Legislature(2003 - 2004)

05/06/2003 09:01 AM FIN

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
                     SENATE FINANCE COMMITTEE                                                                                 
                           May 06, 2003                                                                                       
                              9:01 AM                                                                                         
SFC-03 # 77,  Side A                                                                                                            
SFC 03 # 77,  Side B                                                                                                            
SFC 03 # 78,  Side A                                                                                                            
CALL TO ORDER                                                                                                               
Co-Chair Gary Wilken convened  the meeting at approximately 9:01 AM.                                                            
Senator Lyda Green, Co-Chair                                                                                                    
Senator Gary Wilken, Co-Chair                                                                                                   
Senator Con Bunde, Vice Chair                                                                                                   
Senator Robin Taylor                                                                                                            
Senator Ben Stevens                                                                                                             
Senator Donny Olson                                                                                                             
Senator Lyman Hoffman                                                                                                           
Also Attending:   SENATOR TOM WAGONER;  REPRESENTATIVE MIKE  HAWKER;                                                          
REPRESENTATIVE  CARL  MORGAN; REPRESENTATIVE  MIKE  CHENAULT;  LOREN                                                            
GERHARD, Southeast Conference;                                                                                                  
Attending  via  Teleconference:    From  an  offnet  location:  SARA                                                          
FISHER-GOAD,  Alaska Industrial  Development  and Export  Authority;                                                            
KEVIN  BANKS,  Division  of  Oil  and  Gas,  Department  of  Natural                                                            
Resources;  MIKE NUGENT,  General Manager,  Agrium; From  Anchorage:                                                            
KEVIN  PEARSON,  Anchorage  Economic  Development  Corporation,  and                                                            
ARDOR  Director;   SUE  COGSWELL,   Price  William  Sound   Economic                                                            
Development District;  WANETTA AYERS, Executive Director,  Southwest                                                            
Alaska  Municipal   Conference;  From   Fairbanks:  JANET   DAVISON,                                                            
Community  Research Center,  Fairbanks North  Star Borough;  KATHRYN                                                            
DODGE,  Economic  Development  Coordinator,   Fairbanks  North  Star                                                            
Borough;  DEB  HICKOK,   President  and  Chief  Executive   Officer,                                                            
Fairbanks  Convention  and Visitors  Borough, and  member,  Economic                                                            
Development  Commission  of the Fairbanks  North  Star Borough;  JIM                                                            
DODSON, Chair, Fairbanks Economic Development Corporation                                                                       
SUMMARY INFORMATION                                                                                                         
SB 177-PERS/TRS COLA FOR ACTIVE DUTY MILITARY                                                                                   
The bill reported from Committee.                                                                                               
HB 203-AIDEA DIVIDENDS TO STATE                                                                                                 
The  Committee heard  from  the sponsor  and the  Alaska  Industrial                                                            
Development  and Export Authority.  The bill was held in  Committee.                                                            
HB  79-AK REGIONAL ECONOMIC ASSISTANCE PROGRAM                                                                                  
The  Committee  heard from  the  sponsor  and  representatives  from                                                            
economic  development  organizations.  A  committee  substitute  was                                                            
adopted and the bill was reported from Committee.                                                                               
HB  57-ROYALTY GAS CONTRACTS                                                                                                    
The Committee  heard from the sponsor  of this bill and a  companion                                                            
Senate  bill, the  Department  of Natural  Resources,  and  industry                                                            
representatives. The bill was held in Committee.                                                                                
HB 170-MOTOR VEHICLE REGISTRATION FEES                                                                                          
This bill was scheduled but not heard.                                                                                          
     SENATE BILL NO. 177                                                                                                        
     "An  Act  relating  to  cost-of-living   benefits  for  retired                                                            
     members  in the  public employees'  retirement  system and  the                                                            
     teachers'  retirement system who are called to  active military                                                            
     duty; and providing for an effective date."                                                                                
This was  the second  hearing for  this bill in  the Senate  Finance                                                            
Co-Chair  Wilken  reminded  the  Committee  of  discussions  on  the                                                            
feasibility  of incorporating  the  provisions  of SB  26 with  this                                                            
bill.  He informed  that  "fiscal complications"  are  involved  and                                                            
therefore each bill would be considered independently.                                                                          
Co-Chair  Green offered  a motion  to report SB  177 from  Committee                                                            
with individual recommendations and accompanying fiscal note.                                                                   
There was no objection  and SB 177 MOVED from Committee  with fiscal                                                            
note #1 from the Department of Administration.                                                                                  
     HOUSE BILL NO. 203                                                                                                         
     "An  Act  relating  to  the definitions  of  'net  income'  and                                                            
     'unrestricted  net  income'  for purposes  of  calculating  the                                                            
     dividends  to be  paid to the  state by  the Alaska  Industrial                                                            
     Development   and  Export  Authority;  and  providing   for  an                                                            
     effective date."                                                                                                           
This  was the first  hearing  for this  bill in  the Senate  Finance                                                            
Co-Chair Wilken  stated that this bill "clarifies  the definition of                                                            
'net income'  in regards to the annual  dividend that AIDEA  [Alaska                                                            
Industrial Development  and Export Authority] pays  to the State. If                                                            
passed, in  FY 04 AIDEA  dividend would raise  somewhere between  $9                                                            
and $18 million."                                                                                                               
REPRESENTATIVE MIKE HAWKER  testified on behalf of the House Finance                                                            
Committee that  this bill addresses a "circumstance  encountered" in                                                            
AIDEA  operations  and  financial   reporting  in  relation  to  the                                                            
statutory  net income  of  the Authority.  Under  the provisions  of                                                            
current statute, he informed  that, AIDEA would not contribute "it's                                                            
regular" dividend  to the State general fund in FY  04. He explained                                                            
that current  statute provides that  AIDEA "shall distribute  to the                                                            
State a judgmental  determination  between 25 and 50 percent  of its                                                            
net income" to the State general fund for "general purposes".                                                                   
Representative  Hawker specified that the definition  of "net income                                                            
subject to distribution"  is the purpose of this legislation, noting                                                            
the accounting  of net income by AIDEA  is "somewhat different  than                                                            
what  the  State  believes  [should  be]  subject  to  the  dividend                                                            
calculation."  He  explained  that current  statute  exempts  inter-                                                            
government  transfers, capital  contributions  and grants;  opining,                                                            
"Clearly, those items that  are not part of the operating results of                                                            
AIDEA that should be subject to some kind of a dividend."                                                                       
Representative  Hawker shared that this bill proposes  including the                                                            
"write-down  of fixed or  hard assets,  [i.e.] previous investments                                                             
that  one would  call impairment  losses"  to the  income items  not                                                            
utilized   in  the   calculation   of   net  income   for   dividend                                                            
distribution.  He  exampled  the  write-off  in  the  past  year  of                                                            
substantial  investments in the Alaska  Seafood International  (ASI)                                                            
processing  plant  in Anchorage  as  well as  the Healy  Clean  Coal                                                            
project.  He reminded  that  these investments  were  made by  AIDEA                                                            
"many years  ago" and  that the  write-down of  those assets  had no                                                            
affect  on  the  cash  flow  of  the  Authority,   nor  its  ongoing                                                            
operations  during  the  reporting  year.  He  elaborated  that  the                                                            
investments had not provided  a cash return to AIDEA for a number of                                                            
Representative Hawker instructed,  "these types of impairment losses                                                            
are  not uncommon;  they  are  to  be anticipated  in  operating  an                                                            
