Legislature(2003 - 2004)
02/26/2004 09:03 AM Senate FIN
| Audio | Topic |
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
MINUTES
SENATE FINANCE COMMITTEE
February 26, 2004
9:03 AM
TAPES
SFC-04 # 21, Side A
SFC 04 # 21, Side B
SFC 04 # 22, Side A
CALL TO ORDER
Co-Chair Gary Wilken convened the meeting at approximately 9:03 AM.
PRESENT
Senator Lyda Green, Co-Chair
Senator Gary Wilken, Co-Chair
Senator Con Bunde, Vice Chair
Senator Ben Stevens
Senator Donny Olson
Senator Lyman Hoffman
Also Attending: TOM IRWIN, Commissioner, Department of Natural
Resources; KEVIN BANKS, Analyst, Commercial Section, Division of
Oil & Gas, Department of Natural Resources; ALLEN WRIGHT Vice
President, Public Affairs, Flint Hills Resources; ALLEN LASATER,
Vice President, Environmental Health & Safety, Flint Hills
Resources and the future President of Flint Hills Resources,
Alaska; JEFF COOK, Representative, Williams' Alaska Petroleum Inc;
PHILIP REEVES, Assistant Attorney General, Civil Division (Juneau),
Department of Law; DAVE STANCLIFF, Staff, Administrative Regulation
Review Committee, Office of Senate President Gene Therriault; ANDY
HEMENWAY, Hearing Officer, Department of Administration
Attending via Teleconference: There were no teleconference
participants
SUMMARY INFORMATION
SB 348-ROYALTY OIL CONTRACT SALE APPROVAL
A Committee heard from the Department of Natural Resources, the
Department of Law, and the industry. A committee substitute was
adopted and the bill reported from Committee.
SB 203-OFFICE OF ADMINISTRATIVE HEARINGS
The Committee heard from the sponsor, the Department of
Administration, and adopted a committee substitute. The bill was
held in Committee.
SB 273-ASMI BOARD/ SEAFOOD TAXES & ASSESSMENTS
Scheduled but not heard.
SENATE BILL NO. 348
"An Act approving the sale of royalty oil by the State of
Alaska to Flint Hills Resources Alaska, LLC, and Flint Hills
Resources, LLC; and providing for an effective date."
This was the first hearing for this bill in the Senate Finance
Committee.
Co-Chair Wilken informed that this legislation would provide
legislative approval of a royalty oil contract between the State
and Flint Hills Resources, Alaska, LLC, regarding the sale of the
State's North Slope royalty oil.
Co-Chair Wilken explained that a new version of the bill is before
the Committee solely because the original version of the bill was
drafted before the February 25, 2004 signing of the agreement.
Co-Chair Green moved to adopt the Version 23-LS1772\D committee
substitute as the working document.
Senator Bunde objected in order to clarify that the reason for the
committee substitute was to update information specific to the
signing of the agreement.
Co-Chair Wilken concurred.
Senator Bunde withdrew his objection.
There being no further objection, the committee substitute was
ADOPTED.
TOM IRWIN, Commissioner, Department of Natural Resources, informed
the Committee that the Department distributed several handouts
including one titled "Best Interest Finding and Determination For
the Sale of Alaska North Slope Royalty Oil To Flint Hills Resources
Alaska, LLC" dated February 12, 2004 [copy on file], a copy of the
contract between the State and Flint Hills Resources (FHR) [copy on
file], a copy of "The Alaska Royalty Oil and Gas Development
Advisory Board Resolution 04-1" dated February 17, 2004 [copy on
file] from the State's Royalty Board, and a copy of the
Department's Division of Oil and Gas forthcoming presentation
titled "Sale of North Slope Royalty In-Kind Oil to Flint Hills
Resources" [copy on file}.
Commissioner Irwin read a section from the Introduction on page one
of the Best Interest Findings handout as follows.
From an in-depth consideration of the potential economic,
environmental, and social impacts, and the various
requirements for sale of the State's royalty oil, with a focus
on the criteria specified under the terms of AS 38.05.183(a)
and (e) and AS 38.06.070(a), the commissioner finds that a
negotiated long-term contract for the sale of the State's
royalty oil to FHR is in the State's best interest.
Commissioner Irwin explained that AS 38.05.183 obligates the
Commissioner of the Department of Natural Resources to review the
proposal and AS 38.06.070 obligates the Royalty Board to review it.
He declared that "this is an incredibly good contract for the
State" as well as a good contract for FHR. It moves that State
forward. He acknowledged the efforts of the State's negotiating
team which included Kevin Banks, Senior Analyst, Department of
Natural Resources; Philip Reeves, Assistant Attorney General, Civil
Division (Juneau), Department of Law; Mark Myers, Director,
Division of Oil & Gas, Department of Natural Resources; and Janet
Wilson Baxter, Legislative Liaison, Office of the Commissioner,
Department of Natural Resources.
