO-CHAIRMAN GREEN remarked, "And I think the regulation was written with the context that you're putting something in there and it shouldn't leak out. And everybody agreed to that; however, there were a plethora of pits developed that never were used and nobody thought about that. And it was the use of the law to punish that causes some people concern of `Hey, wait a minute why do I blow the whistle if I've seen in the past that this bites me' and so that was just an issue I just wondered about. The other thing, Ms. Adair indicated that while several states - a third I think you used - about a third of the states have employed something like this, her comment went on to say that `yes, but it was perhaps ill- advised and that now they're seeing that maybe those weren't done as well, they were too hasty and may not be all that it was cracked up to be." Number 676 MR. PAULEY responded, "Mr. Chairman, during our Resources Committee hearings on SB 199, we heard testimony from representatives from Oklahoma and also from Texas which both have self-audit laws on the books. The testimony we heard was that those laws have been very positive, that they had inspired companies to do audits who hadn't been previously doing them before. We heard testimony from John Riley who is the litigation director for the Texas Natural Resources Conservation Commission - sort of their counterpart to our DEC, and he had very positive reviews about how the law has been implemented there and the number of companies and municipalities, I might add, who are taking advantage of its provision. The testimony we heard has been positive. I mean, we haven't talked to every single one of the 17 states that have this because of limited time and staff resources, but with the ones we talked to, we've heard positive feedback. On the other hand, I have not heard any convincing testimony from other states about that their laws were lemons or that they haven't been working as intended." Number 751 MR. PAULEY continued, "If I could just throw in one thing sort of on a different subject, but this is something I forgot to bring up. There was some testimony given a little while ago on the issue of - - that this bill could hypothetically be used to protect information that is needed to determine proper Medicaid payments to hospitals and detect fraud and things of this nature and this has come up at repeated hearings before and we're unclear as to what is motivating the testimony. The definition of environmental health and safety law contained in the law very plainly states that where health and safety is concerned, we're talking about occupational health and safety - occupational health and safety only. So as applied to a hospital, the only application this bill has would be to occupational safety issues with regard to the employees of the hospital. It has nothing to do with patient care standards or anything of the sort or whether excessive treatments are being used or whether the Medicaid payments are fraudulent. It's just not even touched by this bill and we think there's just a fundamental misunderstanding - that they don't understand that health and safety is limited to occupational. It doesn't have anything to do with patient care status. I might add though that the existing privilege law in the Alaska Statutes very much has an impact on the treatment of patients. I'm not aware that has caused (indisc.) abuses and it's been on the books since the early `70s." CO-CHAIRMAN GREEN asked if there were any questions and thanked Mr. Pauley for his testimony. Number 871 MARIE SANSONE, Assistant Attorney General, Natural Resources Section, Department of Law, said she has been the lead attorney for the Department of Law on this bill for the Civil Division. The Criminal Division has followed it separately and probably would want to express their concerns. She said, "We do have many, many concerns with this bill and our concerns primarily arise out of the breadth and scope of the bill. First of all, the laws that are affected -- if you look in the definitions in Section 490 (a) or (3), the bill defines environmental or health and safety law. It applies to all federal and state environmental laws and the municipal ordinances passed in conjunction with or to implement those laws. This first of all is broader than the EPA policy. The EPA policy only applies to the laws that EPA enforces. So when you say all environmental laws, DEC certainly implements the majority of the state's environmental laws but so do the other agencies and departments. The Alaska Oil and Gas Conservation Commission, for example, regulates a lot of environmental and health and safety aspects with the injection wells. The Department of Natural Resources - their forest practices regulations would certainly be considered an environmental regulation; they regulate water quality." Number 985 MS. SANSONE further stated, "Then if we look at this issue about the occupational safety and health laws, they are all the federal and state occupational health and safety laws and the municipal ordinances adopted to implement and in conjunction with those. So they are not just OSHA. They're a broad array of health and safety laws that come into play in an occupational setting. We feel that if the sponsor truly intends this to really be just OSHA, it would be a simple matter to amend the bill to say that. But without that limitation, we cannot interpret the bill broadly and in fact, in Section 490(b), the bill tells us we have to interpret this term `environmental or health and safety' laws broadly. So there's a huge sweep of laws throughout all the Titles of the Alaska Statutes. Then in the definitions also, they define the term `audit' and that's