Legislature(1997 - 1998)
05/09/1998 09:00 AM FIN
* first hearing in first committee of referral
= bill was previously heard/scheduled
= bill was previously heard/scheduled
MINUTES SENATE FINANCE COMMITTEE 9 May, 1998 9:00 a.m. TAPES SFC 98-164, Sides A and B CALL TO ORDER Senator Bert Sharp, Co-Chair, convened the meeting at approximately 9:00 a.m. PRESENT In addition to Co-Chair Sharp, Senators Pearce, Torgerson, Adams, Parnell, and Phillips were present when the meeting was convened. Senator Donley arrived later. Also Attending: Representative Mark Hodgins; Wilson Condon, Commissioner, Department of Revenue; John Shively, Commissioner, Department of Natural Resources; Beverly Mentzer, Alaska Gas Commercialization Manager, Exxon Company, USA; Paul Fuhs, Yukon-Pacific Corporation; Paul Canale, Assistant Director of Government Affiars, BP Exploration Alaska; George Findling, Business Development Advisor, Atlantic Richfield Corporation (ARCO); Steve White, Assistant Attorney General, Department of Law; Ted Popely, Counsel, Senate and House Majorities. SUMMARY INFORMATION CSHB 116(FIN) WORKERS COMPENSATION SELF-INSURANCE GROUP SCS CSHB 116(FIN) was REPORTED out of committee with a "do pass" recommendation with forthcoming zero fiscal note from the Department of Revenue, Division of Insurance, and accompanying $49,500 fiscal note from the Department of Labor and Workforce Development, Division of Workers Compensation. CSHB 393(RES) DEVELOP STRANDED GAS RESOURCES CSHB 393(RES) was HEARD and HELD in committee for further consideration. CSHB 406(FIN)am SUBSISTENCE USES OF FISH AND GAME CSHB 406(FIN) was REPORTED out of committee with no recommendation and fiscal notes by the Department of Law and the Alaska Courts. HOUSE BILL NO. 116 "An Act relating to workers' compensation self- insurance." Senator Donley MOVED to RESCIND the committee's earlier action of failing to report HB 116 out. Senator Phillips expressed interest in revisiting the amendments that were considered but failed to be adopted in the previous hearing. Senator Adams stated that he would not re-offer the four amendments that previously failed to be adopted. Without objection, the action to report the bill from committee was RESCINDED. Senator Donley MOVED to REPORT SCS CSHB 116 (FIN), as amended, with individual recommendations and attached fiscal notes. Senator Phillips OBJECTED. AT EASE until 9:04 A.M. RECONVENED Senator Phillips WITHDREW his OBJECTION. There being no further objection, it was so ordered. SCS CSHB 116(FIN) was REPORTED out of committee with a "do pass" recommendation with forthcoming zero fiscal note from the Department of Revenue, Division of Insurance, and accompanying $49,500 fiscal note from the Department of Labor and Workforce Development, Division of Workers Compensation. HOUSE BILL NO. 393 "An Act relating to contracts with the state establishing payments in lieu of other taxes by a qualified sponsor or qualified sponsor group for projects to develop stranded gas resources in the state; providing for the inclusion in the contracts of terms making certain adjustments regarding royalty value and the timing and notice of the state's right to take royalty in kind or in value from projects to develop stranded gas resources in the state; relating to the effect of the contracts on municipal taxation; and providing for an effective date." Co-chair Sharp clarified that the Resources Committee version of the bill was the most recent version (version "R"). REPRESENTATIVE MARK HODGINS testified that the legislation would cover payment in lieu of taxes. He stated that the liquefied natural gas (LNG) that would be developed from the project would come from the North Slope through an 800- mile pipeline. He explained that LNG was a different commodity than oil, as it did not have a spot market. In order for the LNG project to go forward, contracts had to be made beforehand that included the pipeline, the refinery, and the ships to transport the product to the marketplace. Representative Hodgins referenced a report authored by Dr. Van Meurs that estimated the price at $15 billion, which would not make Alaska competitive in the international market. The Van Meurs report advised that the project would be competitive if the price were reduced to $12 billion. He pointed out that the North Slope currently had approximately 35 trillion cubic feet of natural gas proven reserves. He noted that over 12 percent of the amount belonged to the people of Alaska. He stressed that the legislature therefore had a duel role, as both the tax and regulation authority and as an actual owner of the resource on behalf of the people. Representative Hodgins continued with suggestions made in the Van MeursVreport to bring the $15 billion figure down to $12 billion by reviewing the state's tax regime. He noted that the federal government would garner approximately $26 billion from the project over the course of its economic life (estimated at 30 to 50 years). The state and local taxes would be approximately $12.6 billion. Representative Hodgins reported that Dr. Van Meurs had suggested reducing state taxes by 2 percent (about $270 million) and convincing the federal government to reduce its percentage. He thought technological advances would also help make the project profitable. He emphasized that the project