Senator Olson recalled that news releases pertaining to this
agreement as specifying that FHR agreed that the price of its
petroleum products in Fairbanks would not exceed those of
Anchorage. He supported the concept and wondered if this benefit
could be extended throughout the State.
Commissioner Irwin stated that the FHR and the State's negotiating
teams worked hard to develop this agreement. The State considers
the arrangement of aligning the wholesale prices in Fairbanks with
those in Anchorage "as a major step forward." This would not impact
retail prices as other issues such as volume and transportation
come into consideration. While this agreement does not apply to
other areas of the Alaska, some benefit is anticipated as other
locations' wholesale purchasing originates in either Fairbanks or
Anchorage.
Senator Bunde asked whether it would "be fair to assume that the
cost of producing would be the same" in Fairbanks or Anchorage "so
that the wholesale prices would reflect actual costs.
Commissioner Irwin responded that two issues are involved in this
discussion: one being the dynamics of open market competitiveness
of products that are brought in California and other places from
outside of the State. The second dynamic is that there is an active
refinery in Fairbanks. In theory, due to the open market
competitiveness, prices should be less expensive in Anchorage as
"that is where the cheapest route is." On the other hand, the
Fairbanks refinery is using Alaska gas. Utilizing that logic,
Fairbanks should be cheaper as there are no shipping costs
involved. The negotiating team considered addressing the wholesale
price to be the fairest approach for Alaskans.
Senator Bunde applauded the fairness efforts. An alternative
suggestion would be to allow higher wholesale prices in Anchorage
to support the wholesale price in Fairbanks.
Commissioner Irwin stated that the intent was not to raise the
price in one location to make it fairer for the other as
competitiveness with the outside world must continue. In addition,
this Company must be competitive "across the board."
Senator Bunde acknowledged. He asked that further information
regarding efforts to develop a fuel system in Fairbanks that would
allow it to be more competitive with the Anchorage system be
provided.
Commissioner Irwin expressed that these issues would be addressed
in the forthcoming presentation.
KEVIN BANKS, Analyst, Commercial Section, Division of Oil & Gas,
Department of Natural Resources, stated that his presentation,
portrayed in the aforementioned handout titled "Sale of North Slope
Royalty in-Kind Oil to Flint Hills Resources," would provide the
background of the State's Royalty In-Kind (RIK) oil program and the
highlights of the agreement with FHR, including the RIK arrangement
with them.
Mr. Banks recounted that two years prior, Williams Alaska Petroleum
Inc. decided to sell its North Pole refinery to FHR. To make the
sale attractive, securing a long-term oil contract with the State
was a condition of that purchase. This legislation would provide
FHR with ten-year long-term contract with the State that would
allow the refinery purchase to transpire. He noted that Williams'
gas stations and convenience stores would be sold to a separate
entity. FHR would acquire the refinery and some of "the
terminalling facilities in Anchorage and Fairbanks." Williams'
interest in the Trans-Alaska Pipeline System (TAPS) property at the
Anchorage International Airport would not be included.
Mr. Banks explained that the State owns approximately one-eight of
the production of oil on the North Slope. This oil could either be
received as Royalty in Kind (RIK) or Royalty in Value (RIV). The
RIV process would allow the lessee to sell the product and pay the
State its share of the revenue. In the RIK process, the State would
take possession of the oil and sell it to its own customers. These
arrangements have been in place in excess of 25-years. He reviewed
some previous RIK and RIV contract terms.
Mr. Banks shared that the decision to contract with Flint Hills was
made after a thorough overview of the marketplace. During the
negotiations with FHR, the State's negotiating team was provided
expert assistance by a private consultant firm. Negotiations began
in July 2003.
Senator Bunde asked how the negotiations addressed pertinent issues
such as how volume purchasing would affect jet fuel price parity.
Mr. Banks stated that while high volume customers might enjoy a
lower price than smaller operators, the contract expressly states
that similar customers would pay the same price whether they are in
Anchorage or Fairbanks.
Senator Bunde asked whether they would pay the same price
regardless of the cost to FHR.
Mr. Banks responded that in addition to price, demand is also a
consideration. While high volume customers might pay a lower cost
than small volume purchasers, the fairness lies in the fact that
the same price would be charged to that customer in either
location.
Senator Bunde commented that this sounds like "artificial price
supports," a practice that did not bode well in the farming
industry.
Mr. Banks noted that, as specified in its Resolution, the Royalty
Board has reviewed and approved this agreement. The Department is
requesting that the Legislature also approve the contract.
Mr. Banks reviewed some of the contract components: sale of oil
would range between 56,000 and 77,000 barrels per day which would
allow for seasonal demands; once every twelve months, FHR could
request a change in the volume with the minimal quantity being
specified at 24,000 barrels per day for the first five years of the
contract and the maximum being 77,000 barrels a day or 85-percent
of the State's royalty production on the North Slope. In the second
five-year portion of the contract, while FHR would be required to
continue to meet the special commitment components of the bill,
which would be addressed later in the presentation, FHR could only
reduce the quantity to less than 24,000 barrels per day by
receiving zero barrels per day for twelve months. After those
twelve months, they could request to increase their barrel
consumption; however, the Commissioner must approve the quantity,
as the Department might have agreed to provide other customers its
oil allotment. Therefore, FHR "would be taking a chance" were it to
reduce its barrel quantity, as it might not be able to increase it.