in Section 490(a)(2). An audit can be conducted by anybody affiliated with a company; it can be an employee of the company; it can be a contractor. They don't have to have any authority to conduct the audit. They don't have any money - authorities spend money to conduct the audit - they may not have the authority to spend the money to make the corrections that the audit recommends. So anybody anytime can initiate an audit. Well that's a problem - that's a very serious problem and one that we feel sets up this bill for fraud and abuse." MS. SANSONE continued, "The audit report is defined in 490(a)(1). The audit report - it sounds like that term ought to just be the report and the analysis, but it's not. It's everything that goes into making that report. It's all the data, all the evidence, and Ms. Adair read them - photographs, analyses and so on - and there's even a catchall in case they missed anything - all documents and communications associated with the audit. Well that's everything. It would pick up the corrective action plan unless under the immunity you come in and get to see that, but for the privilege you don't. That's just way too broad." Number 1114 MS. SANSONE stated, "The bill creates - it really has two parts - it has a privilege and that's found in Section 450 and 455 and also in Section 2 of the bill, there's an amendment to Title 12, the Criminal Code, so they're putting it into the criminal laws, as well. Then there's immunities in Section 475. Now the important point to remember about these is that they're really treated very differently and for the limitations, we've just heard that the sponsor believes there's a lot of minefields and I guess we would disagree with that. We think there are limitations but they're confusing and ambiguous, but they're there for the immunities from penalties. For the privilege, there really are no limitations. The privilege is triggered without any advance notice of the audit. For the immunity you have to give advance notice of the audit; not for the privilege. You just start your audit. For the immunity, you have to undertake corrective action which is appropriate. If you're going to be forgiven penalties, you need to fix your problem. Not true for the privilege. For the privilege, you do not have to correct your violation. So we have a bill that's set up so that for minor violations, for the most part, you could make a limited disclosure and get immunity. If you had a really serious problem or one that you really felt you needed to hide, well you just use the privilege and you don't have to worry about meeting any requirements; you just assert it." MS. SANSONE further stated, "Now in this new CS, they've inserted a provision that we can have an in-camera review to find out if there's fraud and so forth. That provision is really an impossibility. We cannot prove fraud; we cannot prove those conditions unless we have the evidence. The evidence you need to prove fraud is the evidence that would be concealed by the privilege. So that provision really does not help us out - I mean, it's nice to put it there but in practice, we won't be able to do that." Number 1285 MS. SANSONE explained, "Now, because the privilege is so broad that's of concern in itself, but in the very first section of the bill - in the first paragraph it tells us it applies to every type of case; every type of civil case. So, we're not just talking about enforcement cases. We're talking about cases where people are injured. We're talking about construction claims. We're talking about insurance cases. We're talking about cases to recover money for contaminated sites. Any type of civil case you can imagine is impacted by this bill. Criminal proceedings are all impacted and administrative proceedings are, as well." Number 1350 MS. SANSONE provided background on what a privilege is. She said, "A privilege is something in the law of evidence and procedure that really is very special. A privilege has a much broader meaning than just confidential. Confidential information is not necessarily privileged so the two terms do not mean the same. In the law, the concepts relating to privilege are very old. They have been defined and interpreted by courts over a long time - even hundreds of years - some of the concepts. Privileges can be created by the courts and they can also be created by the legislature. There are two ways that information can be privileged. First of all, we talk about information that's privileged from disclosure. If a person is entitled to claim a privilege, that means that that person cannot be compelled to disclose the information to any other person. And it also means that the person claiming the privilege can prevent any other person from disclosing the information to another person. So privileged from disclosure means you can't access the information and you can't find out about it. The other way information is privileged, is privileged from use as evidence. Evidence is privileged; it cannot be used as evidence in court. So even though you have that information, if somehow it was disclosed to you, even if everybody in the courtroom has that information, you cannot use that as evidence. The judge doesn't get to hear it. The jury doesn't get to hear it. If it's a hearing in front of a legislature, the legislature doesn't get to hear it and can't use it. Now this is really an oddity in evidence law because most of the laws of evidence are designed to bring out the truth - and you hear the trial lawyers and prosecutors say that litigation is a truth seeking process. When people cannot resolve their disputes through settlement, they have to go to court and part of that is to find out what really happened. And when