Legislature(2003 - 2004)

05/20/2003 10:38 AM FIN

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
                              MINUTES                                                                                         
                     SENATE FINANCE COMMITTEE                                                                                 
                           May 20, 2003                                                                                       
                             10:38 AM                                                                                         
                                                                                                                                
                                                                                                                                
TAPES                                                                                                                       
                                                                                                                                
SFC-03 # 106,  Side A                                                                                                           
SFC 03 # 106,  Side B                                                                                                           
SFC 03 # 107,  Side A                                                                                                           
                                                                                                                              
CALL TO ORDER                                                                                                               
                                                                                                                                
Co-Chair  Gary Wilken convened  the meeting  at approximately  10:38                                                            
AM.                                                                                                                             
                                                                                                                                
PRESENT                                                                                                                     
                                                                                                                                
Senator Lyda Green, Co-Chair                                                                                                    
Senator Gary Wilken, Co-Chair                                                                                                   
Senator Con Bunde, Vice Chair                                                                                                   
Senator Robin Taylor                                                                                                            
Senator Ben Stevens                                                                                                             
Senator Lyman Hoffman                                                                                                           
Senator Donny Olson                                                                                                             
                                                                                                                                
Also Attending:   REPRESENTATIVE VIC  KOHRING; REPRESENTATIVE  LESIL                                                          
MCGUIRE; MARK  MYERS, Director Division  of Oil and Gas,  Department                                                            
of Natural  Resources;  KRIS KNAUSS,  Staff to  Representative  Pete                                                            
Kott; LARRY  PERSILY, Deputy  Commissioner,  Department of  Revenue;                                                            
LEONARD  STENBERG, General  Counsel, Alaska  Communication  Service;                                                            
DANA TINDELL,  Senior Vice President, Legal and Regulatory  Affairs,                                                            
General Communications Incorporated;                                                                                            
                                                                                                                                
Attending  via  Teleconference:    From an  offnet  location:  KEVIN                                                          
TABLER,   Land  and  Government   Affairs   Manager,  Unical;   GARY                                                            
ZIMMERMAN,  General   Manager,  Avis  Rental  Car   of  Alaska;  BOB                                                            
DINDINGER,  President  and Chief  Executive Officer,  Alaska  Travel                                                            
Adventures;   TERRY  PARKS,  Dollar   Rental  Car;  ANDREW   HALCRO,                                                            
President, Alaska Rental Car                                                                                                    
                                                                                                                                
SUMMARY INFORMATION                                                                                                         
                                                                                                                                
                                                                                                                                
HB  28-OIL & GAS ROYALTY MODIFICATION                                                                                           
                                                                                                                                
The Committee  heard  from the  sponsor, the  Department of  Natural                                                            
Resources and an oil company.                                                                                                   
                                                                                                                                
HB 271-PASSENGER/RECREATIONAL VEHICLE RENTAL TAX                                                                                
                                                                                                                                
The Committee heard from  the sponsor, the Department of Revenue and                                                            
representatives from the  rental car industry. Three amendments were                                                            
considered  but not adopted. The bill  was reported from  Committee.                                                            
                                                                                                                                
HB 106-TELECOMMUNICATIONS & RCA ACTIONS                                                                                         
                                                                                                                                
The Committee  heard  from the  sponsor and  representatives of  the                                                            
telecommunications industry.                                                                                                    
                                                                                                                                
                                                                                                                                
     CS FOR SPONSOR SUBSTITUTE FOR HOUSE BILL NO. 28(FIN)                                                                       
     "An Act relating to adjustments to royalty reserved to the                                                                 
     state to encourage otherwise uneconomic production of oil and                                                              
     gas; and providing for an effective date."                                                                                 
                                                                                                                                
                                                                                                                                
This  was the first  hearing  for this  bill in  the Senate  Finance                                                            
Committee.                                                                                                                      
                                                                                                                                
Co-Chair  Wilken  stated that  this  bill,  "addresses  oil and  gas                                                            
royalty  modifications  for marginal  oil  and gas  fields. The  new                                                            
modification  formula outlined in  HB 28 allows the commissioner  of                                                            
Department of Natural Resources  to negotiate a royalty rate that is                                                            
in the best interest of the State."                                                                                             
                                                                                                                                
Senator Taylor  offered a motion to  report the bill from  Committee                                                            
with individual recommendations and accompanying fiscal note.                                                                   
                                                                                                                                
Senator  Taylor  then objected  to  the motion  for  the purpose  of                                                            
taking testimony.                                                                                                               
                                                                                                                                
Co-Chair Wilken ordered the motion out of order.                                                                                
                                                                                                                                
REPRESENTATIVE  VIC KOHRING,  Sponsor,  testified that  in 1995  the                                                            
legislature  passed   a  law  that  provided  for   an  oil  royalty                                                            
reduction. He  relayed that the intent was to encourage  development                                                            
of  marginal  fields  that  are  not  profitable,   including,  new,                                                            
existing  and "mothballed"  fields.  He remarked  that this  statute                                                            
"just hasn't worked"  with the State receiving only  one application                                                            
for reduction  that was not approved.  He attributed the  failure of                                                            
the statute  to  its complexity  and because  it  did not  encourage                                                            
industry  participation.  As  a result,  he  sponsored  the  current                                                            
legislation, which simplifies and streamlines the process.                                                                      
                                                                                                                                
Representative  Kohring explained this bill grants  the commissioner                                                            
of the Department  of Natural Resources  the authority to  determine                                                            
the level of  reduction of royalty  rates based on the economics  of                                                            
each field.  He specified the reduction  would be available  for any                                                            
marginal field or field  that is not profitable in Alaska that could                                                            
benefit from  a royalty reduction.  He noted the reduction  would be                                                            
applied  on "a sliding  scale basis",  generally  between three  and                                                            
12.5  percent,  based  on  the  profitability   of  each  field.  He                                                            
described the  internal or contracted study that would  be conducted                                                            
to analyze fuel recovery,  production rate and volume, and operating                                                            
costs upon which  the commission would base any decision  whether to                                                            
grant a reduction and at what percentage.                                                                                       
                                                                                                                                
Representative Kohring  stressed the importance to provide incentive                                                            
to develop marginal fields to generate income for the State.                                                                    
                                                                                                                                
MARK MYERS, Director Division  of Oil and Gas, Department of Natural                                                            
Resources,  testified  that  this  bill  would  modify  an  existing                                                            
royalty reduction  statute, AS 38.05.180(j).  He noted this  statute                                                            
had  been previously  amended,  although some  of  the changes  have                                                            
proven cumbersome  and unclear.  He stated  the existing statute  is                                                            
difficult to administer.                                                                                                        
                                                                                                                                
Mr. Meyers  stated this legislation  would simplify the process  yet                                                            
still provide  the commissioner "the  necessary tools" to  evaluate,                                                            
condition   and  accept  or  reject   an  application  for   royalty                                                            
reduction.  He detailed  the application  and  approval process  for                                                            
participation.  He listed three cases for which a  royalty reduction                                                            
could be granted:  a delineated field  that a producer claims  would                                                            
be uneconomic  to develop, an existing  field that has proven  to be                                                            
uneconomic  possibly  due  to  declining  production  or  increasing                                                            
operating  expenses,  and  fields that  are  "shut in  already".  He                                                            
acknowledged that determination  of whether a field is uneconomic is                                                            
a complex process  that also must  factor the price of oil,  cost of                                                            
transportation, economics  and size of the reservoir and size of the                                                            
wells.                                                                                                                          
                                                                                                                                