involved private enterprise and that it would not proceed if it was not profitable. He underlined that following the Van Meurs suggestion, the state could reduce the price of the project by approximately $270 million in taxes that could be forgiven or deferred to a later date. The state would then receive at least $12.4 billion. Representative Hodgins shared that as a member of the private sector, his concerns were the jobs and economic opportunity a project would create. He referred to oil and gas development in Cook Inlet, including an LNG facility that had been exporting since 1969 and the Unocal plant in Nikiski that exported fertilizer and ammonia. He stressed that there was a vast industry that could arise from the development of natural gas. Representative Hodgins stated that once the legislation was enacted, the Department of Administration would be allowed to negotiate with a sponsor group to contract the project. The proposed contract had to be ratified by the legislature, which would provide an opportunity for public exposure and participation. Representative Hodgins addressed changes made to the bill by the House Finance Committee removing the "gas-to- liquids" intent language. He said the change would allow future gas-to-liquids technology to be addressed under different legislation. He explained that some legislators thought that if the language were contained in the bill, there could be some relief on the existing pipeline, which could cause confusion. Representative Hodgins then spoke to the merits of the pipeline and the affected communities. He pointed to page 23, starting at line 29, with language related to sponsor groups. He understood the concerns of local municipalities and maintained that they would have a voice in the contract process. He conceded that due to the nature of the contract, it would be difficult to guarantee that the municipalities would be able to affect the outcome of the contract. He asserted that the current version of the bill had been extensively discussed; he wanted it adopted into law with no further changes. Representative Hodgins cited Dr. Van Meurs's projections of $150 billion in revenues that could come from the North Slope project. He noted that while there were 35 trillion cubic feet of proven reserves, there could be two to three times that amount once the project began, because there would be incentive to find more gas. Representative Hodgins relayed concerns regarding the reinjection of available gas and concerns that the sale of natural gas could impact black-oil production. He stated that Phillips Petroleum, Inc. had testified that "Point Thompson could come on line and could actually develop the ramp-up period, fill the pipeline with gas from Point Thompson, and thereby allow reinjection of the North Slope gas back into Prudhoe Bay and Kuparuk and other fields." He believed the action would allow the maintenance of the maximum amount of black oil from the North Slope facilities. Representative Hodgins summarized that the legislation would allow for "a great project for Alaskans" that would bring in needed revenues. He acknowledged that there would be impacts to municipalities and to the state. He pointed out that the state was a taxing and regulation authority, and most importantly would be an owner in the project. He noted that approximately 50 percent of the royalty revenues would be deposited into the permanent fund. He stated that the complexity of the project was such that the enabling legislation was necessary to allow the administration to start a sponsor group; once the sponsor group or private enterprise started, the preliminary engineering would be done and there would be suggested timelines. He wanted Alaskans to be trained and ready to work on the project. Representative Hodgins noted that local hire provisions would be considered within the allowances of the constitution. He suggested that the best local provision was a well-trained Alaskan workforce. Senator Adams asked where the market would be and how much natural gas would have to be sold to make the project feasible. Representative Hodgins responded that the primary market would be the Pacific Rim countries of Japan, Korea, and Taiwan. He noted there had been economic strife in the countries, and that the main competitors would be Australia, Indonesia, and possibly Russia. He explained that natural gas was primarily sold under contracts and that current contracts were reaching maturity. He listed the years 2005, 2008, 2010, and 2015 as dates discussed as prime times to enter the market. He believed it best to enter the marketplace as soon as possible using the speculation of North Slope reserves. He opined that the Alaska natural gas project could become the largest in the world. Representative Hodgins continued that in order for the project to be successful, 14 million metric tons had to be transported through the pipeline annually. He pointed out that the LNG was already sold from the Nikiski plant, and Alaska had been the sole provider of LNG products to Japan. While the plant had not reduced its output, he stressed that increased demand and supply provided from elsewhere had reduced the state's share to less than 2 percent. Representative Hodgins spoke to conflicting testimony heard in other legislative committees regarding the