the witnesses get on the stand, you probably remember, they swear to tell the truth, the whole truth and nothing but the truth. Now privilege is different from that because a privilege allows you to conceal the truth, not bring it out. So the privilege keeps information concealed. Privileges protect important information; they're not designed to protect trivial unimportant information. MS. SANSONE continued, "So when lawyers talk about the privilege, they'll say the information is probative - it would have helped to prove a claim or a defense. They might say that the information that is being privileged was prejudicial; it would have made someone's claim weaker or it would have made someone's defense weaker but it would have made a difference. You have to ask if the courts are supposed to be figuring out the truth, why have we created this privilege to keep away the evidence that's important that would have helped the judge or jury decide the case. The reason for that is that it furthers - there has to be some goal that we're trying to further and that's usually that you're trying to strengthen a relationship to improve communications in a relationship. So you have a husband and wife privilege to further the marriage; you have a lawyer/client privilege so that clients can come in and be very candid in their disclosure and get good advice; you have a doctor/patient privilege so that you don't have to be afraid what you tell your doctor is going to be found out by everyone. These privileges though are very narrow because you're keeping evidence away from people that need it to make decisions. It usually will protect only the communication and not the underlying evidence. All these privileges have clear cut exceptions like in a malpractice case, a client gives up their attorney/client (indisc.-coughing), doctor/patient privilege. Many of the privileges are called qualified, meaning they can be overcome if you show hardship or that it's impossible to get your evidence any other way such as when a witness dies, you can't interview that person. And finally, most privileges are waived by disclosure. The party that wants to keep the information privileged has the responsibility and obligation to keep it confidential." MS. SANSONE remarked, "I wanted to go over these characteristics and Mr. Bundy talked about some of them because the privilege in SB 199 has absolutely none of those characteristics. The privilege in SB 199 is broad; it's not narrow, it has no exceptions, it's not qualified if it's impossible or an undue burden to get the information any other way, and it's not waived by disclosure. As lawyers and people that enforce the law, that causes us concern because all the other privileges have these characteristics. They've evolved that way over hundreds of years and they work. And that's why they're the way they are. So when we have a new privilege developed that doesn't match any of the characteristics of regular privileges, that really troubles us. It troubles us because not only are we looking at enforcement, and maybe for enforcement some narrow exceptions might be appropriate, but we're going to apply this privilege to everybody whether they're private parties - it could be a purely private case where two people can't figure out who has contaminated whose property. It could be public litigation where the state has been sued -- and I have a case right now where we can't figure out who's responsible for how much contamination on the property and frankly, the state's going to end up paying for most of it. All types of cases. So that troubles us." Number 1598 MS. SANSONE stated, "Now the last point I want to say about privileges is that there's already two that can be used to protect environmental audits. The trade secret privilege protects information - confidential, proprietary business information, so that would be a key type of information that a business legitimately would be concerned about protecting and they can protect it. They can protect it under the evidence rules and under many, many statutes that the legislature has passed in particular areas to protect that kind of information. We also have the attorney/client privilege and I'd be the last person to disagree with Mr. Pauley that that can be abused in an audit because it should not be used to make the audits confusing or ambiguous. That's not appropriate. But where an audit is raising questions about criminal liability or serious tax problems or something of that nature, it's very appropriate to bring in the lawyer and try to figure out how to deal with it and they have that privilege they can use. Now there's a couple other ways to protect information because there's an implication here that people don't have any tools to protect information. That's not true. There are exclusionary rules. These are rules of evidence or procedure where the information is not privileged or secret among the parties, but it's kept out of evidence - kept out of the courtroom. And the key one that gets used in connection with audits is the exclusionary rule for subsequent remedial measures. If there's an accident - someone falls down a broken staircase and I repair that staircase, the fact that I repaired it cannot be used as evidence that it was broken. So that's one type of exclusionary rule that protects evidence of situations where people have found out about a problem and fixed it. Other types of evidence get excluded through the rules of criminal procedures such as motions to suppress evidence when there's been an improper search or seizure or an illegal confession. So there are techniques to exclude evidence when there's been an abuse." Number 1706 CO-CHAIRMAN GREEN interrupted Ms. Sansone