Mr. Meyers pointed  out that this legislation also  allows a royalty                                                            
structure  that could "recapture  dollars"  if the economics  of the                                                            
field change.                                                                                                                   
                                                                                                                                
Mr. Myers  assured that  a royalty  reduction would  not be  granted                                                            
without  extensive   analysis  of   all  relevant  factors   and  an                                                            
understanding of the reasonable rate of return on the project.                                                                  
                                                                                                                                
Mr. Myers  told of an application  submitted  by Unical, in  which a                                                            
reduction   was  offered   although   the  company   chose  to   not                                                            
participate, and another  application submitted by Conico, which the                                                            
Department denied because  it was not determined to be in the public                                                            
interest.   He  stressed   the   applications   are  given   serious                                                            
consideration  and that instances exist whereby a  royalty reduction                                                            
could  result  in  a field  beginning  production  or  remaining  in                                                            
production.                                                                                                                     
                                                                                                                                
Mr. Myers cited  current royalties are calculated  at 12.5 to 16.66,                                                            
and  occasionally 20  percent.  He recognized  that  a reduction  to                                                            
three percent would affect  the economics of a field, although would                                                            
not  "materially  change it  in a  very  large scope."  However,  he                                                            
emphasized the fiscal impact to the State is "very high".                                                                       
                                                                                                                                
[Note: tape interruption]                                                                                                       
                                                                                                                                
Co-Chair Wilken asked if this legislation allows for review.                                                                    
                                                                                                                                
Mr. Myers replied  that this bill includes a provision  allowing for                                                            
a legislative  review of the preliminary best interest  findings. He                                                            
explained  that  the  Legislative  Budget  and  Audit  Committee  or                                                            
"designated members"  of the legislature to obtain  the confidential                                                            
data. Therefore, he assured  that the legislature could choose to be                                                            
directly involved  in the process.  He qualified that later  reviews                                                            
or changes  would be subject  to the terms  of the contract  between                                                            
the producers  and the State. He exampled  a provision in  contracts                                                            
allowing for periodic economic review.                                                                                          
                                                                                                                                
KEVIN  TABLER,   Land  and  Government   Affairs  Manager,   Unical,                                                            
testified via  teleconference from an offnet location  in support of                                                            
the  legislation.  He  expressed  that  it would  help  clarify  and                                                            
provide  flexibility  for  the commissioner   to process  a  royalty                                                            
application.   He  remarked   that   current  statutes   create   an                                                            
"unworkable situation".                                                                                                         
                                                                                                                                
Senator  Bunde  commented   he  was  encouraged  by  the   testimony                                                            
indicating  that in the event  of success,  the State would  have an                                                            
opportunity to "recover on the upside".                                                                                         
                                                                                                                                
Senator Olson  asked the number of  wells and amount of revenues  in                                                            
question.                                                                                                                       
                                                                                                                                
Mr. Myers  replied  that the  extent of  this legislation  would  be                                                            
highly  variable   and  dependent  upon  companies'   submission  of                                                            
applications.  He knew  of no pending  applications.  He noted  some                                                            
fields  in the Cook  Inlet are "late  in their  life of production"                                                             
that would  receive  serious consideration  if  an application  were                                                            
submitted.  He  relayed  that in  review  of  other fields,  it  was                                                            
estimated that  the revenue amount "could easily be  in the hundreds                                                            
of millions of dollars"  over the life of the field to "as much as a                                                            
few tens of millions  of dollars differential in the  royalty rate."                                                            
He qualified  that the State could  recover revenue if the  contract                                                            
were "conditioned  properly".  He  stated that under the  provisions                                                            
of this legislation,  a contract could  be written to provide  a net                                                            
fiscal effect  of nearly zero. He  spoke to the need that  "the tail                                                            
be  very  long" and  the  royalty  managed  efficiently  to  recover                                                            
revenue resulting from  a royalty reduced from 12.5 percent to three                                                            
percent.                                                                                                                        
                                                                                                                                
Senator  Olson  asked  the  outcome   if  the  results  are  not  as                                                            
anticipated.                                                                                                                    
                                                                                                                                
Mr. Myers assured that  a full technical analysis would be conducted                                                            
to ensure  the  reduction  is warranted.  He listed  geological  and                                                            
geophysical  engineering,   studies  of the  reservoir,   production                                                            
history  and detailed  cost data,  as included in  the analysis.  He                                                            
furthered  that  this  legislation  allows  the State  to  engage  a                                                            
consultant to review the analysis.                                                                                              
                                                                                                                                
Mr. Meyers emphasized this legislation is a policy call.                                                                        
                                                                                                                                
Senator Taylor  offered a motion to  report the bill from  Committee                                                            
with individual recommendations and accompanying fiscal note.                                                                   
                                                                                                                                
There was no  objection and CS SS  HB 28 (FIN) MOVED from  Committee                                                            
with fiscal note #2 for $150,000.                                                                                               
                                                                                                                                
                                                                                                                                
     CS FOR HOUSE BILL NO. 271(FIN)(efd am)                                                                                     
     "An  Act   levying  and  providing   for  the  collection   and                                                            
     administration  of excise taxes on the rental  of passenger and                                                            
     recreational  vehicles usable  on highways and vehicular  ways;                                                            
     and providing for an effective date."                                                                                      
                                                                                                                                
                                                                                                                                
This  was the first  hearing  for this  bill in  the Senate  Finance                                                            
Committee.                                                                                                                      
                                                                                                                                
Co-Chair Wilken  stated that this bill, relating to  a "personal and                                                            
recreational vehicle  rental tax", "imposes a ten-percent  State tax                                                            
on rental or lease  of passenger vehicles and a three-percent  State                                                            
tax  on  lease  or  rental  of  recreational  vehicles.   Commercial                                                            
vehicles and farm equipment  are exempt and vehicles leased for more                                                            
than 90 consecutive days are also exempt."                                                                                      
                                                                                                                                
KRIS KNAUSS, Staff to Representative  Pete Kott, testified that this                                                            
bill was introduced  at the request of the Governor  with the intent                                                            
to generate approximately  $6 million in revenue with  a ten percent                                                            
tax on rental  cars and three percent  tax on recreational  vehicles                                                            
(RVs). He remarked  that with over  1.6 million visitors  to Alaska,                                                            
the Administration  determined  "it would be  good to get  something                                                            
back from the tourism industry."  He informed that approximately 100                                                            
businesses   would  be  impacted   and  that  government   employees                                                            
conducting  government  business would  be exempt  from the tax.  He                                                            
noted an amendment  adopted by the House of Representatives  changed                                                            
the effective date from July 2003 to January 2004.                                                                              
                                                                                                                                
LARRY  PERSILY,   Deputy   Commissioner,   Department  of   Revenue,                                                            
testified he was available to answer questions.                                                                                 
                                                                                                                                
Amendment  #1: This amendment  deletes the  following language  from                                                            
page 1 line 14 and page 2 lines 1 - 3 in Section 1.                                                                             
                                                                                                                                
          Sec. 43.52.030. Levy of recreational vehicle rental tax.                                                              
     There is  imposed an excise tax on the charge  for the lease or                                                            
     rental of a recreational  vehicle in this state if the lease or                                                            
     rental of the recreational  vehicle does not exceed a period of                                                            
     90 consecutive days.                                                                                                       
                                                                                                                                
Senator Bunde moved for adoption.                                                                                               
                                                                                                                                
Co-Chair Wilken objected for an explanation.                                                                                    
                                                                                                                                