The State has attempted to establish an agreement that would limit
FHR's ability to arbitrage the State's oil against the marketplace
to the State's or other producers' disadvantage. The goal was not
to establish "some kind of price cap."
Mr. Banks referred the Committee to the "Price" chart in the
handout.
*Price
· State will get a premium of $0.30 per barrel above the
price of Royalty in-Value ("RIV")
· State will receive additional annual revenue ranging from
$2.6 million and $8.4 million per year, depending on
volumes.
Co-Chair Wilken asked the volume that Williams has typically
acquired from the pipeline.
Mr. Banks specified that while approximately 220,000 barrels might
flow through the refinery each day, Williams' actually purchases
50,000 or 55,000 barrels per day from the State and an additional
20,000 barrels from other producers. The balance is re-injected
into the pipeline.
Co-Chair Wilken asked how recently the refinery purchased 24,000
barrels per day.
Mr. Banks responded that while it might have been within the last
three or four years, it was only on a month-by-month basis.
Mr. Banks noted that, as depicted in the "Example Calculation of
FHR RIK Price" chart in the handout, the formula utilized in this
agreement is modeled after those utilized by the producers and the
in-State refineries when Alaska oil is sold at Pump Station No. 1.
Price
Example Calculation of FHR RIK Price
ANS Spot Price
- $1.55
- Interstate TAPS Tariff
+
- PSVR Ref. Stream-IPA/Lisb. Stream
- Line Loss
- FHR Price
- Royalty Field Cost Payment to Lessees
= RIK Value
Mr. Banks continued that the negative $1.55 is the component that
represents the deduction applicable to the cost of marine
transportation of Alaskan oil to the West Coast. In this number,
the State is also "capturing the market value of our oil." The
industry utilizes a factor of approximately $1.85 and the State's
utilization of the $1.55 price would result in a higher price in
RIK.
Mr. Banks noted that, "looking back in time demonstrates that the
proposed RIK contract price would have been favorable to the
State." This is depicted on the chart on page four of the handout.
He noted that the destination price agreed upon in royalty prices
has been lower than anticipated. This benefits the State. "The real
difference in the premium that we expect to receive under this
contract is developed in the difference between that $1.55
deduction and the transportation deduction that the producers
take."
Mr. Banks stated that commitments that are unique in this agreement
include the following.
Special Commitments/State Benefits
· Equipment Installation for Clean Fuels Processing
· Anchorage Tank Removal and Tank Farm Evaluation
· Shipment by Rail
· Fairbanks International Railroad
· Wholesale Gasoline Rack Price Parity
Mr. Banks stated that as specified in the agreement, FHR would be
investing up to one million dollars in equipment to support clean
fuels processing in order to meet Environmental Protection Agency
(EPA) requirements by the end of 2006. In addition, FHR has agreed
to work with the Government Hill Community Council in Anchorage to
expedite tank removal in one area while constructing a new tank
farm in another location. FHR would also address environmental
issues at the former site. FHR would also transport fuel and
gasoline between Anchorage and Fairbanks via the Alaska Railroad.
Senator Bunde asked why the commitment to ship via the Alaska
Railroad was pursued rather than shipping it "as economically as
possible."
Mr. Banks responded that the Railroad was concerned that FHR might
construct a pipeline as an alternative mode of transportation.
However, rail shipment is the most economic and consistent manner
with which to ship product from Fairbanks to Anchorage. FHR would
have not have agreed to this component were that not the case.
Co-Chair Wilken stated that further discussion in this regard would
occur during FHR's testimony.
Senator Bunde opined that were the Railroad to increase business,
perhaps it could pay a dividend to the State.
Mr. Banks noted that FHR has also agreed to work with the State to
evaluate improvements to the fuel supply system at the Fairbanks
International Airport terminal and its hydrant system. In addition,
they have agreed to promote Fairbanks among air cargo carriers.
Mr. Banks stated that Fairbanks is ideally geographically suited to
ship cargo from Asia to Europe whereas Anchorage is more ideally
suited to handle cargo shipments from Asia to the Lower 48. While
there is competition between the two airports, some shipping routes
are more suitable to one than the other. Therefore, total cargo
movement for the whole State would be the goal, with shipment
centers being moved to Fairbanks from Russian locations. As
discussed earlier, gas price parity would be instituted.
Senator B. Stevens asked whether the "Interstate TAPS Tariff"
identified in the RIK pricing calculation would be the "Tariff
Allowance" discussed in Section 3, on page eight of the "Best
Interest Findings and Determination" handout.
Mr. Banks affirmed that it is.