need for natural gas and the best "window of opportunity" for Alaska to enter the marketplace. He responded that the decisions would have to be made as the project progressed. Representative Hodgins asserted that the project would not advance unless customers were in place and in partnership with the state and participating industries. He claimed the project could become one of the largest, if not the largest, private-enterprise project in the world. WILSON CONDON, COMMISSIONER, DEPARTMENT OF REVENUE, testified that HB 393 would establish a framework for developing a project-specific fiscal system for commercializing stranded gas in Alaska. He explained that the fiscal system would provide for contractual payments in lieu of some or all state and local taxes. He pointed out that the bill would not require the administration to come before the legislature with a proposal to modify royalties, but would require the consideration that the provisions for specifying how royalties were valued over the long term could be included in a contract. He added that the bill would also stipulate that the contract might modify the provisions for taking royalty in-kind, such as provisions governing the six-month notice requirement and the current right the state had to take royalty in-kind on relatively short notice for the gas business. He stressed that the bill would require the executive branch to entertain applications, develop potential contracts, and present proposed contracts to the legislature for specific legislative authority to execute the contracts. Commissioner Condon referred to a document outlining the process required for entering into a contract ("CSHB 393, Flow Chart, the Alaska Stranded Gas Development Act," copy on file). He detailed the steps of the process. First, the prospective sponsors had to apply. The commissioners of the Departments of Revenue (DOR) and Natural Resources (DNR) would proceed with negotiating a contract if the proposed project and sponsors met certain qualifications. Commissioner Condon noted that the stipulations contained in the bill would govern negotiation of the contract, including the fiscal terms, local hire, local purchasing, payment sharing with municipalities, and gas supplies for local communities. He added that the bill would establish a municipal advisory group, which the commissioner of DOR must involve in the contract negotiation process. Commissioner Condon continued that the bill would provide for public commentary and preliminary legislative review periods; following those, the contract could be modified before being presented to the legislature for formal consideration, including deciding whether the executive branch would be given specific authority to execute the contract. He stressed that the contract could not be executed without specific legislative approval to the executive branch. Senator Phillips pointed to page 22, line 20 of the bill (Section 43.82.435) and questioned whether "may" meant "shall" from a legal point of view related to the executive branch submitting the contract to the legislature. Commissioner Condon replied that at the end of the process, the governor could decided that he or she would not submit the contract to the legislature, if the governor did not think it was a good idea. The contract would then be dead without legislative authorization. He stated that "may" did not reflect the legislature's authority but the governor's discretion regarding whether or not to proceed with the proposal. Co-chair Sharp clarified that any contract that went forward would have to be ratified by the legislature. Senator Phillips summarized that the governor could withdraw the contract if he or she believed it was not in the best interests of the state. Commissioner Condon responded that he was correct. Senator Phillips turned to page 22, lines 27 through 31 (Section 43.82.440), "a person may not bring an action challenging the constitutionality of the law authorizing a contract enacted" under the section. He asked why people would not be allowed to challenge the constitutionality of the law. Commissioner Condon replied that the section would give a shorter period of time for the statute of limitations than would normally be available. Once somebody entered into a contract, they would have a 120-day time period, in order to get an answer regarding constitutionality quickly. Senator Phillips opined that the two sections were the most important in the bill. Senator Adams asked how the affected municipalities and communities would be treated. He also wanted to know more about the employment of Alaskans in the newly created jobs. He commented that sometimes the only way to guarantee local hire and patronage of local businesses was through a sole- source contract to an Alaskan company. Commissioner Condon replied that the involvement of local communities was both procedural and substantive; the bill would require (Sections 500 through 520, pages 23 through 25) the establishment of a municipal advisory group and that the commissioner of DOR involve the advisory group in the negotiation of the contract and consult with them regarding the provisions governing payments to local communities. He pointed out that the principles governing the contract terms would require that payments be shared with local municipalities (according to subparagraph (b) of Section 43.82.210). He noted the extensive provision regarding local hire and contracting with local businesses (Section 43.82.230); he stated the language went as far as state and federal constitutions permitted. Senator Phillips asked what would happen in the case of a negotiated preliminary contractor that the governor did not approve of but the legislature wanted. He wondered whether the contract would ever be submitted to the legislature. Commissioner Condon replied "yes and no." He detailed that the "no" part meant that he did not think the legislature could structure a set of arrangements or contract on its own. He believed that the executive branch could bring a proposal that was a customized fiscal system for a proposed project. The legislature could consider the proposal and decide it liked some of the terms and not others. The legislature could pass a general law that had only the terms it wanted. Senator Phillips asked how the legislature would know about a potentially good contract if it was submitted to and rejected by the executive branch. Commissioner Condon responded that an entity submitting a contract that was ignored by the executive branch would most likely go to the legislature. He believed the political process would solve the problem. JOHN SHIVELY, COMMISSIONER, DEPARTMENT OF NATURAL RESOURCES, added that the sponsor could bring the contract to the legislature; it would not be a secret document. He did not know how the executive branch could be forced to sign a contract, however. The legislature could pass a general law related to the structure of the contract, but the governor would have the option of vetoing that law; if the legislature overrode the veto, the contract would go into effect regardless of the governor's opinion on the matter. He believed that both the governor and the legislature would share an interest in what was best for the state. Senator Torgerson asked how the proposed contract would differ from other oil contracts. He believed the legislature only had the authority to either approve or disapprove a contract presented to it. He wanted to know whether the contract would hold if the legislature only approved a portion of the contract in enabling legislation, and the governor vetoed it. Commissioner Condon replied that there would be no contract if the governor vetoed it. He explained that unlike the normal contract authority the legislature could grant the executive branch, the bill would not grant specific authority to the executive branch to enter into a natural gas development contract without legislative approval. He likened the situation to the relationship between the two branches when bonding for building facilities; the executive branch did not have the specific authority to enter into contracts without legislative approval. Co-Chair Sharp voiced concerns with language such as that contained in subparagraph (2) of Section 43.82.210 and contract terms relating to payment in lieu of one or more taxes ("the terms should accommodate the interests of the state, affected municipalities, and the project sponsors under a wide range of economic conditions, potential protect structures, and marketing arrangements"). He commented that the municipalities would not be given a vote in the final contract negotiations, yet could lose a considerable amount of tax revenue; he did not know how the best interests of the municipalities would be protected when the bill used the language "should accommodate." He asked how the local governments could accept the "trust me" attitude, when they could be negotiated out of tax revenues for several years. Co-Chair Sharp cited subsection (3) of the same section stating that if the profitability of the project decreased, increases in the economic rent making up for the tax- revenue losses would not take effect. He surmised that the state and the municipalities were taking a large share of the profitability risk in the project. Commissioner Condon responded that the legislation was basically a means by which the state and local governments would be taking risks to facilitate the development of the resource. He said the question must be asked whether the resource would be developed if the risks were not taken. He stressed that community interest was important and that he hoped it would be protected, but qualified that the contract would still be dependent on the political process and the fairness of the players. He opined that it did not make sense to "tie everyone's hands" to provide protections that early in the process. Co-Chair Sharp pointed out that the state and municipalities were being asked to become equity partners in assuming risk and to depend on the profitability of the project, but the two were not equity partners. Commissioner Condon agreed that was one way to look at the matter. He envisioned the trade-off would be equitable returns to the state and municipalities. He stated that both governments would share the benefits, but would also have to share the risks. Co-Chair Sharp focused on the point that the affected municipalities would be asked to give up local taxes and state taxes, while the remaining areas of the state would only give up state taxes. He reminded the committee that during the construction of the Alyeska pipeline, the