Legislature(1997 - 1998)

05/09/1998 09:00 AM FIN

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
                 SENATE FINANCE COMMITTEE                                    
                        9 May, 1998                                          
                         9:00 a.m.                                           
SFC 98-164, Sides A and B                                                      
CALL TO ORDER                                                              
Senator  Bert  Sharp,  Co-Chair,  convened  the  meeting  at                   
approximately 9:00 a.m.                                                        
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                   
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-                           
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.                                                        
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                   
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                   
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                   
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                   
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                   
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                   
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.                              
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                   
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.                                     
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                   
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.                                    
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                   
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.                                                            
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.                                             
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                   
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                   
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.                                                 
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                   
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                   
Co-chair   Sharp    queried   the    constitutionality   and                   
workability of HB 406.                                                         
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                   
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.                                                         
Co-chair Sharp recessed the meeting to the call of the                         
chair at approximately 11:01 AM.                                               

Document Name Date/Time Subjects