Senator Bunde remarked  that the majority of RV rentals occur within                                                            
the  Municipality  of Anchorage,  which  already imposes  an  eight-                                                            
percent  tax. He  calculated that  another three-percent  tax  would                                                            
"undoubtedly  be  burdensome  on the  industry".  He  informed  that                                                            
because of the current  eight percent tax, customers are renting RVs                                                            
in Canada for travel in Alaska.                                                                                                 
                                                                                                                                
Senator Bunde  reported that an RV typically rents  for $200 per day                                                            
or $4,200  for a two-week  rental. He calculated  the current  eight                                                            
percent tax for this rental  is $338 and the proposed additional tax                                                            
would be $126, totaling $464 total tax.                                                                                         
                                                                                                                                
Co-Chair Wilken  expressed these figures  are "compelling"  and that                                                            
business should  not be directed to Whitehouse, Yukon  Territory. He                                                            
removed his objection to the adoption of the amendment.                                                                         
                                                                                                                                
Co-Chair Green objected.                                                                                                        
                                                                                                                                
A roll call was taken on the motion.                                                                                            
                                                                                                                                
IN FAVOR: Senator Taylor, Senator Bunde, and Co-Chair Wilken                                                                    
                                                                                                                                
OPPOSED:  Senator Hoffman,  Senator Olson,  Senator B. Stevens,  and                                                            
Co-Chair Green                                                                                                                  
                                                                                                                                
The motion FAILED (3-4)                                                                                                         
                                                                                                                                
The amendment FAILED to be adopted.                                                                                             
                                                                                                                                
Amendment  #2:  This amendment  changes  the  proposed  tax rate  on                                                            
rental cars from  ten percent to seven percent on  page 1 line 12 of                                                            
Section 1.                                                                                                                      
                                                                                                                                
Senator Bunde moved for adoption.                                                                                               
                                                                                                                                
Co-Chair Wilken objected for an explanation.                                                                                    
                                                                                                                                
Senator  Taylor relayed the  national average  is approximately  5.9                                                            
percent.  He  commented  that although  "everything  costs  more  in                                                            
Alaska" "nearly  doubling the tax  is probably not appropriate".  He                                                            
surmised that collecting  a seven percent tax would generate revenue                                                            
from this  source without  becoming burdensome  to the industry.  He                                                            
added that  some rental car companies  are "economically  stressed".                                                            
                                                                                                                                
Senator  Taylor  estimated  he  pays a  higher  taxation  rate  when                                                            
renting vehicles in Seattle,  Washington and that he definitely pays                                                            
a higher rate in the State of Hawaii.                                                                                           
                                                                                                                                
Senator Bunde  pointed out  that many airports  impose drop-off  and                                                            
pick-up fees separate from the tax.                                                                                             
                                                                                                                                
Co-Chair  Wilken  directed  attention to  a  chart compiled  by  the                                                            
Montana Department  of Revenue and  provided by Representative  Kott                                                            
titled, "Table  2, Rental Car Tax, State-by-State  Comparison" [copy                                                            
on file.]  This chart,  Co-Chair Wilken pointed  out, indicates  the                                                            
State of Illinois  levies the highest rental car tax  combination in                                                            
the nation  at  31.7 percent,  the State  of Washington  levies  the                                                            
                                                               th                                                               
sixth  highest  tax  at  21.5  percent,  and  Alaska  ranks  47at                                                               
approximately six percent.                                                                                                      
                                                                                                                                
Co-Chair  Wilken maintained  his objection  to the  adoption of  the                                                            
amendment.                                                                                                                      
                                                                                                                                
GARY  ZIMMERMAN,  General  Manager,   Avis  Rental  Car  of  Alaska,                                                            
testified via  teleconference from  an offnet location to  challenge                                                            
the six percent  total rental car tax in Alaska. He  cited the eight                                                            
percent Municipality  of Anchorage  tax as well as a ten-percent  of                                                            
gross fee paid  to the State as an airport concession  fee, which is                                                            
passed  along to  the consumer.  He  stated that  rental  agreements                                                            
currently list the total  tax paid by the lessee at 18 percent. This                                                            
legislation,  he calculated,  plus  a proposed  statewide sales  tax                                                            
would make  the total rental car tax  30 percent. He expressed  this                                                            
would be detrimental  to business operations in Alaska.  He spoke to                                                            
the seasonality  of  the visitor industry  in Alaska  that does  not                                                            
occur in other states.                                                                                                          
                                                                                                                                
Co-Chair  Wilken  requested  Mr.  Persily  reconcile  the  witness's                                                            
testimony  with  the information  contained  in  the aforementioned                                                             
chart.                                                                                                                          
                                                                                                                                
Mr.  Persily explained  that  the  chart  does not  include  airport                                                            
concession fees  or municipal car rental taxes. He  stated the chart                                                            
reflects  the highest  sales  tax six percent  levied  in Sitka  for                                                            
rental cars in Alaska.  He agreed that the total current tax for car                                                            
rentals  in Anchorage  is  18 percent.  He  noted that  the  airport                                                            
concession fee could be avoided by renting vehicles off site.                                                                   
                                                                                                                                
Senator Bunde  directed attention to the column on  the chart titled                                                            
"state sales tax" and suggested  that if a seven percent State sales                                                            
tax were imposed, Alaska would be equal to the highest tax.                                                                     
                                                                                                                                
Mr. Persily  informed  that several  states  impose a  flat fee  per                                                            
rental,  rather than  a tax  percentage.  He stated  that the  chart                                                            
calculated  the flat fee  as a percentage  of the average $50  daily                                                            
car rental rate,  and therefore varies based on the  actual price of                                                            
each car rental.                                                                                                                
                                                                                                                                
Senator Taylor recalled  discussions on other tax proposals, such as                                                            
a tax on pull tab operations  where it was debated whether the State                                                            
should  exercise  exclusive  taxation  authority.  He  suggested  an                                                            
alternative amendment to  Amendment #2 to limit tax authority on car                                                            
rentals to the State.                                                                                                           
                                                                                                                                
Co-Chair  Wilken requested  the witness continue  with testimony  on                                                            
the legislation.                                                                                                                
                                                                                                                                
Mr.  Zimmerman  reported  the  car  rental  agencies   operating  in                                                            
Anchorage  and Fairbanks  currently  pay over  $4.5  million to  the                                                            
State in  the form  of a percentage  of revenues.   In addition,  he                                                            
estimated $1.5 million  is paid to the Division of Motor Vehicles in                                                            
the  form of  vehicle  registration  and  another $.25  million  for                                                            
"coveted  parking spaces"  at the  two airports.  He challenged  the                                                            
assertion  that the  car rental  industry  or its  customers do  not                                                            
contribute  to the State economy.  He opined that the proposal  is a                                                            
"very  targeted  tax" and  that  "a  certain  fairness issue  is  at                                                            
state".                                                                                                                         
                                                                                                                                
Mr. Zimmerman  found it "inconceivable"  that a customer  renting an                                                            
RV at $200 per day would  pay less tax than a customer renting a car                                                            
for $70 per  day. He furthered those  travelers who rent  cars would                                                            
stay at hotels and pay  local bed taxes, as opposed to travelers who                                                            
rent  RVs and  do  not stay  at  hotels. He  noted  Senator  Bunde's                                                            
comments regarding  the burden of the proposed tax  on the RV rental                                                            
industry and stressed  that the burden would also  exist for the car                                                            
rental industry.  He compared  the percentage  of the total  vehicle                                                            
rental charges  on a two-week  RV rental to  that of a two-week  car                                                            
rental.                                                                                                                         
                                                                                                                                