percentage of employees hired from his community was small. He understood the intent was to not give veto power to the affected municipalities, but suggested the language "should accommodate" was inappropriate. He used a freight-train metaphor to explain the potential for a legislative- approved contract based on the wishes of the few legislators representing the impacted communities, not the majority of legislators from elsewhere in the state. He stressed that while there could be some employment benefits from such a project, there were also social challenges that would be borne by the communities along the new pipeline. He reiterated concerns. Commissioner Shively responded that the issue had been addressed in the past. Communities like the North Slope Borough and Valdez had limitations on property tax authority to accommodate the needs of the whole state. He agreed there were several challenges, such as the impact to Fairbanks before the revenues were generated. He thought the issues should be addressed by the governor and the legislature, but independently from the project's revenues. Commissioner Shively continued that the only municipality that would certainly be able to tax if the project was built was the North Slope Borough; although the primary route seemed to be to Valdez, there were other options. He did not think all fears could be addressed until a contract was negotiated and the risks could be addressed specifically. Co-Chair Sharp appreciated that Section 43.82.900 clearly defined the different kinds of affected municipalities. He pointed out that municipalities impacted by the Alyeska pipeline did not have the authority to assess the facilities in their jurisdiction at the full value because of the arrangement to promote the pipeline. He noted that the value was much higher than anticipated. BEVERLY MENTZER, ALASKA GAS COMMERCIALIZATION MANAGER, EXXON COMPANY USA, referred to submitted written testimony (copy on file). She stated that Exxon supported HB 393 in its current version, which provided reasonable guidelines and boundaries for development of a fiscal contract. The bill kept options open for the state of Alaska to maximize the value of its gas resources. She added that it did not contain any specific fiscal terms or mandate the method for gas commercialization. Ms. Mentzer concluded that the legislation would provide the opportunity for input from the legislature, local municipalities, and the public during the contract development stage. She noted that it appropriately required legislative review and authorization of any fiscal contract. Co-Chair Sharp asked whether the legislation would allow or prohibit a contract or agreement to be considered for the economic benefits bestowed on a gas-to-liquids project. Ms. Mentzer responded that the statutory language in the bill was broad enough to include a gas-to-liquids conversion project. PAUL FUHS, YUKON-PACIFIC CORPORATION, spoke in support of the bill as it was. He commented that HB 393 was a framework for negotiating a tax contract, but the most important provision for his company was that it would create an incentive for formation of a project sponsor group. He reported that discussions with the Asian market had shown that the most important element was to bring gas supplies together with the permit so that there could be a unified project to move forward. He noted that the bill had a sunset date of 2001. [Tape SFC-98 164, Side B] Mr. Fuhs stated that his company would be in good faith with the municipalities; their experience has been that the municipalities were very positive about the project and willing to look at flexible ways of approaching the taxation on the project. He did not see the municipalities as a problem in any way. Senator Phillips pointed out that the sunset date applied to the deadline in which an application for a contract could be submitted. PAUL CANALE, ASSISTANT DIRECTOR OF GOVERNMENT AFFIARS, BP EXPLORATION ALASKA, testified in support of the legislation. He referred to written testimony given by David Brooks to the House Finance Committee (copy on file). He stated that BP believed the bill provided a positive signal to the industry and developers of stranded gas that the state was prepared to discuss any fiscal impediments in the way of a project directed toward the development of the state's stranded-gas reserves. He assured the committee that BP supported the legislation. GEORGE FINDLING, BUSINESS DEVELOPMENT ADVISOR, ATLANTIC RICHFIELD CORPORATION (ARCO), spoke in support of HB 393 (version "R"). He referred to previous testimony describing ARCO's gas commercialization plans and how HB 393 would support those plans. He stated that ARCO believed that the framework legislation could help advance gas commercialization in Alaska; ARCO viewed the legislation as an essential signal that the state wanted to proceed down the development road in partnership with private parties. The bill gave ARCO the basic confidence it needed regarding parallel efforts to assemble sponsor groups, reduce costs, develop a market, pursue federal fiscal incentives, and resolve many commercial and regulatory issues facing the LNG project. Co-chair Sharp asked whether the bill as worded would allow economic participation and encouragement by the state for a gas-to-liquid