operation  like  AIDEA."  However,  he expressed  concern  with  the                                                            
ability of  AIDEA to utilize  write-downs of  past investments  as a                                                            
devise  to  avoid  payment  of  a  dividend.  He  noted  that  AIDEA                                                            
currently has $789 million  unrestricted net assets, $356 million of                                                            
which is unrestricted  cash and investments. Therefore,  he surmised                                                            
this legislation would  "facilitate a steady, regular, recurring and                                                            
predictable  dividend  from  AIDEA,"  to the  benefit  of  financial                                                            
planning  for the State.  He furthered that  the provisions  of this                                                            
legislation  would  not  impose  an  egregious  restriction  on  the                                                            
Authority's  net  income.  Rather, he  opined,  it would  provide  a                                                            
"stable  environment"  for  relations with  the  Authority's  debtor                                                            
agencies, lenders,  "the financial  community and the State  and the                                                            
Nation as a whole."                                                                                                             
Representative Hawker predicted  this legislation would result in an                                                            
additional  $18   million  AIDEA  dividend  for   FY  04,  which  he                                                            
considered "appropriate at this time".                                                                                          
Senator  Bunde asked  if the provisions  of  this legislation  would                                                            
comply with generally accepted accounting principles (GAAP).                                                                    
Representative  Hawker replied  that this  bill would reconcile  the                                                            
difference  between  GAAP, the  required  procedure  by which  AIDEA                                                            
reports  financial  statements,  to a  statutory definition  of  net                                                            
income,  whereby the  Legislature  would create  a dividend  policy.                                                            
This policy, he  said, would "modify the accountant's  definition of                                                            
the all inclusive net income  to exclude these particular items." In                                                            
his  professional  opinion, as  a Certified  Public  Accountant,  he                                                            
assured this would be in accordance with GAAP.                                                                                  
Co-Chair  Wilken referenced  a  letter of  opposition  to this  bill                                                            
dated April 1, 2003, from AIDEA.                                                                                                
Senator Olson wanted to know why AIDEA opposes this legislation.                                                                
SARA  FISHER-GOAD,   Alaska   Industrial   Development  and   Export                                                            
Authority,  testified via  teleconference from  an off net  location                                                            
about the Board's  primary concern  with the precedence a  statutory                                                            
change to dividend  calculations could  set in creating a  situation                                                            
whereby AIDEA could not pay a dividend.                                                                                         
Senator Olson asked the  sponsor if this legislation would result in                                                            
the Authority investing in "less than profitable" ventures.                                                                     
Representative Hawker asserted  this would not affect the investment                                                            
policy of AIDEA.  He recalled legislation passed the  prior session,                                                            
which  significantly  redefined  net  income  and  unrestricted  net                                                            
income and  was precipitated  by "the accounting  world's change  in                                                            
its presentation  of  financial  statements". He  characterized  the                                                            
current legislation  is a "finalization" of the changes  made in the                                                            
earlier  legislation and  actually  a "housekeeping"  matter than  a                                                            
policy  direction.  He surmised  it  would  not encourage  AIDEA  to                                                            
operate  in  a manner  other  than  the  most prudent  and  in  best                                                            
interest of the State.                                                                                                          
Senator Taylor asked why  the losses on investments, which have been                                                            
occurring  for some period  of time, are  only recently reported  as                                                            
such. He questioned  whether the reasons are political.  He compared                                                            
the practice  to the recent  national events  involving the  alleged                                                            
dubious  accounting   practices  of  the  Enron  Corporation.     He                                                            
contended that  the previous gubernatorial  administration  reported                                                            
the value of the seafood  plant and the clean coal project as higher                                                            
than  their  actual  worth.  He  therefore   asked  if  the  current                                                            
Murkowski  Administration  corrected the accounting  procedures  and                                                            
subsequently wrote down the losses.                                                                                             
Representative Hawker was  unable to speak to the motives of actions                                                            
taken  by AIDEA.  However, he  spoke to  the practice  of  preparing                                                            
financial   statements,    which   involves   judgment    decisions,                                                            
particularly  judgments  to  the "realizability"   of the  value  of                                                            
assets. He further informed  that the impaired value of "long lived"                                                            
assets has been  a matter of controversy due to inconsistencies.  As                                                            
a result, he  noted, accounting standards  have been changed  in the                                                            
past several years.                                                                                                             
Senator Taylor asked if  the State regularly audits AIDEA. If so, he                                                            
questioned  why auditors had not identified  the losses in  the past                                                            
and  subsequently require  the  Authority  to account  for them.  He                                                            
pointed  out that  AIDEA had  the ability  to pay  dividends to  the                                                            
State during the previous administration.                                                                                       
Ms. Fisher-Goad  spoke to a trigger  mechanism that determines  when                                                            
impairment losses  are recognized. She informed that  losses for the                                                            
Healy Clean  Coal project have been  written down once prior  to the                                                            
occasion  of the previous  fiscal year. She  noted that because  ASI                                                            
underwent   a  process   of  refinancing   and  restructuring,   the                                                            
impairment  loss  was not  "recognized"  until the  previous  fiscal                                                            
year. She stated  that AIDEA produces  audited financial  statements                                                            
each  year and  that  each legislator  should  receive  copy of  the                                                            
Senator  Taylor   requested  that  financial  auditors   within  the                                                            
Division of Legislative  Finance review the financial statements. He                                                            
was concerned why the losses  were not reflected earlier. He assured                                                            
he supports the legislation.                                                                                                    
Co-Chair Wilken  listed considerable discussion on  the two projects                                                            
as well as pending federal  legislation to "bail out" the clean coal                                                            
project as possible factors in the timing of the write-downs.                                                                   
Co-Chair Wilken  pointed out that  the fiscal note amount  indicates                                                            
an indeterminate  cost to  implement this  legislation; however  the                                                            
accompanying  analysis estimates the  cost to be between  $8 million                                                            
and $9 million. He asked  if a more definitive figure was available.                                                            
He also  wanted an  estimate of future  revenues  to the State  as a                                                            
result of the changed dividend amounts.                                                                                         
Representative   Hawker   responded   that   the  fiscal   note   is                                                            
indeterminate  because the statute provides a "range  upon which the                                                            
dividend  may be judgmentally  determined."  The range, he  said, is                                                            
between 25  to 50 percent  of net income.  He calculated a  possible                                                            
dividend of $9,058,000  at 25 percent and $18,170,000 at 50 percent.                                                            
He was unaware of any disputes to the accuracy of these figures.                                                                
Co-Chair Wilken surmised  that in a year that AIDEA unrestricted net                                                            
assets and/or investments  was unfavorable, the State has the option                                                            
of not receiving a dividend.                                                                                                    
Representative  Hawker affirmed and  clarified that current  statute                                                            
provides  that the legislature  would be  "statutorily post  scribed                                                            
from taking any cash from AIDEA."                                                                                               
Senator Taylor suggested  that with statutory change, AIDEA could be                                                            
liquidated and  approximately $700 million deposited  into the State                                                            
general fund.                                                                                                                   