Senator B. Stevens opined that the "Line Loss" component detailed
on the chart and in Section 5, page nine of the Best Interest
Findings booklet, would appear to be "an insignificant number." He
asked whether the fact that the pipeline is not operating at
capacity is a factor.
Mr. Banks stated that the "Line Loss" component was previously "a
much larger number" as the pump stations along TAPS removed oil
from the line for fuel. This is no longer the case. Therefore, Line
Loss is truly a change in volume as the oil cools in the pipeline
and the balances on each end of the line fluctuate. He agreed that
it is a fairly small number, equating to a penny or a penny and a
half.
Senator B. Stevens asked whether information pertaining to the "FHR
Price," as specified in the calculation, is that as located in the
paragraph on page eight of the "Best Interest Findings" handout. He
asked whether the State would bear the expense of transporting the
crude oil to Pump Station No. 1.
Mr. Banks responded no. The "Royalty Field Cost Payment to Lessees"
provides the Lessees with a field cost deduction, whether the State
receives its oil through RIK or RIV. Setting the FHR price above
that deduction as specified on the calculation chart would allow
the State "to receive sufficient credit to pay the RIV fuel cost
deduction."
Senator B. Stevens voiced confusion as to whether the State bears
the cost of the tariffs north of Pump Station No. 1.
Mr. Banks responded that the Price graph in the presentation
handout assumes that the crude oil being taken from Prudhoe Bay
occurs at Pump Station No. 1 rather than from another site such as
Kuparuk River Unit which has another set of tariffs that would
apply between it and Pump Station No. 1.
Senator B. Stevens asked whether those transportation deductions
are factored into this tariff rate or would be absorbed in another
manner.
Mr. Banks responded that the deduction would be incorporated into
the price, and would, therefore, result in a lower price.
Senator B. Stevens understood that fuel taken from Kuparuk and
other sites would be incorporated into the price.
Mr. Banks commented that oil from Kuparuk would have a "net back"
which would be lower than the pump price for Prudhoe Bay. This is
similar to how the lessees' RIK is calculated.
Mr. Banks clarified that wholesale rack price parity would apply to
posted wholesale prices in Anchorage and Fairbanks. This would
allow the Division to ascertain whether similar prices are being
charged in these markets. There is concern that higher expenses in
Fairbanks might increase prices in Anchorage. However, the markets
are different as there is an excess supply of gasoline produced in
the Anchorage market that must be exported. Anchorage producers
could either export their excess supply to a refinery in another
location or decrease production. These pressures serve to result in
lower prices in Anchorage than experienced in Fairbanks. This would
serve to benefit customers in Fairbanks. Fairbanks' conditions
would not result in lowering Anchorage's price.
Mr. Banks noted that FHR has agreed to hire locally when possible.
It is anticipated that the $100 million Clean Fuels project would
have a significant construction and employment impact for a short
term. Currently, the refinery has 150 full time positions with an
annual payroll of approximately $8 to $12 million. He noted that
the State's previous agreement with Williams required that 80
percent of the RIK oil sold to them must be used in the refinery.
The agreement with FHR specifies that they would make all
commercially reasonable efforts to use the royalty oil in their
refinery. This would insure that employment efforts would be
supported.
Senator Hoffman asked whether any consideration was given to the
tax structure and liabilities of FHR due to the fact that it is a
Limited Liability Corporation (LLC).
Mr. Banks replied yes, that "sometimes painful discussions" in this
regard occurred, particularly since the State could not view the
financial strength of FHR, "an LLC and a privately held
corporation," as opposed to Williams, which was a publicly held
corporation and subject to certain reporting requirements. As a
result, a provision was incorporated into this agreement specifying
that an advisor would be retained to examine FHR finances and their
future perspectives and a report would be provided to the State in
regards to these matters. Were the "health of FHR" to fall below a
certain bond rating it would be required to post a Standby Letter
of Credit (LC) with the State equating to the sale of 90 days of
sale oil. This would be approximately $120 million LC.
Senator Hoffman asked for the difference between a LC and a bond.
Mr. Banks replied that, "an LC is made out to the State." For
example, this would provide the State with "an unfettered ability
to cash it" were this contract to go into default.
Senator Hoffman asked whether there is a difference in the tax
structure of an LLC and a corporation.
Mr. Banks replied that he was unsure.
Senator Bunde understood that an LLC would not pay a corporate
income tax.
Senator Hoffman asked regarding the Department's fiscal note. He
also asked the amount of money the State would receive at 24,000
barrels per day level.
Mr. Banks responded that 24,000 barrels per day would provide the
State $2.6 million a year based on the previously discussed thirty-
cent premium. An expected range would be between $2.6 million and
$8.4 million. It is anticipated that the initial volume would range
between 56,000 and 77,000 barrels per day.
Senator Hoffman asked that the tax impact in regards to an LLC
verses a corporation be provided.
Co-Chair Wilken supported that request.
