Legislature(1995 - 1996)
04/24/1996 08:15 AM House RES
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= 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.
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