project. Mr. Findling responded that ARCO felt that the statutory language was such that the requested outcome would not be ruled out. Commissioner Condon affirmed that the language in the current version of the bill would allow for the development of stranded gas. He noted that a lot of work had been done to deal with the issue from an LNG project perspective; if another proposal was made, more work would be needed. Senator Parnell commented that the language was broad enough to be applicable to a gas-to-liquids project. He asked whether the department would treat it that way. Commissioner Condon replied in the affirmative. Representative Hodgins confirmed for Co-Chair Sharp that the legislation would cover gas-to-liquid projects. He noted that the gas-to-liquids language was originally in the bill and was taken out; the sponsors felt that the language adequately covered gas-to-liquids technology. He believed legislation would probably come forward if additional legislation was needed and there was economic feasibility shown. AT EASE 9:57 AM RECONVENED 10:30 AM Co-chair Sharp announced that he would NOT OFFER Amendment 1. Co-chair Pearce MOVED to ADOPT of Amendment 2. Co-chair Sharp shared that the House Finance Committee members who authored the current version of the bill had no objection to the amendment. He stated that that in light of the testimony heard at the meeting, he urged the committee give the amendment favorable consideration. Co-chair Sharp explained that the amendment allowed the conversion of gas-to-liquids if the necessary technology was developed before the bill's sunset date. He noted that the technology did not exist currently and that it was uncertain whether it would exist by the year 2001. Senator Adams OBJECTED. He stated that the amendment would narrow the scope of the bill. He stressed the importance of keeping options open. A roll call was taken on the motion. IN FAVOR: Phillips, Sharp, Pearce OPPOSED: Adams, Donley, Parnell Senator Torgerson was absent from the vote. The motion FAILED (3/3). Amendment 2 was not adopted. CSHB 393(RES) was HEARD and HELD in committee for further consideration. HOUSE BILL 406 "An Act authorizing the Board of Fisheries and the Board of Game to identify fish and game that are taken for subsistence and to identify subsistence and nonsubsistence areas; relating to the establishment of preferences for and to regulation of subsistence fishing and hunting; relating to advisory committees." Co-chair Sharp addressed the fiscal notes. He referred to a recap of the fiscal notes in the members' files. Senator Phillips MOVED to MODIFY the fiscal notes to change them all to federal funds except for the fiscal notes from the Alaska Courts and the Department of Natural Resources (Department of Law, Civil Division, component DNR). Senator Adams OBJECTED because there had not been a discussion on HB 406 and he did not understand why there were nearly $3 million in fiscal notes. A roll call was taken on the motion. IN FAVOR: Parnell, Phillips, Donley, Pearce, Sharp OPPOSED: Adams Senator Torgerson was absent from the vote. The motion PASSED (5/1). The fiscal notes were changed to federal funds except for Alaska Courts and the Department of Law. Senator Adams wanted clarification about the constitutionality of the bill. STEVE WHITE, ASSISTANT ATTORNEY GENERAL, DEPARTMENT OF LAW, replied that there were two sections of the bill that raised constitutional issues. The first section was the one dealing with eligibility for subsistence, or who would be considered a qualified subsistence user. One section of the bill would qualify people based on residency; people would get a presumption in favor of eligibility or a presumption against eligibility based on whether they lived in a subsistence-dependent area. A constitutional issue would be raised under equal-access clauses based upon the supreme court's decision in a case a few years prior. He detailed the reference related to page 4, line 31 to page 5, line 13, subsections (d) and (e). Mr. White continued that there were essentially two ways to become a qualified subsistence user under the bill. The first would be to qualify under individual criteria, which were administered through a process before the board (in subsection (c)). The presumptions based on where a person lived were in subsection (d); the way the presumptions would operate was described in subsection (e). There were constitutional issues under the McDowell and Camacho decisions because the presumptions were based on where a person lived. Mr. White noted that there was also a possible second constitutional issue in subsection (c) that was not as clear; one of the criterion to become a certain kind of subsistence user was history of use of a stock or population; the question had been raised of whether the provision would create a closed class, or one that no one could enter in the future. In other words, a person could not become a subsistence user unless they used the stock or population for subsistence, but on the other hand, the person could not use the stock or population unless they were a subsistence user; it created a no-win situation. He thought the issue could be reconciled if past use could be established through some other use besides subsistence, for example, through sport or commercial use. The resolution