Co-Chair Green asked for a definition of impairment losses.                                                                     
Representative  Hawker qualified that  accounting terms are  defined                                                            
similar  to the manner  in which  attorneys define  legal terms.  He                                                            
described  impairment  loss as  an investment  in  a "tangible  hard                                                            
asset," such as  a building, that has a "productive  capacity", i.e.                                                            
would generate  a return when utilized, but is no  longer capable to                                                            
do so  and subsequently  "pay for  itself". He  exampled a  building                                                            
fire as  an event that  could result in  an impairment loss  because                                                            
the value  of the  building would  be less than  the investment.  He                                                            
specified  that a  major fire  would  be considered  a catastrophic                                                             
impairment loss.  He furthered that other events could  result in an                                                            
impairment  loss,  telling  of  the investment  in  a  coal  loading                                                            
facility, with  the return on investment  dependent upon  a contract                                                            
for the  use of that facility.  If the contract  is not renewed,  he                                                            
pointed  out,  the  value  of  the  facility   is  impaired  and  an                                                            
impairment  loss  results.  He stated  that  an impairment  loss  is                                                            
reported in financial statements  as an estimate of the reduction in                                                            
Co-Chair Green  referenced a portion of the sponsor  statement [copy                                                            
on file], which reads as follows.                                                                                               
     Under current  statute there will be no AIDEA  income available                                                            
     for a dividend in  fiscal 2004 as a result of impairment losses                                                            
     recognized  on the Healy Clean Coal Project and  Alaska Seafood                                                            
     International.  Still, AIDEA  has $789 million in unrestricted                                                             
     net  assets   and  $356  million   of  unrestricted   cash  and                                                            
     investments  from which a dividend could be paid.  The dividend                                                            
     formula  proposed  in  House  Bill 203  would  make  $9 to  $18                                                            
     million of this money  available for a dividend to the State in                                                            
     FY 04.                                                                                                                     
Co-Chair  Green   next  directed  attention  to  a  handout   titled                                                            
"Management Discussion  and Analysis" [copy on file], which compares                                                            
assets  and liabilities  of FY  02 and  FY 03.  This information  is                                                            
contained on  page 13 of the AIDEA  2002 Annual Report [portions  of                                                            
which are  on file.] She  asked if the unrestricted  net income  and                                                            
unrestricted  cash figures  cited in the  sponsor statement  reflect                                                            
the  FY 03  amounts  shown  on the  Analysis,  and how  the  amounts                                                            
compare to previous years.                                                                                                      
Representative  Hawker  replied  that  the  amounts  listed  in  the                                                            
sponsor statement  reflect the amounts current as  of June 30, 2002.                                                            
For comparison  purposes, he  referenced page  16 of the AIDEA  2002                                                            
Annual  Report, titled  "Balance Sheet"  [copy on  file]. He  stated                                                            
that  the   figures  are  based  on   a  two  year  "back   trailing                                                            
Co-Chair Green  requested historical information from  2001 and 2002                                                            
for comparison purposes.   She wanted to know whether a trend exists                                                            
in the "status of AIDEA".                                                                                                       
Representative Hawker listed  the cash and equivalence component for                                                            
FY 02 as $14,415,000;  FY 01 as $28,600,000; and FY  00 $27,400,000.                                                            
He next listed  the current investment securities  amounts for FY 01                                                            
as $400,000,000  and  $352,000,000  for FY  00. He  stated that  the                                                            
reductions were as a result  of the write off of the impairment loss                                                            
from the two facilities.                                                                                                        
Co-Chair Wilken asked the unrestricted net assets of FY 00                                                                      
Representative  Hawker  answered  $856  [million],  qualifying  this                                                            
amount is an "approximation,  recognizing the change  in format." He                                                            
furthered  that the amount  in FY  01 was $877  [million], and  $789                                                            
[million] in FY 02.                                                                                                             
Senator  Taylor asked  whether this  legislation  must be passed  to                                                            
ensure  the State receives  a dividend  from AIDEA  in the  upcoming                                                            
fiscal year.                                                                                                                    
Co-Chair Wilken affirmed.                                                                                                       
Senator Olson  referenced the June 30, 2002 Balance  Sheet and asked                                                            
the percentage  of AIDEA earnings derived from the  Red Dog Mine and                                                            
how this legislation would affect that operation.                                                                               
Representative Hawker deferred to AIDEA                                                                                         
Senator  B. Stevens directed  attention  to pages  20 and 21  of the                                                            
AIDEA  2002  Annual   Report  titled,  "Notes  to  Basic   Financial                                                            
Statements"  [copy on file].  He pointed  out note (1) Organization                                                             
and  Operations, lists  the  initial AIDEA  bond  obligation of  $85                                                            
million for  the Healy Clean Coal  Project and $48 million  for ASI,                                                            
totaling $133 million.  He noted the write-down of the loss in these                                                            
investments  is $93 million and he  asked if additional write-downs                                                             
would occur for the balance  of approximately $41.6 million invested                                                            
in these projects.                                                                                                              
Representative Hawker again deferred to AIDEA.                                                                                  
Senator B.  Stevens continued to page  26 and (7) Net Investment  in                                                            
Direct Financing  Leases,  Notes and Development  Projects  [copy on                                                            
file] and cited a portion as follows.                                                                                           
     The components of the Authority's net investment in direct                                                                 
     financing leases at June 30, 2002 are (stated in thousands):                                                               
          Minimum lease payments receivable         $824,645                                                                    
                Less unearned income                (495,031)                                                                   
                Less impairment loss                 (25,600)                                                                   
          Net investment in direct financing leases                                                                             
Senator  B. Stevens surmised  the unearned  income represents  lease                                                            
payments  or  finance  payments  not  collected.   He  requested  an                                                            
explanation  of the impairment loss  in this context as it  appeared                                                            
to be recorded  as a payment not received  rather than as  an asset.                                                            
Representative Hawker explained  the two investments made into these                                                            
projects,  one into  a hard asset,  the other  financing leases  for                                                            
operations.  He furthered  that  the second  investment essentially                                                             
created a loan  to provide funding  to support the project.  In this                                                            
instance, he said the asset  is a loan to be repaid in the form of a                                                            
lease. The unearned  income, he stated, represents  the repayment of                                                            
the loan and the  impairment loss represents a further  reduction in                                                            
the value of the investment that would not be recouped.                                                                         
Senator B.  Stevens clarified  two forms  of impairment losses  were                                                            
realized, one  in the value of the asset, the other  in the value of                                                            
future revenues from that investment.                                                                                           
Representative  Hawker affirmed and  noted the loss of value  to the                                                            
State in this asset is manifested in the leases.                                                                                
Ms. Fisher-Goad  addressed the remaining  $41.6 million invested  in                                                            
the Healy and  ASI projects that had not been written  down to date.                                                            
She first clarified that  no bonds were issued for the investment in                                                            
Senator B. Stevens  asked if AIDEA therefore purchased  the facility                                                            
outright without bond financing.                                                                                                
Ms. Fisher-Goad  affirmed. She explained that the  value of ASI, for                                                            