Mr. Zimmerman  described the impacts,  informing that 90  percent of                                                            
transactions  involve credit  cards,  in which the  bank collects  a                                                            
percentage of the total  charge. He stated that the rental companies                                                            
therefore pay  an amount equal to a portion of the  tax to the bank,                                                            
thus increasing  operating expenses.  He pointed out that  this bill                                                            
contains no  provisions to help offset  that cost to the  car rental                                                            
and motor home rental businesses.                                                                                               
                                                                                                                                
Mr. Zimmerman cautioned  that the vehicle rental industry is "facing                                                            
very  bleak   market  conditions",   noting  that  deplanements   in                                                            
Anchorage has only increased  four percent in the past six years. In                                                            
Fairbanks,  he  furthered,  the  number  of  deplanements  has  been                                                            
unchanged in the past six  years and in the current year, Juneau and                                                            
Kenai are experiencing  decreased  numbers of deplanements  over the                                                            
previous  year. He  stated that  the situation  is  not expected  to                                                            
improve and relayed general  concerns relating to tourism as well as                                                            
the "general business climate"                                                                                                  
                                                                                                                                
Mr. Zimmerman addressed  discussions held amongst members of the car                                                            
rental  industry several  years prior  about  developing an  offsite                                                            
rental  facility in  Anchorage. However,  he  stated that  customers                                                            
would have  to pay  for construction  of such  a facility through  a                                                            
"pass through fee". He  expressed that the proposed tax in this bill                                                            
is poorly timed, given the current economic situation.                                                                          
                                                                                                                                
BOB DINDINGER, President  and Chief Executive Officer, Alaska Travel                                                            
Adventures,  testified via  teleconference  from an offnet  location                                                            
about  RV  rental  facilities  located  in  Anchorage,  Skagway  and                                                            
Seattle.  He  informed  that the  bulk  of this  business  has  been                                                            
primarily  in European travelers  but has not  fared well in  recent                                                            
years due to travel conditions.  He agreed with Senator Bunde that a                                                            
"major   shift"  of  business   has  occurred   from  Anchorage   to                                                            
Whitehouse,   Yukon  Territory,  caused   by  the  passage   of  the                                                            
Municipality of  Anchorage rental tax. Mr. Dindinger  also explained                                                            
that it  is more  economical for  travelers to  fly from Germany  to                                                            
Whitehorse  and tour Alaska,  returning to  Whitehorse to return  to                                                            
Germany.                                                                                                                        
                                                                                                                                
Mr. Dindinger  stated that four of his competitors  have gone out of                                                            
business  and  he   listed  the  changing  numbers   of  rentals  in                                                            
Whitehorse  and  in  Alaska.  He  furthered  that  his  company  has                                                            
downsized  its fleet. He  expressed concern  that a State tax  would                                                            
provide an additional disincentive for renting RVs in Alaska.                                                                   
                                                                                                                                
TERRY PARKS,  Dollar Rental Car, testified  via teleconference  from                                                            
an offnet location about  the negative impacts on the industry since                                                            
the events  of September 11, 2001  and the more recent outbreaks  of                                                            
the  Severe  Acute  Respiratory  Syndrome  (SARS).  He  stated  that                                                            
national rate  reductions, despite  no changes to fixed costs,  have                                                            
also impacted  the Alaska businesses. He spoke to  the difficulty in                                                            
keeping employees employed and the need to increase the fleet.                                                                  
                                                                                                                                
Mr. Park assured that he  was willing to contribute to the State and                                                            
to pay taxes, as he attributed this as a responsibility.                                                                        
                                                                                                                                
Mr. Parks  noted  the cruise  industries  are owned  outside of  the                                                            
United States  and although  they pay port  fees, they pay  no State                                                            
taxes. He asserted  that the cruise  industry earnings are  spend by                                                            
the  companies and  it  employees  out of  State, in  comparison  to                                                            
locally  owned business  in  which the  earnings  are reinvested  in                                                            
Alaska.                                                                                                                         
                                                                                                                                
Mr. Parks emphasized the  burden on rental industries to collect the                                                            
funds and process the taxes,  reiterating that the companies are not                                                            
reimbursed  for the additional credit  card transaction charges.  He                                                            
also pointed out that some  computer systems do not account multiple                                                            
taxes.                                                                                                                          
                                                                                                                                
ANDREW  HALCRO,   President,  Alaska   Rental  Car,  testified   via                                                            
teleconference  from offnet location about the 100  employees of the                                                            
company  located in  nine communities  in  Alaska. He  spoke to  the                                                            
economic  development  at the Ted  Stevens  Anchorage International                                                             
Airport and  reminded that  three years prior  the State  authorized                                                            
the sale of bonds to finance  the $230 million expansion. He relayed                                                            
that the car  rental industry was  not included in this process  and                                                            
identified problems  with the project.  As a result,  he stated that                                                            
the car rental  industry formed a  consortium to design and  propose                                                            
the construction  of a  four-story parking  garage with two  stories                                                            
occupied by  rental companies and  financed by the rental  industry.                                                            
                                                                                                                                
Mr. Halcro  calculated a State tax  coupled with existing  taxes and                                                            
fees  would total  28 percent.  He  estimated the  proposed  parking                                                            
garage would cost $40 million  and would require a customer facility                                                            
charge of  approximately $3.50  per day for  each rental  agreement.                                                            
The  market, he  stressed  could not  support this  combination  and                                                            
therefore the  parking garage project  would not be constructed.  He                                                            
warned  that the  consequence  of not  proceeding  with the  private                                                            
parking facility  would be the rental  industry and customers  would                                                            
be  "at the  mercy of  the  State at  an airport  that  is now  $150                                                            
million over budget and really no solution in sight."                                                                           
                                                                                                                                
Mr. Halcro  also spoke to the fairness  issue, telling the  co-chair                                                            
that a Fairbanks  resident traveling to Anchorage  and renting a car                                                            
for one  day would  pay a 20 percent  State tax,  plus an 8  percent                                                            
local tax. He compared  this to a traveler from out of State renting                                                            
an   RV,   impacting   the   parks,   highways   and   other   State                                                            
infrastructure,  and paying only three percent in  tax. He suggested                                                            
that if  the intent  is to generate  revenue from  those who  impact                                                            
roadways and the State's  infrastructure, the proposed tax should be                                                            
implemented equally to all vehicle rentals.                                                                                     
                                                                                                                                
                                                                                                                                
SFC 03 # 106, Side B 11:26 AM                                                                                                   
                                                                                                                                
                                                                                                                                
Mr.  Halcro contended  that  the RV  industry concern  the  business                                                            
would  "bleed" to  Canada  is no  different  than his  concern  that                                                            
business would  be lost to taxi cabs, shuttle buses  and car rentals                                                            
located away from airports.                                                                                                     
                                                                                                                                
Mr. Halcro expressed  he understood the State's fiscal  gap and as a                                                            
result the car rental industry  should "take full responsibility and                                                            
my customers to  take full responsibility in getting  the State on a                                                            
straight and narrow."  He stated that in the previous  year, the car                                                            
rental   businesses   located   at   the   Ted   Stevens   Anchorage                                                            
International Airport paid  over $3.7 million in direct taxes to the                                                            
Department of Transportation and Public Facilities.                                                                             
                                                                                                                                
Mr. Halcro  told  of recent  purchase of  land in  Fairbanks by  his                                                            
company off airport property  and the intention to construct a state                                                            
of the  art service  facility.  He stated  that a new  tax would  be                                                            
factored into any capital investment decisions.                                                                                 
                                                                                                                                
Senator Olson asked former  State Representative Halcro's opinion on                                                            
Amendment #2.                                                                                                                   
                                                                                                                                
It   was  determined   Mr.   Halcro   had  disconnected   from   the                                                            
teleconference network.                                                                                                         
                                                                                                                                