could be difficult but could address concerns about creating a closed class. Mr. White summarized that the principal constitutional issue was raised by the presumptions based upon residency in the other two sections. Co-chair Sharp asked whether the current Tier II was based a point system for qualification related to past usages and where a person lived. Mr. White explained that Tier II had two criteria left after the supreme court removed the "where you live" criteria; one related to a person's dependency on a particular stock or population and the second related to the availability of alternative resources. The system was not closed because a person was already a subsistence user; the legislation would qualify them through the other two Tier II criteria. A person would qualify in the first place in subsection (c) as a subsistence user. Co-chair Sharp noted that Tier II applications asked how long an applicant had lived in the area and used the resource; the longer and more often used, the more points, and the more ability to qualify for a permit. He mentioned something about being tied to a region, which he did not think had been challenged. Senator Adams asked whether the bill would comply with the Alaska National Interest Lands Conservation Act (ANILCA). Mr. White responded that he did not believe the bill would comply with ANILCA. He thought there would have to be changes to the bill or to ANILCA in order to regain state management. Senator Adams pointed out that Senator Ted Stevens had amendments regarding ANILCA. He asked for more details about the amendments and whether they would be beneficial to the state of Alaska. Co-chair Sharp did not think what Senator Stevens would do had any relationship to HB 406. He opined that Senator Stevens did things he said he would not do and did not do other things he said he would do. Senator Adams argued that possible provisions in HB 406 could result in dual management. Co-chair Sharp believed that Senator Stevens had been "flexible" in the past. Mr. White described the amendments; whether they were beneficial to the state was a judgment the legislators could make. He underlined that the amendments would not be truly effective until December 1, and then only if the state had a law that came in compliance with ANILCA. Mr. White provided an overview of what the amendments would do. The amendments would clarify what federal lands were; ANILCA governed subsistence uses on federal lands. The amendments would make certain findings, one of which had been controversial. The amendments would define customary, traditional uses, commercial trade, and rural residency in Alaska, and they would establish reasonable opportunities to measure subsistence under federal law. The definitions and establishment of reasonable opportunity would bring ANILCA closer to what the state's statutory definitions and practices had been over the years. The amendments would specify the composition and operation of regional councils, which was not present in the existing version of ANILCA. The amendments would clarify what would happen when the state came into compliance; the state would unequivocally regain management, unless the state was found by a court to be out of compliance. The amendments dealt with federal court oversight and would establish that state agencies (such as state boards) had the same deference as equivalent federal agencies (such as federal boards) and that the decisions made by the boards could not be overturned unless found to be arbitrary, capricious, an abuse of discretion, or otherwise in violation of law. In other words, the federal courts would have to defer to interpretations or adoptions of subsistence regulations by state boards, unless they were defective in any one of the three listed ways. Finally, the amendments would not prohibit the state or the federal government from co-managing with other land- use organizations or organizations involved in subsistence resource. Co-chair Sharp queried the constitutionality and workability of HB 406. TED POPELY, COUNSEL, SENATE AND HOUSE MAJORITIES, responded that the bill as written conformed to the Alaska Constitution and would not require an amendment. He added that the provision in the bill that had raised concerns related to community-based presumptions that were fully rebuttable and had been argued to go afoul of the equal- access provisions, including uniform application of law. He did not believe the bill would be found to violate the state constitution because the residency-based criterion was not ultimately used in determining whether or not someone was a qualified subsistence user. In other words, it was merely used at the presumption stage, and was fully rebuttable, which meant that the subsistence preference was ultimately open to anybody in the state of Alaska without regard to where they lived. The criterion would merely be used in a preliminary fashion as an administrative convenience to sort people. Ultimately, since the presumption was rebuttable (by preponderance of the evidence standard) it would not be used as a determining factor as it had been in McDowell and other cases. He stressed that it would not be even a little bit of a factor in the ultimate determination by the boards of whether or not someone would qualify as a subsistence user in