to inform her that the committee was running out of time and asked her to provide a copy of her testimony. He asked her to summarize the other issues that were of concern. Number 1751 MS. SANSONE stated, "I did want to cover that we can protect information under court rules if it's annoying, embarrassing, oppressive, if there's an undue burden or expense. We feel there is simply no need for a privilege when you have privileges, exclusionary rules and protective orders available. Protective orders can be tailored to unique situations so if someone did have information that was highly sensitive, they can go to court and they can ask for whatever type of order they feel is appropriate - whatever they come up with, they can ask for if they can justify they can protect it. The audit privilege, we feel that it originates with the type of privilege called a self-evaluative privilege developed by the courts but it has gone way beyond that. It does not meet any of those criteria that the courts have set up for that type of privilege. That privilege is recognized in environmental cases and in the Ninth Circuit. It's something we had discussed in Senate Finance as a possible alternative. The audit privilege sort of grows out of there but it's really an aberration. In the medical peer review privilege that Mike Pauley gave you a copy, is an example of that and if we looked at that in comparison to the audit bill, we'd see it's much more narrow, many protections and limitations - a much more acceptable way to deal with information without sweeping it all up. This bill - the privilege is so broad, it operates as a vacuum cleaner literally to sweep up all the evidence of crimes and violations. We are concerned with people that really are criminals; that have intentionally and deliberately set out to violate the law and to hide evidence. We're almost talking two different languages from the sponsor. The sponsor talks about moms and pops, we're talking about midnight dumpers, fly-by-night operators, people that engage in fraud and deliberate efforts to conceal and hide information and that submit false reports to the state. That's why the fact that they're required to submit reports is not sufficient, if they're submitting false reports. And how do you know they're false reports? Well, in the course of an investigation, you would access the types of documents, information and evidence that are concealed by this audit privilege. So that's of great concern to us." Number 1866 MS. SANSONE concluded, "We don't feel that the bill truly is working in other states. The Colorado Deputy AG has stated there's been no significant increase in voluntary disclosure or compliance, which is important because Colorado was one of the first states to put this law on the books. It's the only state where the AG and the enforcement agencies have really supported an audit privilege. All enforcement attorneys in offices have vehemently opposed this privilege as we heard today from the United States attorney. Colorado which was a very friendly environment is now reporting no significant increase in disclosure or compliance. The bill is not working there. The Tennessee attorney general thinks it may be unconstitutional and it'll burden the courts, make the courts do work that enforcement agencies are to do. So the other states are reporting problems. They're having problems with their federally delegated programs but the really adverse effects won't come to light for awhile because the adverse effects are going to stem from the bad actors who are going to abuse the bill, hide the evidence and we're not going to know - we're not going to know until people show up and they want to know why am I injured - why is my property not worth any money - why do I have this funny rash - why can't I breathe, and they're not going to be able to find out. And that's when we're going to know that this bill does not work. The bill is just like a trojan horse. It looks nice, it sounds good, it sounds like it's going to help. You'll find the supporters all say we like the concept of the bill - the concept is very attractive but what's inside is not very good and it's not going to work and it's going to cause us a lot of trouble." Number 1939 CO-CHAIRMAN GREEN asked if Ms. Sansone had testified on the Senate side? MS. SANSONE replied, "yes." CO-CHAIRMAN GREEN inquired what the response had been to her testimony. Number 1962 MS. SANSONE responded, "We had quite a bit of testimony, Mr. Chairman, in the Senate Resources Committee. Senator Leman removed a number of troubling provisions, but the problem -- and then we had some more amendments in Senate Finance to deal with the specific problem. The problem with amending the bill is that the concepts here really are contrary to the way the law works so to try to amend the bill - it's like trying to drive the wrong way on a highway. If the evidence law is set up to be a certain way, to be narrow and have disclosure and so on, and you're trying to dodge all these cars, eventually you crash. If we went through the details, I could be here until the end of session going through every sentence, telling you `Well, this sounds like it's going to work, but here's what's really...' -- it has these funny twists and turns. It's a long bill and it has a lot of those and they're problems. CO-CHAIRMAN GREEN thanked Ms. Sansone for her testimony. He announced that because of the tremendous difference of attitude on the bill, he would place it in a subcommittee of Representatives Austerman, Nicholia and chaired by Representative Kott. ADJOURNMENT There being no further business to come before the House Resources Committee, CO-CHAIRMAN GREEN adjourned the meeting at 6:27 p.m.