Senator Bunde  speculated on Mr. Halcro's  position surmising  that,                                                            
"seven percent is better than ten percent."                                                                                     
                                                                                                                                
A roll call was taken on the motion to adopt Amendment #2.                                                                      
                                                                                                                                
IN FAVOR: Senator Olson, Senator Bunde and Senator Hoffman                                                                      
                                                                                                                                
OPPOSED: Senator B. Stevens,  Senator Taylor, Co-Chair Green and Co-                                                            
Chair Wilken                                                                                                                    
                                                                                                                                
The motion FAILED (3-4)                                                                                                         
                                                                                                                                
The amendment FAILED to be adopted.                                                                                             
                                                                                                                                
Amendment #3:  This conceptual amendment limits authority  to levy a                                                            
tax  on  car   rentals  to  the  State;   clarifying  that   airport                                                            
authorities and  municipalities are not authorized  to impose such a                                                            
tax.                                                                                                                            
                                                                                                                                
Senator Taylor moved for  adoption and stated that varying tax rates                                                            
and user  fees exist  in Anchorage  and Fairbanks  and subsequently                                                             
this legislation would  impact communities differently. He clarified                                                            
this amendment provides  that municipalities would be precluded from                                                            
imposing taxes and fees on car rental businesses.                                                                               
                                                                                                                                
Senator Taylor  spoke to  various taxes imposed  on alcohol  and the                                                            
confusion  it creates.  He talked  about different  taxing  entities                                                            
that do not communicate  with each other and the eventual  situation                                                            
whereby  a  business  could  no  longer  operate  due  to  excessive                                                            
taxation.  He characterized  this  amendment  as a  policy call.  He                                                            
suggested  that more revenue  could be generated  for the State  and                                                            
that in some communities the overall tax rate would be reduced.                                                                 
                                                                                                                                
Senator B.  Stevens moved to amend  the amendment to include  cruise                                                            
ship destinations.                                                                                                              
                                                                                                                                
It was  established  that the  amendment includes  all communities,                                                             
local governments and taxing authorities.                                                                                       
                                                                                                                                
Mr.  Persily  asked  if this  would  abolish  those  existing  taxes                                                            
currently imposed  by local governments  and airport authorities  or                                                            
instead "freeze" the current taxes.                                                                                             
                                                                                                                                
Senator Taylor  answered that  all taxes  would be eliminated,  thus                                                            
granting  the  State  sole authority  to  impose  taxes  on  vehicle                                                            
rentals.                                                                                                                        
                                                                                                                                
Mr.  Persily  noted   the  Municipality  of  Anchorage   would  lose                                                            
approximately  $4.5 million in revenues  beginning at the  effective                                                            
date of  this bill.  He asked  if the  intent is  to also  eliminate                                                            
airport  concession fees  paid to the Department  of Transportation                                                             
and Public Facilities.                                                                                                          
                                                                                                                                
Senator  Taylor  responded  that State-imposed   fees would  not  be                                                            
affected.   He  remarked   that   revenues  collected   by   airport                                                            
authorities  are deposited to the  State general fund, although  the                                                            
legislature  always  "chooses"  to  appropriate  the  funds  to  the                                                            
authorities.                                                                                                                    
                                                                                                                                
Co-Chair  Wilken maintained  his objection  to the  adoption of  the                                                            
amendment.                                                                                                                      
                                                                                                                                
A roll call was taken on the motion.                                                                                            
                                                                                                                                
IN FAVOR: Senator Taylor and Senator Hoffman                                                                                    
                                                                                                                                
OPPOSED: Senator B. Stevens,  Senator Bunde, Senator Olson, Co-Chair                                                            
Green and Co-Chair Wilken                                                                                                       
                                                                                                                                
The motion FAILED (2-5)                                                                                                         
                                                                                                                                
The amendment FAILED to be adopted.                                                                                             
                                                                                                                                
Senator Taylor  offered a motion to  report the bill from  Committee                                                            
with individual recommendations and new fiscal note.                                                                            
                                                                                                                                
There  was no  objection  and CS  HB 271  (FIN)(efd  am) MOVED  from                                                            
Committee  with  a  $96,500  fiscal noted  dated  5/20/03  from  the                                                            
Department of Revenue.                                                                                                          
                                                                                                                                
AT EASE 11:36 AM / 11:43 AM                                                                                                     
                                                                                                                                
                                                                                                                                
     CS FOR HOUSE BILL NO. 106(JUD) am                                                                                          
     "An   Act  relating   to  retail  tariffing   standards   in  a                                                            
     competitive  local  exchange service  area;  and to  exemptions                                                            
     from  retail  tariff  filing  requirements  and  certain  other                                                            
     provisions  in competitive telecommunications  markets; setting                                                            
     a   policy  regarding   unbundled  network   elements   in  the                                                            
     telecommunications  market;  relating  to depreciation  expense                                                            
     rates for  certain telecommunications utilities;  requiring the                                                            
     Regulatory  Commission of Alaska  to conduct an investigation,                                                             
     take  certain actions,  withhold certain  actions, and  issue a                                                            
     report; and providing for an effective date."                                                                              
                                                                                                                                
                                                                                                                                
This  was the first  hearing  for this  bill in  the Senate  Finance                                                            
Committee.                                                                                                                      
                                                                                                                                
Co-Chair  Wilken  stated that  this  bill,  sponsored  by the  House                                                            
Judiciary  Committee, "provides  for changes  in telecommunications                                                             
utility  regulations  and  rates  and  policies  regarding   carrier                                                            
interconnection   agreements.  In  addition,  the  RCA  [Regulatory                                                             
Commission  of Alaska] of Alaska is  required to submit a  report to                                                            
the  Legislature  within  180  days  regarding  the  status  of  the                                                            
telecommunication  industry  in  Alaska."  He  noted  testimony  and                                                            
questions would be limited to 15 minutes per witness.                                                                           
                                                                                                                                
REPRESENTATIVE  LESIL  MCGUIRE, Chair,  House  Judiciary  Committee,                                                            
spoke  to the  three  months of  bipartisan  work invested  in  this                                                            
legislation  by the House Labor and  Commerce Committee,  as well as                                                            
the  House  Judiciary  Committee.  She  admitted  the  limited  time                                                            
available  for  the Senate  to  consider  the complexities  of  this                                                            
substantive  bill, but remarked  that the  Senate Finance  Committee                                                            
"must put a certain  amount of trust in your colleagues"  serving in                                                            
the House of Representatives.  She asserted this bill is "absolutely                                                            
necessary   in   the   State   of   Alaska   right   now   to   keep                                                            
telecommunications  industry competitive."  She suggested  she could                                                            
realize   political   consequences  for   her   actions  with   this                                                            
legislation,  but considered this  to demonstrate her commitment  to                                                            
the issue. She stressed the Legislature's duty is to set policy.                                                                
                                                                                                                                
Representative  McGuire  characterized  the RCA  as  similar to  the                                                            
judicial  branch, and as  a "quasi judicial  agency" is responsible                                                             
for issuing rulings  on issues.  She understood it  is difficult for                                                            
the RCA  to issue rulings  because these  rulings establish  policy.                                                            
She therefore concluded  that the legislature must intervene and set                                                            
policies.  She  surmised  that  the RCA  could  then  interpret  and                                                            
implement  those policies  in the  same manner as  the Alaska  Court                                                            
System implements laws passed by the Legislature.                                                                               
                                                                                                                                