the  purpose of  reporting  an impairment  loss,  was determined  by                                                            
calculating the "alternative use value" of the building.                                                                        
Co-Chair  Wilken again asked  the status of  the $41.6 million,  and                                                            
whether  it  would be  reported  as  an impairment  loss  in  future                                                            
financial statements.                                                                                                           
Ms. Fisher-Goad was not  prepared to answer to the future of the two                                                            
projects.  She noted that  impairment losses  were reported  for the                                                            
projects, but emphasized  that assets continue to depreciate and are                                                            
reported as  such regardless of whether  an impairment loss  occurs.                                                            
Senator B.  Stevens noted  the potential  that impairment losses  on                                                            
these investments  would be reported in future financial  statements                                                            
would influence his support  of this legislation because such write-                                                            
downs could impede the  Authority's ability to pay a dividend to the                                                            
Co-Chair  Wilken understood  that AIDEA recognizes  $133 million  in                                                            
asset value,  and although  $91 million has  been written down,  the                                                            
remainder of the investment has not yet "been dealt with".                                                                      
Representative  Hawker rephrased the question to AIDEA:  He asked in                                                            
the context of  future prospects, what is the current  book value of                                                            
the coal project  and of the ASI investments, and  the prospects for                                                            
further impairment recognitions in future fiscal years.                                                                         
Ms. Fisher-Goad  repeated that she  was not prepared to provide  the                                                            
current  book  value  of these  assets  nor  whether  the  Authority                                                            
expects future impairment loss recognition.                                                                                     
Co-Chair  Wilken  requested  this  information  be provided  to  the                                                            
Ms. Fisher-Goad  stated she would provide this information  later in                                                            
the week.                                                                                                                       
Senator  B.  Stevens   also  requested  information   regarding  the                                                            
impairment  losses reported over the  past five years. He  indicated                                                            
language  on  page  14 of  the  AIDEA  2002  Annual  Report,  titled                                                            
"Management's Discussion  and Analysis" [copy on file] referencing a                                                            
$10,419  impairment  loss recorded  in  FY 01  for the  Skagway  Ore                                                            
Terminal. He expressed  interest in the frequency of impairment loss                                                            
reporting by AIDEA.                                                                                                             
Ms. Fisher-Goad  would provide this  information the following  day.                                                            
Co-Chair   Green   also   requested   information    regarding   the                                                            
unrestricted  cash investments and  unrestricted net assets  for the                                                            
same five years.                                                                                                                
Ms.   Fisher-Goad   noted  significant   accounting   changes   were                                                            
implemented the  previous year, cautioning that comparison  would be                                                            
Senator  Taylor remarked  that  this  legislation provides  that  if                                                            
impairment  losses are recognized  and allowed as an exclusion  from                                                            
net  income, a  dividend  would be  available  to the  State in  the                                                            
current fiscal  year. He opined this issue is more  important than a                                                            
determination  of impairment  losses  in past  years. Therefore,  he                                                            
emphasized  the importance  of this legislation.  He commented  that                                                            
although  he  appreciated  that  the  recording  of  the  impairment                                                            
losses, as well as changing  accounting principles, have "cleaned up                                                            
the books".  However, he  stressed his "attitude  toward AIDEA"  and                                                            
the asset base,  is unchanged. He preferred to report  the bill from                                                            
Committee and address the questions later in the process.                                                                       
Co-Chair  Wilken noted  adequate time  remained  in the legislative                                                             
session to address this bill.                                                                                                   
Co-Chair  Wilken agreed  this bill  would provide  a revenue  source                                                            
that should be implemented.                                                                                                     
SFC 03 # 77, Side B 09:48 AM                                                                                                    
Co-Chair Wilken ordered the bill HELD in Committee.                                                                             
     HOUSE BILL NO. 79                                                                                                          
     "An Act extending  the termination date of the  Alaska regional                                                            
     economic  assistance program;  and providing  for an  effective                                                            
This  was the first  hearing  for this  bill in  the Senate  Finance                                                            
Co-Chair  Wilken explained  that this  bill sponsored  by the  House                                                            
Community  and Regional  Affairs  Committee would  reauthorize  "the                                                            
Alaska  Regional  Economical  Assistance  Program, better  known  as                                                            
ARDOR [Alaska  Regional  Development Organization],  for five  years                                                            
until July 1, 2008. He  announced he prepared a committee substitute                                                            
that would change the extension date to one year.                                                                               
REPRESENTATIVE  CARL  MORGAN, Chair,  House Community  and  Regional                                                            
Affairs Committee,  read talking points into the record  as follows.                                                            
     The Alaska  Regional Development Organizations  (ARDOR) Program                                                            
     is  the  State's  contribution   to regional   initiatives  for                                                            
     developing Alaska's economy.                                                                                               
     There are currently 13 ARDORS statewide.                                                                                   
     The Legislature first created the ARDOR Program in 1988.                                                                   
     The ARDOR  Program provides a network of organizations  to plan                                                            
      and support economic development at the regional level.                                                                   
     Board members participation reflects a local commitment.                                                                   
     Each  ARDOR, with 15-20  members, constitutes  150 plus  local,                                                            
     civic minded individuals  who volunteer their time to achieve a                                                            
     stronger economic base in their region.                                                                                    
     The  ARDOR  Program  is  providing  a return  for  the  State's                                                            
     The State provides $620,000 in grant funds. The ARDORs [have]                                                              
     used these grant funds to leverage over $3 million in other                                                                
     House Bill 79 extends this successful program to July 1, 2008.                                                             
Representative  Morgan  noted each  ARDOR receives  over $47,000  in                                                            
State funding.                                                                                                                  
Co-Chair Wilken  spoke to a proposed committee substitute  to extend                                                            
the commission  for one year instead  of the five years provided  in                                                            
the bill.                                                                                                                       
Co-Chair  Green  moved  for adoption  of  HB  79, 23-LS0493\D  as  a                                                            
working draft.                                                                                                                  
Co-Chair  Wilken objected to  speak to the  changes proposed  in the                                                            
committee substitute. He  pointed out the $620,000 cost to the State                                                            
to fund this program. He  indicated the 2003 annual report submitted                                                            
to the Legislature by ARDOR  [copy not provided], is unclear whether                                                            
each regional  organization  is successful.  He noted the  Southeast                                                            
Regional Conference  demonstrates success and an ability  to measure                                                            
that success;  however, he commented  that others are "a  little lax                                                            
as to where  and what they're  spending their  money on and  whether                                                            
indeed there's any results."                                                                                                    
Co-Chair  Wilken  referenced  a letter  dated  April 11,  2003  from                                                            
himself to  Commissioner Blatchford  of the Department of  Community                                                            
and Economic Development  [copy on file], suggesting  elimination of                                                            
the ARDOR  Program in FY  05. However, rather  than eliminating  the                                                            
program, Co-Chair Wilken  informed the Committee of his intention to                                                            
review the  matter during  the legislative  interim to ensure  funds                                                            
allocated to the program are used wisely.                                                                                       