Alaska. Mr. Popely quoted from a passage by the Alaska Supreme Court in the Kenaitze case [1986 State v. Kenaitze Indian Tribe], the closest case providing guidance as to whether or not the proposed legislation could violate the constitution. He reminded the committee that in the Kenaitze case, the supreme court considered the Tier II provisions that originally included a person's proximity to the resource as one of the qualifying criterion. The proximity to resource was ultimately stricken and the determination was made that the non-subsistence areas were found not to violate the constitution. The court looked at the argument raised against the non-subsistence areas, which said that establishing non-subsistence areas created an extreme inconvenience for people who did not live in them. The people would not have local access to subsistence resources in their immediate proximity the way people outside the non-subsistence areas could. The court addressed the argument and said: Inconvenience is in no sense the equivalent of bar to eligibility for participation in subsistence hunting and fishing, and does not suffice to trigger an analysis under the equal access clauses. Mr. Popely submitted that the same argument would apply under HB 406 if and when it were challenged; ultimately the residence criteria would be classified as an administrative inconvenience rather than as a qualifying criterion as it was in McDowell or Kenaitze, and would therefore be upheld. Co-chair Sharp asked whether any of the proposed amendments would cause conflicts with existing state law or cause potential problems for the state. Mr. Popely responded that there had been sections that were added by Public Law 105-83 that were not contemplated at the task force stage. For example, Mr. White had addressed the basis on which the federal courts could overturn agency decisions, or the deference standard. He pointed to the example of the section added to comply with the Administrative Procedure Act, which added the section "otherwise not in accordance with law." There were also provisions in the findings of the law that was passed that were not contained in the task force proposal. For example, there was explicit recognition of both the Katie John [Katie John v. United States] and Babbitt [Alaska v. Babbitt] decisions; if the provisions were adopted because the state adopted a constitutional amendment, the provisions would become part of federal law. The Katie John decision would go to the federal government's ability and authority to manage navigable waters in Alaska, and the Babbitt decision would go to the U.S. Secretary of Interior's ultimate authority to manage lands in Alaska. Mr. Popely turned to Section 805, another provision that was added. He noted that there was a provision in the Stevens amendments that would permit the interior secretary to bring a judicial action to enforce the subsection relating to the state's compliance with federal law; that was another provision not contained in the task force proposal. In other words, if the provision were adopted, the U.S. Secretary of the Interior could bring an action to enforce the state's non-compliance with federal law, whereas under the previous Title VIII provisions, an individual would bring the action. Senator Adams asked whether HB 406 would comply with ANILCA. Mr. Popely replied that there were two questions and two answers. The first question was related to whether the bill would comply in terms of the specific preference schemes articulated under Title VIII; the answer was no. The second question was whether the legislation would comply with the general intent of ANILCA. He believed the question asked by Senator Adams was the first question. Senator Adams replied that he liked the first answer. He noted that the legislative majority had conducted a public opinion poll on the subject of subsistence. The response had been that the public wanted to vote on a constitutional amendment. He asked whether the legislature should hold back on the constitutional amendment. Co-chair Sharp opined that the choice would not be made by Mr. Popely but by the legislature. Senator Adams pointed out that Mr. Popely represented the majority. He withdrew the question. Senator Phillips MOVED to REPORT CSHB 406(FIN)am with individual recommendations and the updated fiscal note. Senator Adams OBJECTED. He stated that his problem with the bill was the constitutionality of a few provisions related to equal access and resident status. He believed that the bill would not comply with ANILCA. He thought the bill would function as an invitation for dual management, which he did not believe the public wanted. He noted the nearly $3 million fiscal note change from general funds to Department of Fish and Game funds, with the exception of a few items. He opined that there was an expectation of the measure complying with ANILCA, so that the state would get management back. A roll call was taken on the motion. IN FAVOR: Parnell, Phillips, Donley, Pearce, Sharp OPPOSED: Adams Senator Torgerson was absent from the vote. The motion PASSED (5/1). CSHB 406(FIN) was REPORTED out of committee with no recommendation and fiscal notes by the Department of Law and the Alaska Courts. ADJOURNMENT Co-chair Sharp recessed the meeting to the call of the chair at approximately 11:01 AM.