Representative  McGuire stated that the federal Telecom  Act of 1996                                                            
specifically   recognized  that  each  state  is  unique   and  must                                                            
establish  policies  to implement  the Act.  She  informed that  she                                                            
worked for  U.S. Senator Ted Stevens  at the time the Act  was under                                                            
consideration  and she recalled the Senator expressing  that the Act                                                            
was not  "crafted  with Alaska  in mind  in any  sense whatsoever."                                                             
Despite  this, she  opined,  "we have  been  able to  apply the  '96                                                            
Telecom Act  to Alaska in  a way that is  remarkable." She  asserted                                                            
that   Alaska   has    become   one   of   the   most   competitive                                                             
telecommunications market in the U.S.                                                                                           
                                                                                                                                
Representative  McGuire  asserted  that,  whether  because  of  time                                                            
constraints or lack of  resources, the RCA has "failed to act timely                                                            
in  recognition   to   the  shifts   that  have   occurred  in   the                                                            
marketplace."  She said  this bill,  therefore requests  the RCA  to                                                            
consider  "certain  policies"   in  regard  to  tariff  filings  and                                                            
unbundled  network  elements,  which  she considered  the  two  most                                                            
important factors a monopoly must address.                                                                                      
                                                                                                                                
Representative  McGuire spoke of assurances  in the bill's  language                                                            
to require  that the RCA  must make the  initial determination  that                                                            
"the carrier is in a competitive  marketplace". She stated that this                                                            
bill further  clarifies that "a competitive  marketplace  isn't just                                                            
defined by the service  area." She expressed concerns over potential                                                            
allegations that  "if over 50 percent of the entire  service area is                                                            
competitive,  then  therefore   the company   is competitive."   She                                                            
remarked  this  argument  would  be  undesirable  and  exampled  the                                                            
community of Kodiak  as being competitive while Nome  is not and the                                                            
subsequent deregulation  of the provider of the entire service area,                                                            
allowing  it to operate  without regulatory  oversight in areas  for                                                            
which there is  no competition. Therefore, she pointed  out language                                                            
addresses  this in subsection  (d)(1) of  Sec. 42.05.433.  Exemption                                                            
from   retail  tariffs   for  telecommunications    services  in   a                                                            
competitive  market.,  in Section  2  of the  bill,  which reads  as                                                            
follows.                                                                                                                        
                                                                                                                                
                (1) "competitive service area" means an area served                                                             
     by a  local exchange  carrier in which  at least 50 percent  of                                                            
     all retail customers  have a choice of facilities-based service                                                            
     providers; the area may be                                                                                                 
                     (A) the entire service area; or                                                                            
                     (B) if the entire service area is not                                                                      
          competitive, specifically identified communities within                                                               
          the service area that are competitive;                                                                                
                                                                                                                                
Representative  McGuire emphasized the entire service  area could be                                                            
encompassed in a competitive  service area, and gave Anchorage as an                                                            
example.  She  considered  this  provision  as "giving  the  RCA  an                                                            
additional  set of  tools in  their tool  belt to  make decisions."                                                             
However, she asserted  this legislation requests the  RCA to utilize                                                            
certain tools  and make decisions  that have  not been addressed  by                                                            
the RCA.                                                                                                                        
                                                                                                                                
Representative  McGuire pointed out  specific timelines are  imposed                                                            
in this bill.  She opined that it  would be in the best interest  of                                                            
all parties, especially  to the consumer, to resolve the issues in a                                                            
timely manner.                                                                                                                  
                                                                                                                                
Representative  McGuire told the Committee  that representatives  of                                                            
companies would  testify to how this legislation would  or would not                                                            
benefit  them, but  stressed that  the consumers  are priority.  She                                                            
predicted  that if  the existing  situation  continues, competition                                                             
would be eliminated. She  explained that one company with "virtually                                                            
an equal  market  share in  certain areas  of Alaska"  could not  be                                                            
regulated  as  if it  were  a monopoly.  She  remarked  that such  a                                                            
company "with  its hands tied behind  its back, fighting  up against                                                            
its closest  competitor within  percentage  points, and expect  that                                                            
that  company would  continue  to succeed;  it is  an impossibility                                                             
economically and I think we all understand that."                                                                               
                                                                                                                                
Representative McGuire  expected it to be determined that Anchorage,                                                            
Juneau  and Fairbanks  would  be deemed  to be  competitive  markets                                                            
under the provisions  of this legislation. She stated  that carriers                                                            
operating  in these  markets  would  not be  required  to undergo  a                                                            
"tariff   rate  filing  case"   because  it   is  not  required   of                                                            
competitors.   She  commented  that   this  is  a  "recognition   of                                                            
capitalism;  of  free  market;   of  the  invisible  hand;  this  is                                                            
Economics 101." She told of her college courses in economics.                                                                   
                                                                                                                                
Representative  McGuire assured that if "elements"  were later found                                                            
to  indicate  that  the free  market  system  has  not  operated  as                                                            
intended with  regard to this matter, this bill would  allow the RCA                                                            
to revisit the issue and make a different determination.                                                                        
                                                                                                                                
Representative  McGuire  next  pointed  out  that  the  Telecom  Act                                                            
requested  monopolies  to  lease out  portions  of  their  unbundled                                                            
network elements;  those portions necessary to allow  competition in                                                            
the marketplace.  She  noted this  has continued  in Alaska and  has                                                            
"worked  magnificently;  wonderful  for  all  of us."  However,  she                                                            
stated  that the  monopoly  company  is forced  to lease  out  their                                                            
facilities  for less than their costs.  She attributed this  in part                                                            
to project labor  agreements and to Alaska's "unique  landscape" and                                                            
existing  equipment. She stated  that the cost  in Fairbanks  to the                                                            
incumbent  carrier is  $32, yet it  can only  charge the  competitor                                                            
$19, resulting in a monthly loss of $500,000.                                                                                   
                                                                                                                                
Representative  McGuire  asserted  she  presents  this bill  not  on                                                            
behalf of any company or lobbyist or individual.                                                                                
                                                                                                                                
Senator Bunde  understood that while this legislation  would provide                                                            
the  RCA with  "more  tools"  it also  requires  the  Commission  to                                                            
utilize those tools.                                                                                                            
                                                                                                                                
Representative McGuire affirmed.                                                                                                
                                                                                                                                
Senator Bunde  spoke to the importance  of an independent  judiciary                                                            
and warned  that once  the legislature  begins to  intervene  in the                                                            
policy  of the  RCA,  the Commission  is  no longer  an independent                                                             
entity.                                                                                                                         
                                                                                                                                
Representative McGuire  replied that the RCA should be maintained as                                                            
a quasi-judicial body in  that the legislature should not be setting                                                            
rates or determining  dominant carriers. However she  asserted it is                                                            
"absolutely appropriate"  for the legislature to set  policy for the                                                            
RCA.  She stated  that  evidence  exists  that the  legislature  has                                                            
provided inadequate direction to the RCA.                                                                                       
                                                                                                                                
Senator Taylor  noted receipt  of an e-mail  from Commissioner  Dave                                                            
Harbour  of the RCA  to Senator Bunde  dated May  20, 2003 [copy  on                                                            
file], indicating  that because Co-Chair Wilken had  excused himself                                                            
from Committee  action regarding other  legislation relating  to the                                                            
RCA, due  to a conflict  of interest, Mr.  Harbour assumed  Co-Chair                                                            
Wilken would do the same with respect to this bill.                                                                             
                                                                                                                                
Co-Chair Wilken clarified  he has a conflict on interest with HB 111                                                            
due to  his involvement with  a regulated  water and sewer  utility;                                                            
however, this  legislation relates to telecommunications  and he has                                                            
no conflict.                                                                                                                    
                                                                                                                                