Senator Bunde questioned how the State would benefit from FHR
shipping product via the Alaska Railroad as the Railroad is "a
quasi private enterprise" and that the property tax generated from
the refinery would not be contributed to the State.
Co-Chair Wilken thanked the Department of Natural Resources for its
presentation.
ALLEN WRIGHT Vice President, Public Affairs, Flint Hills Resources,
introduced himself and Mr. Allen Lasater, the prospective President
of Flint Hills Resources, Alaska. Both currently reside in Wichita
Kansas.
SFC 04 # 21, Side B 09:50 AM
Mr. Wright complimented the State's negotiating team for their
professional and thorough approach to the negotiations. The end
product is considered to be beneficial to both entities.
Mr. Wright reviewed a handout titled "Flint Hills Resources Who We
Are, Culture and Philosophy, Commitment to adding value" [copy on
file]. FHR is one of the leading producers of fuels and base oils
for lubricants and other petrochemical and commodity products.
Headquartered in Wichita Kansas and owned by Koch Industries, FHR
has sixty years of experience in this field. It is tightly focused
on its goals, growth, and success based on a "culture of principled
entrepreneurship" with a commitment to integrity and to consumer
needs. Its innovative approach to business, combined with safety,
efficiency, and environmental protection operational goals, has
resulted in the development of value-added fuels for customers. Its
2,000 employees support these endeavors. The company will be
sustainable for the long run.
Mr. Wright shared that the company has two refineries; one in
Minnesota with a 280,000 barrel a day refinery capacity and a
refining and chemical plant in Texas, which produces in excess of
300,000 barrels a day. FHR is one of largest heavy crude oil
refineries in the United States. The production of clean fuels is a
focus.
Mr. Wright expressed that the purchase and sale agreement of the
Williams' refinery that was announced in November 2003, is
contingent upon the approval of this contract with the State. This
is an exciting opportunity. FHR is committed to the "clean fuels"
enhancements outlined by Mr. Banks.
Mr. Wright reviewed some the company's projects that would lend
expertise to this proposed undertaking.
Senator Bunde asked whether the company has other transportation
agreements that specify that its products must be transported by a
specific mode of transportation, such as the proposed agreement
with the Alaska Railroad.
Mr. Wright responded that the Texas operation utilizes its own
proprietary rail line. The Minnesota refinery is serviced either by
truck or other common carrier lines.
ALLEN LASATER, Vice President, Environmental Health & Safety, Flint
Hills Resources and the future President of Flint Hills Resources,
Alaska, clarified that no specific transportation mode is required
at the other operations.
Mr. Wright noted that FHR has a joint venture interest in a company
called Excel Paralubes, which is located in Louisiana. This plant
produces base oils and other lubricants. FHR also has developed a
diverse fuels marketing system that has 160 terminal locations
throughout the United States. This system markets gasoline, jet
fuel, diesel, heating oil, and performance fuels.
Mr. Wright stated that in regards to Environmental health and
safety issues, "the company strives for 100 percent compliance"
with environmental and safety issues "while meeting the
expectations of the commodities in which we operate." Clean fuels
have been brought to the market "well in advance of federal
guidelines." Environmental standards measures support the company's
goals.
Senator Bunde voiced appreciation of the fact that the company
could meet the environmental standards of Minnesota, as they are
quite stringent. Continuing, he asked regarding the company's
Minnesota plant's "BluePlanet" gasoline; specifically how it
compares to what is currently being produced at the North Pole
Refinery and whether the company would be implementing this
approach in Alaska.
Mr. Wright responded that BluePlanet is similar to the product that
would be produced at the North Pole refinery.
Mr. Lasater explained that BluePlanet is a low sulfur gasoline that
meets Minnesota's 2006 environmental requirements. The company
completed this requirement years prior to the deadline. The company
would be producing fuel similar to BluePlanet in Alaska, as similar
requirements would become effective in Alaska in January 2007.
Mr. Wright noted that "transparency" is very important to FHR. An
alliance has been formed with communities in Minnesota to develop a
website that would allow access to the company's environmental
performance. The company's efforts in Environmental, Health and
Safety issues have also been acknowledged in Texas.
Mr. Wright also conveyed that the company is an active participant
in the communities in which it operates. He reviewed some of the
partnerships, sponsors, and other sorts of participation that have
occurred in its various locations.
Co-Chair Wilken noted that the company has provided an
"Environmental, Health and Safety Facts" brochure [copy on file].
Mr. Lasater stated that FHR is committed to operating a successful
refinery in Alaska, as supported by its commitment to the
production of clean fuels.
Co-Chair Wilken recalled that Williams had conducted a significant
expansion of this refinery in the mid 1990s which increased the
refinery's production by up to 60-percent. He asked the amount of
that investment as this would assist in placing the proposed $100
million investment in perspective.
Mr. Lasater stated that Williams's third crude oil refinery unit,
which produces 100,000 barrel per day, became operational in 1998.
He recalled that the investment might have totaled $80 million.
JEFF COOK, Representative, Williams' Alaska Petroleum Inc,
clarified that Williams' expended $71 million on that project.