Co-Chair  Wilken next directed  attention to  a letter to the  House                                                            
Community and  Regional Affairs Committee from the  Alaska Municipal                                                            
League, dated  February 20,  2003 [copy on  file]. He informed  this                                                            
letter also requests implementation of performance measures.                                                                    
Co-Chair  Wilken  surmised  the  Department  is  agreeable  to  this                                                            
intent. Therefore, he suggested  extending the program only one year                                                            
to  allow for  review  of the  findings  the  following legislative                                                             
session. He assured that  if no problems are identified, the program                                                            
could be extended further.                                                                                                      
Senator  Olson  requested  the  opinion  of  sponsor  regarding  the                                                            
proposed committee substitute.                                                                                                  
Representative  Morgan  qualified  that  he  had  not  reviewed  the                                                            
proposed committee  substitute and  that he had no control  over the                                                            
will of the Senate Finance Committee.                                                                                           
Senator Olson  shared the co-chair's concerns about  accountability;                                                            
however  he  attributed   this  to  the  maturing   process  of  the                                                            
participants.  He questioned the "wisdom" of a one-year  termination                                                            
Co-Chair  Wilken  reiterated  this  change  would  focus  effort  on                                                            
"developing  the worth of  the $650,000  expenditure." He  suggested                                                            
all or  a portion of these  funds might  be better spent  elsewhere.                                                            
Regardless,  he said  the expenditures  should be  reviewed and  the                                                            
findings "embodied" in the FY 05 budget.                                                                                        
Senator Olson  asked the amount of  federal funding involved  in the                                                            
Representative  Morgan replied that the State appropriation  garners                                                            
over $13 million annually.                                                                                                      
There was no  objection and the committee  substitute, Version  "D",                                                            
was ADOPTED as a working draft.                                                                                                 
KEVIN  PEARSON,  Anchorage  Economic  Development  Corporation,  and                                                            
ARDOR  Director,  testified  via teleconference  from  Anchorage  in                                                            
favor of  extending the  ARDOR Program. Although  the ARDOR  Program                                                            
provides a small percentage  of the funding for economic development                                                            
activities  in Anchorage, he emphasized  the sole reliance  on these                                                            
funds  by outlying  communities.  He  was  also concerned  with  the                                                            
"message" an extension  of only one-year would portray to investors.                                                            
Mr. Pearson charged  that the onus is on the Legislature  as to what                                                            
information is  needed to measure the program's success  and justify                                                            
the expenditure.  He furthered  that the  program is successful  and                                                            
information is available to demonstrate this.                                                                                   
SUE COGSWELL,  Price William  Sound Economic  Development  District,                                                            
testified via teleconference  from Anchorage about the participation                                                            
in the  ARDOR  program since  1991 and  as an  economic development                                                             
district  since  2001.  She told  of  projects  to build  a  seafood                                                            
processing plant  in Valdez, an economic development  summit held in                                                            
Cordova and the hope for additional economic growth.                                                                            
WANETTA  AYERS,  Executive  Director,  Southwest   Alaska  Municipal                                                            
Conference (SWAMC),  testified via teleconference  from Anchorage in                                                            
favor of reauthorization  of the ARDOR  Program on behalf  of the 54                                                            
communities  and 131 members  of the Conference.  She informed  that                                                            
the Conference  was formed in 1986  and earned ARDOR designation  in                                                            
1989. She reported that  State funding comprises 22 to 25 percent of                                                            
the  Conference's  budget during  the  past several  years;  federal                                                            
funding comprises  approximately 25 percent; and over  50 percent of                                                            
the funding  is  derived from  earned income.  She noted  that  as a                                                            
designated   economic   development   district,   SWAMC  saves   the                                                            
communities  of  Southwestern   Alaska  "hundreds  of  thousands  of                                                            
dollars,  if not  millions"  annually by  reducing  the local  match                                                            
requirement for  federally funded projects.  She furthered  that the                                                            
SWAMC allows area communities  to be more efficient and in a "better                                                            
position to take advantage of market opportunities".                                                                            
Ms. Ayers told  the Committee that  in FY 02, SWAMC was selected  by                                                            
the  US Congress  to  administer  a  $30 million  stellar  sea  lion                                                            
mitigation  fund. She noted  that little  direction was provided  in                                                            
the  enabling  legislation,  although  review  of  other  mitigation                                                            
programs,  the SWAMC  board  established  three goals:  achieve  the                                                            
soonest  possible distribution  of fund to  those directly  impacted                                                            
but  federal  fisheries  closures  and  restrictions,   to  minimize                                                            
administrative   costs  to  one  percent  or  less,  and  develop  a                                                            
negotiated settlement  process that has widespread  support from the                                                            
communities, businesses  and individuals most impacted. She reported                                                            
that all  three objectives  were achieved.  She  stated this  is one                                                            
example of accomplishments ARDOR groups could realize.                                                                          
Ms. Ayers opined  that a one-year extension rather  than a four-year                                                            
extension  of the program  would be  "an indication  of the  State's                                                            
lack of commitment  to economic development." She  stressed the need                                                            
for an on-going commitment.                                                                                                     
Co-Chair  Wilken  assured  that  if  review  of  the  ARDOR  Program                                                            
determines that  the expenditures are justifiable,  he would support                                                            
increased funding for the program.                                                                                              
JANET  DAVISON,  Community  Research Center,  Fairbanks  North  Star                                                            
Borough, testified  via teleconference from Fairbanks  about her job                                                            
duties in monitoring economic  development activities in the Borough                                                            
and measuring  "gains and  losses" in the  community. She  suggested                                                            
the Entrepreneurial  Statement  report she  produces is a  "starting                                                            
place" for  measuring the success  of economic development  efforts.                                                            
She stressed that  the funds allow for economic development  efforts                                                            
is  rural communities.   She spoke  to  the benefits  of  the  ARDOR                                                            
Program and the  economic development opportunities  it continues to                                                            
provide in both urban and rural communities.                                                                                    
KATHRYN  DODGE, Economic  Development Coordinator,  Fairbanks  North                                                            
Star  Borough,  testified via  teleconference  from  Fairbanks  that                                                            
economic  development   is a  long-term   commitment  and  does  not                                                            
demonstrate  results  overnight.   She  remarked  that  a  five-year                                                            
extension of the  ARDOR Program would send a message  of commitment.                                                            
She  expressed  that  the  Fairbanks  ARDOR  Program  "compels"  the                                                            
community  to  focus on  economic  development  and  encourages  the                                                            
development  of public and private  partnerships in the "pursuit  of                                                            
future economic development for the Borough and for the State."                                                                 
Ms.  Dodge   described  the   local  program's   development   of  a                                                            
comprehensive  economic  development  strategy  and  the  subsequent                                                            
increased momentum  and prioritization  of projects. She  stated the                                                            
local  ARDOR  Program  obtained  $331,000  in economic  development                                                             
grants  secured using  the $44,000  State appropriation  during  the                                                            
past  year.  She gave  examples  of  expenditures  of  these  funds,                                                            
including  assistance  commercial  fish  processors in  the  region,                                                            
hosting  public  safety regional  training  ranges  and development                                                             