LEONARD STENBERG, General  Counsel, Alaska Communication Service, in                                                            
support of the  House Judiciary committee substitute  for this bill.                                                            
He  expressed that  if  "Alaska is  to remain  on  the forefront  of                                                            
telecommunication  policy, passage  of this  bill is essential."  He                                                            
opined that  Alaska has the most competitive  local exchange  market                                                            
in the  nation; however,  State laws still  reflect the "old  era of                                                            
monopoly  regulation."  He  furthered that  this  bill  would be  an                                                            
important "first step" in "modernizing State law in Alaska."                                                                    
                                                                                                                                
Mr.  Stenberg   stated   that  this   bill  addresses   "two   major                                                            
deficiencies in Alaska  policy; first, fully consistent with federal                                                            
law,  it provides  policy  guidance to  State regulators  that  will                                                            
ensure fair pricing  of facilities leased by one carrier  to another                                                            
carrier;  second,  it  delivers  on  the  promises  of  the  federal                                                            
Telecommunications  Act  of  1996  by  deregulating  local  exchange                                                            
markets once they have become competitive."                                                                                     
                                                                                                                                
Mr. Stenberg recommended passage of the bill.                                                                                   
                                                                                                                                
Senator Bunde  relayed he  has received differing  reports  that ACS                                                            
has substantial assets  and is financially strong, but also that the                                                            
company  is near bankruptcy.  He asked  the witness  to clarify  the                                                            
solvency of the company.                                                                                                        
                                                                                                                                
Mr. Stenberg replied  that ACS is a multi-faceted  business with the                                                            
local exchange operations  a significant portion. He stated that the                                                            
local exchange  business is largely  regulated and this is  the area                                                            
of greatest concern.  He noted that other operations  of ACS are not                                                            
regulated and the financial  status of those functions is irrelevant                                                            
to this discussion.  He told of a  recent analysis of the  return on                                                            
investment  of the regulated  business activities  in Anchorage  and                                                            
found  "it  is extremely  low".  He  qualified  that the  RCA  would                                                            
determine  otherwise;  however,  he cited  the  rate of  return  for                                                            
Anchorage  business at zero  to two percent.  He informed that  this                                                            
rate of return stymies incentive to invest for the future.                                                                      
                                                                                                                                
Senator B. Stevens referenced  the definition of competitive service                                                            
area  in  Section  2,  which  he  identified  as  "the  trigger  for                                                            
deregulation" and asked how the definition was determined.                                                                      
                                                                                                                                
Mr.  Stenberg  responded  that  the  "appropriate  measure"  is  the                                                            
presence of "facilities-based competition".                                                                                     
                                                                                                                                
Senator B. Stevens interjected  if this definition exists in federal                                                            
law, or is utilized  by the Federal Communications  Commission (FCC)                                                            
and how "50 percent of customers" as a litmus, was reached.                                                                     
                                                                                                                                
Mr. Stenberg  answered that the amount  is not contained  in federal                                                            
law, but  rather was considered,  discussed  and agreed upon  by the                                                            
House of Representatives.                                                                                                       
                                                                                                                                
Senator B. Stevens asked  if the State of Illinois is the only state                                                            
with and established  percentage of customers used  in determining a                                                            
competitive marketplace.                                                                                                        
                                                                                                                                
Mr.  Stenberg  affirmed   and  remarked  that  Alaska   is  "on  the                                                            
forefront"  of this matter,  as no other  state has experienced  the                                                            
same "levels  of competition".  He  noted that  other criterion  was                                                            
considered,  including   market  share  data,  and  an  "anti-trust                                                             
concept".                                                                                                                       
                                                                                                                                
Co-Chair Wilken requested  the witness comment on the correspondence                                                            
from Mr. Harbour.                                                                                                               
                                                                                                                                
Mr. Stenberg respectfully  disagreed with the positions expressed in                                                            
the e-mail.  He qualified that the  amendments to Section  2 adopted                                                            
by  the  House  of Representatives   "left  some  language  unclear;                                                            
there's probably some technical  clean-up that could be done there".                                                            
However, he  opined that these would  not "constitute any  kind of a                                                            
policy issue"  and he concluded, is not important  for the Committee                                                            
to discuss.                                                                                                                     
                                                                                                                                
Mr.  Stenberg  next  addressed  Mr.  Harbour's   concerns  with  the                                                            
competitive  service area,  and remarked  that the  target areas  of                                                            
Anchorage, Juneau and Fairbanks  are identified. He pointed out that                                                            
facilities-based   competition  is  available  to  "virtually   all"                                                            
consumers  in those  communities. He  added that  when the FCC  "de-                                                            
tariffed" interstate  long distance rates, it "realized  that it may                                                            
not  be true  that every  consumer  has access  to facilities-based                                                             
competitors";  however, the  FCC concluded that  it was in  the best                                                            
interest of the  public in general that deregulation  occur "in that                                                            
context".                                                                                                                       
                                                                                                                                
Mr. Stenberg  spoke to  Mr. Harbour's comments  relating to  pricing                                                            
for   unbundled  network   elements.   Mr.  Stenberg   opined   that                                                            
unfortunately,  this "complicated area of law" in  which the federal                                                            
government has  "created the obligation" for carriers,  such as ACS,                                                            
to  share  their  network.  He  noted  the  federal  government  has                                                            
provided "some  broad policy guidance" in terms of  how to establish                                                            
prices  for those lease  facilities  and then has  delegated  to the                                                            
states "a great  deal of discretion" to set those  prices. He stated                                                            
that in  the establishment  of those  prices, policy  calls must  be                                                            
made.  He  disagreed  that the  policy  guidance  proposed  in  this                                                            
legislation is "in any way inconsistent with federal law."                                                                      
                                                                                                                                
Mr. Stenberg  explained "accelerated  depreciation", stressing  that                                                            
the  "regulation  of rates  for lease  facilities  is fundamentally                                                             
different  than traditional  rate  regulation." He  opined that  the                                                            
intent of traditional rate  regulation was to "recover costs plus be                                                            
allowed a reasonable  profit." He  stated that in relation  to lease                                                            
facilities, the  federal government has instructed  states to "throw                                                            
out everything  we know about traditional rate regulation"  and that                                                            
regulators  should  instead be  "attempting  to emulate  what a  new                                                            
company's  costs would  be if that  new company were  to go  out and                                                            
build  an efficient  new  network."  He  surmised  that such  a  new                                                            
company  would  use  accelerated  depreciation  in  determining  its                                                            
internal  economics.   He  remarked  this  is  logical  as  well  as                                                            
"factually  shown to be true," in  that the chief competitor  of ACS                                                            
has  utilized  this  method  in  facilities   it  has  invested  in.                                                            
Therefore, he surmised  that if the goal were to emulate the actions                                                            
and costs of a new company,  accelerated depreciation is "absolutely                                                            
appropriate."                                                                                                                   
                                                                                                                                
Mr.  Stenberg  furthered   that  when  changing  to  a  competitive                                                             
environment  from  a  monopoly  situation,   increased  demands  for                                                            
innovation,  investment as well as  increased risks, arise.  He gave                                                            
an example of  increased risks in that costs might  not be recovered                                                            
on some  facilities. He cited  this as another  reason for  allowing                                                            
accelerated depreciation.                                                                                                       
                                                                                                                                
Senator Bunde,  noting the highly specialized field  of utility laws                                                            
and  asked if  the witness  was available  for  consultation  during                                                            
"creation" of this bill.                                                                                                        
                                                                                                                                
Mr. Stenberg  replied that  he testified "at  some length"  before a                                                            
subcommittee to  the House Labor and Commerce Committee,  as well as                                                            
the House Judiciary Committee.                                                                                                  
                                                                                                                                