Co-Chair Wilken understood, therefore, that the $100 million FHR
diesel conversion upgrade slated for the refinery would be
significant.
Co-Chair Wilken asked whether the $100 million diesel conversion
would result in there being more than one type of diesel produced
at the North Pole Refinery.
Mr. Lasater responded that the conversion would allow for two types
of diesel to be produced. Federal rules for on-road diesel, which
becomes effective in 2006, would prohibit a sulfur content
exceeding 15-parts per million. Off-road and other diesels such as
heating fuel could contain higher sulfur levels; however, it is
anticipated that these fuels sulfur content would be restricted in
the future.
Co-Chair Wilken asked whether the proposed conversion would affect
the quantity of oil that would be removed from the pipeline,
specifically whether it would increase demand.
Mr. Lasater replied that it should not increase the demand.
Co-Chair Wilken asked when the conversion project might begin.
Mr. Lasater stated that the engineering of the project began in the
fall of 2003. The timing is considered "critically tight" for 2006.
Engineering would be completed in 2004, the project's foundation
would be constructed in 2005, and the equipment would be installed
in 2006. The company is confident that it would meet the 2007
gasoline timeline requirement. The 2006 diesel requirement date is
June 2006. The short construction season in the State might present
an obstacle.
Senator Bunde asked whether this $100 million improvement might
impact the wholesale price of gasoline and diesel.
Mr. Lasater replied that the cost of production would increase.
However, historically the refining business has not been a cost-
plus based business, as the price would be more dependent on free
market competition. While the cost to the company might increase,
the market conditions would have more affect on the price consumers
would pay.
Co-Chair Wilken asked FHR's position in regard to transporting its
products via the Alaska Railroad.
Mr. Lasater understood that this relationship, which was developed
at the request of the State, was based on a couple of factors. The
refinery currently accounts for approximately fifty percent of the
revenue generated by the Railroad. The only alternate shipping
method would be a pipeline and, were that avenue pursued, it would
"have quite an impact to the State as far as the viability of the
Railroad." However, at the conclusion of the contract, construction
of a pipeline would be an option.
Senator Bunde understood therefore, that FHR had not initiated the
Railroad provision.
Mr. Lasater affirmed, however, clarified that for "the foreseeable
future" no other option exists.
Co-Chair Wilken inquired as to when Williams' sale of its
convenience stores might occur.
Mr. Lasater explained that the sale of the convenience stores would
coincide with the date that FHR acquires the refinery.
Co-Chair Wilken asked regarding the company's position on local
hire.
Mr. Lasater stated that the current workforce is viewed by FHR as a
key element in the success of this acquisition. While the company
might bring in some of its management team to run the operation,
the intent is to not reduce the work force to save money, as it
common in some acquisitions. Instead, he continued, the refinery's
direction combined with the clean fuel investment would require an
expanded work base including increased contractual work.
Senator Olson expressed that one of concerns in the State is the
environmental affect of industry, specifically in regards to such
things as spills that might negatively affect fishing grounds and
the fragility of the tundra. Therefore he voiced concern that Koch
Industries, FHR's parent company, has been sizably penalized for
environmental violations in recent years. He asked what safeguards
could be established to prevent violations from occurring.
Mr. Wright responded that the Company assumes full responsibility
for the company's environmental record, good and bad, and that the
company "has learned a great deal from those experiences and as a
result has implemented management and compliance monitoring systems
that allow the company to prevent similar situations from re-
occurring. Specifically, the Texas facility's Clean Air violation
occurred due to employee error. The error was uncovered during a
company audit, the employee was dismissed, and the company alerted
the EPA to the violation. The Company is currently on probation.
While a separate subsidiary of Koch Industries had been
investigated for inaccurate measurements relating to its oil
acquisitions, a jury did not find that FHR had committed any
wrongdoing in this regard and, even though FHR settled in that
lawsuit, it provided no admission of guilt. Furthermore, in this
agreement, FHR would not be purchasing crude oil at the wellhead.
Senator Hoffman asked whether the Koch Industries subsidiaries that
had the violations filed against them were established as LLC
companies.
Mr. Wright replied that he unsure as, at various times, Koch
Industries has utilized different business structures. He recounted
the names of the entities involved in the violations; however,
could not recall their business structure. He stated that this
information would be provided.
Senator Hoffman voiced that this information would be appreciated
as LLCs "have less liability and that is the reason" that they are
established. The State should investigate this further as were
negative circumstances to occur, the liability on the part of an
LLC might differ from the specified violation determinations.
Mr. Wright stated that the current company structure's performance
is one that has received high ratings from the EPA and other
environmental groups. "It is performing at an industry leader
level."
Co-Chair Wilken thanked Mr. Wright and Mr. Lasiter for their
comments and voiced that the State is looking forward to the
development of a mutually beneficial working relationship with Koch
Industries.