efforts to create a cold weather testing industry.                                                                              
DEB  HICKOK,  President  and  Chief  Executive  Officer,   Fairbanks                                                            
Convention  and Visitors Borough,  and member, Economic Development                                                             
Commission  of  the Fairbanks  North  Star  Borough,  testified  via                                                            
teleconference  from Fairbanks that  she understood the hard  budget                                                            
decisions  faced  by  the  Committee,  but  stressed  that  economic                                                            
development  is important. She spoke  to the opportunity  for "grass                                                            
roots"  or "bottom  up" economic  development. She  attested to  the                                                            
success  of  the  ARDOR  Program  in  Fairbanks  and  the  resulting                                                            
"heightened climate of  economic development" since inception of the                                                            
program.  She  described  the  history   of the  organization,   now                                                            
operating  under  the direction  of  professionals  and receiving  a                                                            
larger percentage  of funding from  the Borough. She disagreed  with                                                            
Co-Chair Wilken's  proposal for one-year  extension, as this  is too                                                            
short a goal for measurement.                                                                                                   
JIM  DODSON,  Chair, Fairbanks  Economic  Development  Corporation,                                                             
testified via teleconference  from Fairbanks that the Corporation is                                                            
a recipient  of funding from  the Fairbanks  North Star Borough.  He                                                            
encouraged  support of  original version  of the  bill. He spoke  to                                                            
measurable  results in economic  development  and stressed  the need                                                            
for economic  development  opportunities in  the State.  He  pointed                                                            
out  that  additional  funds  would  be needed  in  the  future.  He                                                            
supported a five-year extension of the ARDOR Program.                                                                           
Senator Olson  asked the potential  increase or decrease  of federal                                                            
funds received  if the Program  were extended  one year rather  than                                                            
Co-Chair Wilken suspected no impact.                                                                                            
LOREN GERHARD,  Southeast Conference  testified in Juneau,  that the                                                            
$47,000  appropriation to  the ARDOR Program  provides one-third  of                                                            
unencumbered   funding  for  the  Conference,  which   is  leveraged                                                            
approximately  ten-to-one to receive  federal funds and other  grant                                                            
program  funding.  He stated  that all  of the  funds  are used  for                                                            
improving  economic   opportunities  in  the  Southeastern   region.                                                            
Outside   Juneau,  he   pointed  out,   the   region  is   suffering                                                            
economically,  and  remarked  that  the  ARDOR Program  is  a  cost-                                                            
effective  way  to  ensure  that  regions  are addressing   economic                                                            
development specific to each region.                                                                                            
Co-Chair  Wilken opined that  the report  prepared by the  Southeast                                                            
Conference is  superior to the reports submitted by  the other ARDOR                                                            
Programs. He expressed  that this report would be used as an example                                                            
in efforts to improve the Program.                                                                                              
Senator  Olson asked  the impact  a shorter  termination date  would                                                            
have on the Southeast Conference.                                                                                               
Mr. Gerhard  replied that  it would not affect  the Program  and the                                                            
receipt  of federal  funds, although  it could  effect planning  for                                                            
future  projects.  He emphasized  the  benefits  of the  ability  to                                                            
utilize the  State appropriation as  unencumbered funds to  leverage                                                            
federal funding.                                                                                                                
Senator Taylor  offered a motion to  report HB 79, 23-LS0493\D  from                                                            
Committee with  individual recommendations  and accompanying  fiscal                                                            
Without objection, SCS  HB 79 (FIN) with the $650,000 fiscal note #2                                                            
from the  Department of  Community and  Economic Development,  MOVED                                                            
from Committee.                                                                                                                 
     CS FOR HOUSE BILL NO. 57(FIN)                                                                                              
     "An Act amending the manner of determining the royalty                                                                     
     received by the state on gas production as it relates to the                                                               
     manufacture of certain value-added products."                                                                              
This  was the first  hearing  for this  bill in  the Senate  Finance                                                            
Co-Chair Wilken  stated this bill "allows the Department  of Natural                                                            
Resources commissioner  to adjust  the value of the State's  royalty                                                            
share for gas  used by a manufacturer  for agricultural chemicals."                                                             
He noted a proposed  committee substitute "Version  C" was submitted                                                            
to the Committee by the  sponsor. He requested a presentation of the                                                            
bill and a comparison of  "Version C" to the House Finance committee                                                            
substitute [referred to as "Version X"].                                                                                        
REPRESENTATIVE  MIKE CHENAULT,  Sponsor, explained  this bill  "adds                                                            
certainty  to in-State  value-added  manufacturing".  Currently,  he                                                            
informed,  royalty  prices are  calculated  in four  different  ways                                                            
which causes problems for  manufacturers because the price of gas is                                                            
uncertain,  as well as the royalty  owed on that gas.  He  explained                                                            
that four years after the  sale of product, an audit could determine                                                            
that the price was considerably  higher, costing the manufacturer $4                                                            
to $5 million  in additional royalties.  He stated this legislation                                                             
would permit  manufacturers  to negotiate  the price  of the  gas to                                                            
allow the  manufacturers  to sell it  at a price  that allows  for a                                                            
SENATOR  TOM WAGONER  clarified  this  legislation  pertains to  the                                                            
"price of the State royalty share of gas".                                                                                      
Senator  Bunde  commented  that residents  of  the  Kenai  Peninsula                                                            
oppose  the  level of  State  spending;  however,  this legislation                                                             
proposes increased State  funding. He understood the need to support                                                            
viable industry. He asked the estimated cost to the State.                                                                      
Representative  Chenault cited the  fiscal note, which predicts  the                                                            
cost to be between zero  and $11,5 million in lost royalty payments.                                                            
He listed  the factors,  including the negotiations  reached  by the                                                            
commissioner, employment  opportunities and tangible benefits to the                                                            
Senator Taylor asked the version the sponsor supports.                                                                          
Representative  Chenault   responded  that  the proposed   committee                                                            
substitute,  Version "C"  mirrors Senate  companion legislation  and                                                            
reflects a compromise agreed upon by the Senate.                                                                                
Senator Wagoner reiterated Version "C" is the preferred version.                                                                
Senator  Taylor moved  for adoption  of CS HB  57, 23-LS0303\C  as a                                                            
working draft.                                                                                                                  
Without objection the committee  substitute was ADOPTED as a working                                                            
Senator Taylor revisited the potential cost to the State.                                                                       
Senator Wagoner  clarified the maximum $11.5 million  predicted loss                                                            
of royalty revenues would occur over a period of several years.                                                                 
Senator Taylor asked if  this estimate is based on the provisions of                                                            
committee  substitute Version  "C"  or the House  Finance  committee                                                            
Representative Chenault replied Version "C".                                                                                    
Co-Chair Wilken  noted a draft fiscal note, dated  5/5/03, addresses                                                            
the provisions in Version "C".                                                                                                  
Senator Hoffman  expressed concern that chemical fertilizing  plants                                                            
nationwide  are currently  failing because  the methane gas  used in                                                            
stock feed  is worth more than the  finished product. He  questioned                                                            
therefore the benefits of this legislation to provide jobs.                                                                     
Representative  Chenault  could not  speak to  businesses  elsewhere                                                            
failing, but  stressed the economic  impact the loss of jobs  on the                                                            