PHILIP REEVES, Assistant Attorney General, Civil Division (Juneau),
Department of Law noted that, at the Department of Law's request,
the Department of Revenue has specified that the State's corporate
income tax utilizes the same guidelines as the federal income tax
which treats most LLCs as corporations for most tax purposes. A
definitive answer in this regard would be provided.
Co-Chair Wilken stated that this would be further monitored as the
legislation advances.
Co-Chair Green moved to report the bill from Committee with
individual recommendations and accompanying fiscal note.
There being no objection, CS SB 348 (FIN) was REPORTED from
Committee with a new zero fiscal note, dated February 26, 2004 from
the Department of Natural Resources.
AT EASE: 10:22 AM / 10:23 AM
CS FOR SENATE BILL NO. 203(JUD)
"An Act relating to administrative hearings, to hearing
officers, and to administrative law judges; establishing the
office of administrative hearings and relating to that office;
and providing for an effective date."
This was the second hearing for this bill in the Senate Finance
Committee.
Co-Chair Wilken communicated that this legislation would create an
independent office of hearing officers under the administration of
a chief administrative law judge (ALJ), within the Department of
Administration. The bill's sponsor would be providing further
information in regards to the office's structure. An explanation
pertaining to the fiscal note would be forthcoming.
Co-Chair Wilken asked whether there was any objection to the
adoption of the Version 23-LS0903\Z committee substitute as the
working document.
There being no objection, Version "Z" was ADOPTED.
[NOTE: A formal request to adopt the Version "Z" committee
substitute was offered later in the hearing.]
DAVE STANCLIFF, Staff, Administrative Regulation Review Committee,
Office of Senate President Gene Therriault, the bill's sponsor,
explained the this committee substitute has been developed to
address technical issues and to "clean up" various components of
the bill as identified by the Legislative Legal Division and the
Administration. He referenced a handout provided by the Regulation
Review committee titled, "Changes Included in SB 203(FIN)" [copy on
file] that specifies the eight changes made in the committee
substitute. The first substantive change is located in Section 66,
line 30, page 31 of the bill and reads as follows.
Sec. 66. AS 39.52.170 is amended by adding a new subsection to
read:
(d) A public employee who is in a permanent full-time
position as a hearing officer or administrative law judge may
not accept employment as a hearing officer or enter into a
contract to act as a hearing officer, administrative law
judge, or judicial officer for the federal government, another
state, a municipality, or a Native tribe.
Mr. Stancliff stated that the municipal jurisdiction specification
was added to the list to avoid possible conflicts of interest.
Senator Olson understood the rationale for this section, as it
would apply to such large communities as Anchorage or Fairbanks;
however, he asked how Rural locations with limited numbers of
hearing officers would be affected.
ANDY HEMENWAY, Hearing Officer, Department of Administration,
responded that currently the State has 25 hearing officers, all of
whom are located in Anchorage, Fairbanks, or Juneau. These
individuals travel to other locations or participate via
teleconference as required. Therefore, this requirement would not
affect smaller communities.
Senator Olson continued to voice discomfort with the inclusion of
municipality employees in the list.
Mr. Hemenway stated that the purpose of this language is to avoid
any conflict of interest that might arise regarding decision-making
on behalf of one sovereign entity verses another's policies or
interests.
Senator Olson questioned how a hearing officer, whose role is one
of neutrality, could have a conflict of interest.
Mr. Hemenway expressed that the intent would be to avoid any
"inherent" conflict of interest. There might be a perception that a
hearing officer who works on behalf of the State might tend to rule
in its favor in a situation involving the State and a municipality,
for example.
Senator Olson observed "that it sounds like we are trying to
protect ourselves from ourselves."
Mr. Stancliff commented that the second change is located in
Section 65 on page 31 of the bill. While the bill provides
protection to the ALJ from inappropriately contact or influence
from agencies or Legislative agencies, it did not provide that
protection to hearing officers. This is addressed in Section 65.
Mr. Stancliff stated that recently enacted legislation incorporated
new processes at the request of Associated General Contractors
(AGC) in regard to dispute resolution. In order to allow that
process to develop, those processes has been eliminated from the
jurisdiction of the legislation.
Mr. Stancliff continued that the Administration has requested that
hearing officers be provided the same type of code as judicial
officers have in that a person could request a different hearing
officer preside over the hearing. This language is included in
Section 3, Subsection 44.21.570(c) on page ten, beginning on line
eleven.
Mr. Stancliff stated that the definition of an administrative
hearing is expanded in language in Section 3, Subsection 44.21.599
(1) on page 11. This section reads as follows.
(1) "administrative hearing" means a quasi-judicial hearing
before an agency, but does not include an informal conference
or review held by an agency before a final decision is issued.
Mr. Stancliff, addressing Senator Olson's concern about the
prohibition of hearing officers working for the State and another
jurisdiction specifically in regards to how this might affect a
small Rural area, stated that this language would serve to address
the concern. Highly contested cases would be heard at the higher
administrative level.