Kenai Peninsula  that would occur  if the local facility  failed. He                                                            
informed that  personnel layoffs are currently under  consideration,                                                            
although he attributed  this to new ownership and  because the plant                                                            
is operating at 70 percent of capacity.                                                                                         
Senator Hoffman  asked if the sponsor would consider  a shorter time                                                            
period  for a  negotiated  price to  minimize  the loss  of  royalty                                                            
Representative  Chenault indicated he would have to  give the matter                                                            
consideration before offering support.                                                                                          
Co-Chair Wilken  referenced page 2  of the draft fiscal note,  which                                                            
details the potential  loss of royalties over the  five-year period.                                                            
Co-Chair Wilken asked for  an explanation of the current process and                                                            
why  the  royalty  rate  changes.  He  also  asked   for  additional                                                            
information on the impact on the State general fund.                                                                            
Representative  Chenault remarked  that this  bill would not  affect                                                            
current  contracts  for  gas supplies.  He  explained  the  existing                                                            
process  whereby the  State  and the  producer negotiate  a  royalty                                                            
amount  without  input of  the  manufacturer.  He stated  that  upon                                                            
review  after  four  years,  the  State  could  determine  that  the                                                            
negotiated royalty was not a "fair price".                                                                                      
Co-Chair  Wilken  asked for  an example  of  the producers  in  this                                                            
Representative  Chenault exampled  Unocal and Marathon, noting  that                                                            
all gas producers are involved in the royalty negotiation.                                                                      
Co-Chair  Wilken  clarified  the  producer  negotiates  a  long-term                                                            
contract for the "price of that feed stock" with the State.                                                                     
Senator Wagoner  told the Committee  that the previous owner  of the                                                            
manufacturing   plant  also   discovered  and   produced  the   gas.                                                            
Currently, he said, Union  Oil produces the gas, and Agrium operates                                                            
as the manufacturer.                                                                                                            
Co-Chair Wilken  next clarified the States receives  12.5 percent in                                                            
royalty from Unocal,  the producer, which sells that  gas to Agrium.                                                            
Representative Chenault  affirmed and continued that the State could                                                            
conduct an  audit of the  royalty price negotiated  with Unocal  and                                                            
subsequently  could determine that  Unocal paid less than  the worth                                                            
of the gas.                                                                                                                     
Co-Chair   Wilken  understood   an  agreement   of  the  price   was                                                            
Representative  Chenault reiterated the existence  of four different                                                            
methods to calculate the  royalty amount. As a result, he stated the                                                            
State  could determine  additional  payment  is required,  at  which                                                            
point, Unocal would collect the funds from Agrium.                                                                              
SFC 03 # 78, Side A 10:36 AM                                                                                                    
Co-Chair  Wilken  asked  if  retroactive  price  adjustments  are  a                                                            
condition of the agreements between Unocal and Agrium.                                                                          
Representative Chenault affirmed.                                                                                               
Representative  Chenault   reiterated  this  legislation  would  not                                                            
impact current  contracts, however  in future contract negotiations                                                             
Agrium,  i.e. the manufacturer,  would participate  in negotiations                                                             
and the royalty price would  remain at the negotiated amount for the                                                            
term of the contract.                                                                                                           
Co-Chair Wilken asked if  Unocal were able to receive a higher price                                                            
from the  sale of  gas to  a buyer  other than  Agrium, whether  the                                                            
difference would be assessed to Agrium.                                                                                         
Senator Wagoner  told of  the contract providing  that Unocal  would                                                            
supply gas to  Agrium at a negotiated price. He noted  one exception                                                            
is increased utility demand during winter months.                                                                               
Representative  Chenault emphasized  this legislation would  provide                                                            
assurances   that  under   the  terms  of   future  contracts,   the                                                            
manufacturer would pay the negotiated royalty price.                                                                            
Co-Chair Wilken  asked if new contracts  would be implemented  in FY                                                            
05 and FY 06.                                                                                                                   
Representative  Chenault informed that one long-term  contract is in                                                            
effect currently  and that  the remainder of  the gas purchases  are                                                            
subject  to  "spot  market".  He  stated  that  the  manufacture  is                                                            
attempting  to purchase  an adequate  supply of  gas to operate  the                                                            
Senator Wagoner  furthered this legislation allows  the commissioner                                                            
to negotiate profit  sharing with Agrium if determined  to be in the                                                            
best interest of the State.                                                                                                     
KEVIN  BANKS,  Division  of  Oil  and  Gas,  Department  of  Natural                                                            
Resources,  testified via  teleconference from  an offnet  location,                                                            
that leases negotiated  since statehood are market-value  leases. He                                                            
explained that  the royalty value is subject to an  evaluation using                                                            
four  different  measures  to  determine  the market  value  of  the                                                            
royalty.  He  noted that  some  leases  in other  states  are  gross                                                            
proceeds leases, which  provides that the royalty paid by the lessee                                                            
is equal to the  amount that the lessee sold the gas.  He stated the                                                            
sale price of  the gas is one of the four measurements  utilized for                                                            
determining market value  of royalty in Alaska and that the State is                                                            
allowed to consider  the price between the lessee  and its customers                                                            
compared  to the  market  value  as measured  by  other mechanisms.                                                             
Therefore,  he pointed  out, the sale  price and  the royalty  price                                                            
could differ  under  the provisions  of the lease  agreement  if the                                                            
market value is higher.                                                                                                         
Mr. Banks stated  that determinations of higher royalty  amounts are                                                            
often made after an audit  and after the initial royalties have been                                                            
paid. In  these instances,  he said, the lessee  is required  to pay                                                            
additional royalty amounts two or more years later.                                                                             
Mr. Banks pointed  out that gas supply contracts commonly  allow the                                                            
lessee and its  customer to agree to an "excess royalties"  term. He                                                            
exampled  contracts between  gas producers  operating in Cook  Inlet                                                            
and utility companies include this provision.                                                                                   
Mr. Banks outlined the  fiscal note estimates the amount of gas that                                                            
would be sold  to Agrium and other  entities, such as utilities,  in                                                            
the future,  not including gas currently  under contract.  He stated                                                            
the fiscal  note assumes that a royalty  contract would provide  for                                                            
the State to  collect additional royalties  in the event  the market                                                            
value is determined higher.                                                                                                     
Co-Chair Wilken asked if  an audit calculates the price of gas if it                                                            
were  sold to  a utility  company,  compared  to the  price  charged                                                            
Agrium, and  collects the difference  from Agrium. He asked  if this                                                            
legislation eliminates  this review and stipulates that the value of                                                            
gas sold to utility  companies has no bearing on the  royalty amount                                                            
due from Agrium.                                                                                                                
Mr. Banks affirmed.                                                                                                             
Co-Chair Wilken clarified  that this bill establishes a procedure by                                                            
which  the royalty  price  is determined  through  negotiation,  and                                                            
asked which parties are involved in these negotiations.                                                                         
Mr. Banks replied  the suppliers and  Agrium negotiate and  that the                                                            
State has no involvement.                                                                                                       
Co-Chair Wilken  asked if the State  is therefore relinquishing  the                                                            
utility value, or alternative  customer value of gas sold to Agrium,                                                            
and  for  the  benefit   of  fertilizer  production   on  the  Kenai                                                            
Mr. Banks affirmed.  He pointed out  that Version "C" provides  that                                                            
the commissioner  has  the discretion  to  set a  royalty price  for                                                            
between  $2 and  $2.43, as  exampled in  the draft  fiscal note.  He                                                            
stated that  under normal circumstances  the value is $2.43  and the                                                            
contract value is $2.00.                                                                                                        
Co-Chair  Wilken  asked how  the commissioner  would  determine  the                                                            
actual amount.                                                                                                                  
Mr. Banks  replied the  commissioner must  ensure that the  contract                                                            
price is not  unreasonable low, and  that the prospective  reduction                                                            
in royalty  receipts would be balanced  by employment opportunities                                                             
in the fertilizer manufacturing plant.                                                                                          
Senator  Hoffman  asked  how  often  during  six-year  term  of  the                                                            
contract would the commissioner  make a determination of the royalty                                                            
amount, once or more often.                                                                                                     
Mr. Banks explained  the process,  whereby each lessee would  submit                                                            
an application  to commissioner and provide the terms  of a contract                                                            
with Agrium listing the  negotiated prices. He said this information                                                            
would be used  in calculating the royalty and would  occur only once                                                            
in the life of the contract.                                                                                                    
Co-Chair  Wilken  announced  the  bill  would  no  report  from  the                                                            
Committee during this hearing.                                                                                                  
MIKE NUGENT,  General Manager,  Kenai Nitrogen  Operations,  Agrium,                                                            
testified  via teleconference   from an  offnet location  that  this                                                            
legislation  is "one piece of a pie,  which could provide  producers                                                            
in Cook Inlet with stability,  and Agrium with certainty of what the                                                            
are to manufacture  the products we sell." He informed  that natural                                                            
gas is the major raw material used to develop products.                                                                         
Mr.  Nugent asserted  the  nitrogen  facility is  one  of few  major                                                            
value-added  manufacturing  operations   in Alaska,  is  the  second                                                            
largest  producer of  nitrogen products  in the  United States,  and                                                            
that six-percent  of  the total  nitrogen products  are produced  in                                                            
North  America. He  listed  the Pacific  Rim countries  that  import                                                            
Agrium products, including  Korea, Taiwan, Mexico, and Thailand, and                                                            
the need to  be competitive in world  markets. He remarked  that the                                                            
company currently is competitive  because of the facility's location                                                            
close  to markets,  the  highly  skilled  workforce and  the  stable                                                            
political  climate;  unlike  the  competitors   located  in  Russia,                                                            
Indonesia,  Saudi  Arabia and  Venezuela.  However,  he pointed  out                                                            
these  countries enjoy  "extremely  low" natural  gas prices,  which                                                            
puts Agrium  at a  disadvantage.  He stated  this legislation  would                                                            
lessen the disadvantage.                                                                                                        
Mr. Nugent informed  that this bill would allow the  commissioner to                                                            
accept the  price negotiated by the  producer and the manufacturer,                                                             
Agrium, as the amount by which royalties would be calculated.                                                                   
Mr. Nugent  pointed out the  fiscal note  does not reflect  economic                                                            
impacts provided  by Agrium, including wages, purchase  of goods and                                                            
services,  taxes and  new development  to Alaska,  and instead  only                                                            
considers the  price of natural gas. He stated that  the analysis is                                                            
based  on  forecasts,  which  involve  several  variables  that  are                                                            
difficult  to  predict, such  as  volume,  price and  ownership.  He                                                            
furthered that  the analysis assumes  that the facility is  operated                                                            
at full capacity.                                                                                                               
Mr.  Nugent  shared that  the  facility  is not  operating  at  full                                                            
capacity  because  Cook  Inlet  suppliers   are  unable  to  deliver                                                            
adequate  natural gas  supplies. He  stated the  plant is  currently                                                            
operating at 75 percent  of capacity, which results in lower revenue                                                            
for the State  of approximately $2  million if 2003. He warned  that                                                            
unless able  to fund producer to supply  a large quality  of natural                                                            
gas  at a  competitive  price, Agrium  could  eventually  fail as  a                                                            
business  and  the State  and  local communities  would  receive  no                                                            
revenues from the operation.                                                                                                    
Mr.  Nugent told  of repeated  discussions  with  producers in  Cook                                                            
Inlet  in which the  primary concerns  were  the additional  royalty                                                            
charges the  producer is subject to.  He cited a letter to  the City                                                            
of Kenai from Aurora Power  Resources, Inc. dated February 11, 2003,                                                            
which reads as follows [copy on file].                                                                                          
     Aurora  Gas, LLC is  aggressively pursuing  the development  of                                                            
     natural  gas producing properties,  primarily on the  West side                                                            
     of Cook  Inlet. Oil  and gas exploration  and development  is a                                                            
     high  cost, high-risk  endeavor. As a  producer looking  for to                                                            
     market  our natural gas  there is a  great hesitation  to enter                                                            
     into a  gas sales agreement with  a purchaser, such  as Agrium,                                                            
     because  it adds  yet another layer  of risk  to a producer.  A                                                            
     producer  selling  gas to  Agrium runs  the risk,  in fact  the                                                            
     probability,  that  certain  years  after  selling its  gas  to                                                            
     Agrium, the State  will assert a claim that royalty needs to be                                                            
     paid  on  a  higher  value  than  the  arms  length  negotiated                                                            
     contract price. This  additional royalty, plus interest accrued                                                            
     at  a higher-than-market  rate, would  have to  be born  by the                                                            
     producer and/or by the purchaser.                                                                                          
     It is for this reason  that Aurora Gas, LLC and its natural gas                                                            
     marketing  affiliate,  Aurora  Power Resources,  Inc.  strongly                                                            
     endorse  this legislation and  the concept that royalty  should                                                            
     be  paid  on  the basis  of  arms  length  negotiated  contract                                                            
     prices.   Accordingly,   we  salute  and   support  the   draft                                                            
     resolution in support  of HB 57 and urge the Kenai City Council                                                            
     to adopt same.                                                                                                             
Mr.  Nugent spoke  of the  increased  difficulty  of development  of                                                            
natural gas reserves caused by the unknown State royalty values.                                                                
Senator Taylor noted he  was absent during portions of the testimony                                                            
asked why the chair intended to hold the bill in Committee.                                                                     
Co-Chair Wilken indicated questions related to the fiscal note.                                                                 
Senator Bunde  referenced Mr. Nugent's testimony asserting  that the                                                            
fiscal note does  not take into account taxes collected  from Agrium                                                            
in determining  the cost of this legislation.  He requested  further                                                            
information on this matter, specifically what taxes.                                                                            
Co-Chair  Wilken  instructed  the  sponsor  to  provide  a  detailed                                                            
sponsor statement explaining the bill.                                                                                          
Co-Chair Wilken ordered the bill HELD in Committee.                                                                             
Co-Chair Gary Wilken adjourned the meeting at 10:59 AM                                                                          

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