Mr. Stancliff stated that Number Six on the Regulation Review
Committee list would address some conflicts the legislation
incurred with agency's "cease and desist" authority. This language
is located in Section 8, on page 13, beginning on line 16.
Mr. Hemenway explained that this language would primarily address
the bill's conflict with the Department of Community and Economic
Development's crease and desist orders for regulated professions.
Mr. Stancliff stated that a technical change incorporated in this
committee substitute is that the clarification of the duties and
responsibilities of ALJs and hearing officers is clearly defined in
the bill.
Senator Bunde mentioned that separate legislation relating to
worker's compensation would incorporate a panel of ALJs. Therefore
he asked how these two pieces of legislation would interact.
Mr. Stancliff replied that this is an unknown, as the integration
stage of the procedure has not been conducted. However, this should
be addressed as the processes advance.
Senator Bunde stated that the bill in question is SB 311-INSURANCE
& WORKERS' COMPENSATION SYSTEM.
Mr. Stancliff acknowledged.
SFC 04 # 22, Side A 10:40 AM
Senator Hoffman asked whether the possible conflict of interest
issue that might arise by a hearing officer being employed in a
second job is addressed in this committee substitute.
Mr. Stancliff responded that substantial discussion has occurred in
this regard, specifically whether hearing officers should be
allowed to practice law outside of their public employee position.
This bill is restrictive in regards to possible conflicts.
Mr. Hemenway noted that language in Section 3, Subsection
44.21.540(c) on page six, lines 24 through 27 addresses the concern
regarding a second job. However, while this bill contains language
in this regard, it does not expressly prohibit work in a second job
outside of their employment with the State.
(c) An administrative law judge employed by the office must
devote full time to the duties of the office unless appointed
to a position that is less than full-time. An administrative
law judge employed by the office may not perform duties
inconsistent with the duties and responsibilities of an
administrative law judge.
Mr. Hemenway understood the intent of this language to be that a
person employed as an ALJ should "not also hold a second job within
the Administration," such as being a Deputy Commissioner, for
example.
Senator Hoffman stated that rather than being concerned about an
individual's ability to hold a second job, his primary concern was
their ability to privately practice law.
Mr. Stancliff responded that while this concern was addressed, the
decision was made not to include it. However, the Chief
Administrative Law Judge would be developing a judicial canon
similar to that currently in place for the State Judicial Branch.
New regulations governing ALJS would also be developed that might
address this issue. It is not, however, required, in Statute.
Senator Hoffman asked whether the independent practice of law would
present a conflict of interest for hearing officers.
Mr. Hemenway shared that this issue is a primary concern. The
Judicial Canon does prohibit judges from practicing law. The
essential question is whether this should also apply to
administrative hearing officers. This is worth considering.
Responding to Senator Hoffman's question, Mr. Hemenway declared
that there is certainly the potential for conflicts of interest in
this area. The question is whether it should be addressed through
regulation or Statute.
Senator Hoffman declared that if there is the potential for
conflict of interest, it should be included.
Mr. Stancliff stated that the State currently contracts with a
number of hearing officers and this process would be continuing.
Therefore, consideration must be given to this situation.
Mr. Stancliff stated that the final change in the bill pertains to
Section 46(b) on page 26 of the bill and regards the amount of time
that hearing officers might spent in regard to insurance rate
setting. Currently, the Director of the Division of Insurance
currently spends more that 1,000 hours in this regard. Were the
rate setting responsibility to shift over to the ALJs, it would
significantly increase the fiscal note. There are some Division of
Insurance duties however, that could be transferred to the Central
Panel without much impact.
Mr. Hemenway voiced that rate setting responsibilities should not
be conducted by the Central Panel.
Mr. Stancliff concurred and stated that were those responsibilities
to become the responsibility of the Central Hearing Panel, the
fiscal note would be cost prohibitive and the bill would falter.
Co-Chair Wilken asked regarding the validity of the University of
Alaska's two-page brief [copy on file] requesting an exclusion from
the jurisdiction of the bill.
Mr. Stancliff commented that the brief might have some validity.
The determination regarding the University is under review.
However, he voiced, "that no State hearing officer should be exempt
from the protections and higher standards" being developed in the
bill. The University has a high quality process and meets those
standards.
Co-Chair Wilken asked how the University's request would be
addressed.
Mr. Stancliff replied that an amendment would be developed to
address their exemption.
Co-Chair Green moved to adopt the Version 23-LS0903\Z committee
substitute as the working document.
There being no objection, the Version "Z" committee substitute was
formally ADOPTED as the working document.
Co-Chair Wilken stated that the fiscal note discussion would occur
during the next hearing on the bill.
Senator Hoffman asked whether there is a shortage of hearing
officer applicants in the State.
Mr. Hemenway responded that in his perception, as positions open,
there are a number of good applicants.
Co-Chair Wilken noted that the bill would be HELD in Committee.
ADJOURNMENT
Co-Chair Gary Wilken adjourned the meeting at 10:52 AM.
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