DANA TINDELL,  Senior Vice President, Legal and Regulatory  Affairs,                                                            
General Communications  Incorporated testified in  opposition to the                                                            
bill, as it is  "anti-competitive and anti-consumer".  She continued                                                            
reading a statement into the record as follows.                                                                                 
                                                                                                                                
     It is bad  public policy done at that eleventh  hour and should                                                            
     not  be passed. CS  HB 106 promised  local telephone  companies                                                            
     with  monopoly power  to raise  rates whether  or not there  is                                                            
     competition.  Moreover,   CS HB  106  permits  local  telephone                                                            
     companies with monopoly  power to raise its competitors' costs,                                                            
     thus [inaudible] any  ability of competition to keep rates down                                                            
     where  there is competition.  In a market where one  competitor                                                            
     controls  another  competitor's  costs,  you cannot  have  true                                                            
     competition.                                                                                                               
                                                                                                                                
     In  addition,  this bill,  as  a result  of last  minute  floor                                                            
     amendments,  is internally inconsistent and it  is not clear in                                                            
     its  intent. It  is difficult  to tell  what the Legislature's                                                             
     intent  is because  it has been  cut and  pasted with words  of                                                            
     previous  sections left in the bill that are  inconsistent with                                                            
     amendments that have been made on the floor in the House.                                                                  
                                                                                                                                
     Without exception,  legislators that rose on the House floor to                                                            
     speak  on this bill discussed  the complexity of these  issues.                                                            
     This bill  changes the way utilities are regulated.  It doesn't                                                            
     give  intent language;  it actually changes  the way  utilities                                                            
     are  regulated.  There  are serious  public  policy  issues  at                                                            
     state.  Please  do  not  move  a  bill  that  changes  the  way                                                            
     utilities  are regulated  without  serious thought.  This  is a                                                            
     complex  bill.  It  reverses  past RCA  decisions.  It  effects                                                            
     pending  decisions  now before  the RCA  and in  our view  will                                                            
     diminish local telephone competition in the marketplace.                                                                   
                                                                                                                                
     The Governor has just  appointed three new commissioners to the                                                            
     RCA. There are a total  of five commissioners to the RCA, which                                                            
     means  that that is a  60 percent turnover.  The RCA is  in the                                                            
     middle  of a proceeding to deregulate  the competitive  markets                                                            
     for local  services. They have  not completed that proceeding.                                                             
     Both ACS and GCI have filed pleadings in that proceeding.                                                                  
                                                                                                                                
     Please  allow the  RCA to  do its  work. It  is an evidentiary                                                             
     body; it  can engage in discovery; it can get  the actual facts                                                            
     on the  record. With  the new RCA and  no possibility  of bias,                                                            
     GCI requests  the Legislature to permit the RCA,  as the expert                                                            
     body, to make these decisions.                                                                                             
                                                                                                                                
Ms.  Tindell   addressed  the  issue   of  low  costs,  referencing                                                             
discussion  that GCI  leases "loops"  from ACS at  $19, whereas  ACS                                                            
costs are between  $33 and $40. She remarked, "That  is an apples to                                                            
oranges comparison,"  explaining ACS reference to  "loop costs as an                                                            
accounting  purpose" their  loop costs  consists  of the "length  of                                                            
facilities from the switch  to the home". She informed that GCI does                                                            
not lease  that entire facility,  but rather  the portion from  "the                                                            
neighborhood  to the  home." She stated  that GCI  provides its  own                                                            
"fiber"  around  the community  and  throughout  the city  and  also                                                            
provides  its own "switch".  She listed GCI  costs at approximately                                                             
$33 for  the "same  comparison  of what  ACS is  representing  their                                                            
costs to be."                                                                                                                   
                                                                                                                                
Ms.  Tindell furthered  that  depreciation  is  also an  "apples  to                                                            
oranges comparison". She  explained, "a rate based regulated company                                                            
that's rates are set. The  overwhelming determination of those rates                                                            
is 'what  percentage  of the  plant  in the  ground do  they get  to                                                            
allocate  to  the  consumer  for the  purpose  of  setting  consumer                                                            
prices." She characterized  this as an allocation cost rather than a                                                            
depreciation  cost,  which "is  a totally  separate  phenomena  than                                                            
depreciation  for tax purposes."  She stated  that depreciation  for                                                            
tax purposes  does  not affect  "the price  that a  company gets  to                                                            
charge for consumers;  it is simply a tax issue that  determines the                                                            
amount of taxes  that company will  pay that year. In contrast,  she                                                            
said depreciation  for ratemaking  purposes  "directly gets  plugged                                                            
through to the consumer."                                                                                                       
                                                                                                                                
Ms.  Tindell  expressed  that  this  bill  would  "deregulate  local                                                            
telephone companies  with monopoly  throughout their entire  service                                                            
area in many cases where  there is not competition, for the purposes                                                            
of depreciation."  She informed  this would  allow the companies  to                                                            
"automatically  increase  the  rates  they charge,  whether  or  not                                                            
there's competition."                                                                                                           
                                                                                                                                
Ms.  Tindell furthered  that  this  bill would  allow  a company  to                                                            
deregulate in  areas where no competition exists.  She suggested the                                                            
provisions  are unclear as to "which  direction the RCA is  supposed                                                            
to go."                                                                                                                         
                                                                                                                                
Ms. Tindell  spoke to the inconsistencies  of the bill, referencing                                                             
page  2, lines  6 -  13, a  portion  of Section  2,  which adds  new                                                            
sections to AS 42.05, and reads as follows.                                                                                     
                                                                                                                                
     Sec.   42.05.433.    Exemption   from   retail    tariffs   for                                                            
     telecommunications  services  in  a competitive  market. (a)  A                                                            
     local  exchange  carrier  may  petition  the commission  for  a                                                            
     determination that  one or more of its markets is a competitive                                                            
     services  area. The commission shall, within  90 days, grant or                                                            
     reject  the petition  according  to the standard  set forth  in                                                            
     this  section. If the  commission fails  to act within  90 days                                                            
     after the submission  of such a petition, the petition shall be                                                            
     deemed granted. A  certification exempts the telecommunications                                                            
     utility from retail tariff filing requirements.                                                                            
                                                                                                                                
     …                                                                                                                          
                                                                                                                                
Ms. Tindell  pointed  out the origin  and issuing  authority  of the                                                            
aforementioned certification  is not specified. She continued citing                                                            
subsection (b) on lines 14 - 17, which reads as follows.                                                                        
                                                                                                                                
          (b) A certification filed under (a) of this section is                                                                
     effective upon filing.  The commission may deny a certification                                                            
     only  upon  a  written  finding  and order  that,  based  on  a                                                            
     preponderance  of the  evidence, the  competitive service  area                                                            
     standard has not been met.                                                                                                 
                                                                                                                                
Ms. Tindell  questioned  the establishment  of both  a petition  and                                                            
certification  and  the  90-day  effective  date  provision  of  the                                                            
petition   compared   to  the   immediate   effective   date  of   a                                                            
certification filing.                                                                                                           
                                                                                                                                
                                                                                                                                
SFC 03 # 2, Side A 12:21 PM                                                                                                     
                                                                                                                                
                                                                                                                                
Ms. Tindell  referenced Section  1 and commented  that "in  order to                                                            
get competition  using [an existing]  carrier's network for  a rural                                                            
area, there  must be  a finding  that it will  not affect  universal                                                            
service or  rates to that rural area."  She opined that it  would be                                                            
"difficult if not impossible" to meet that finding.                                                                             
                                                                                                                                
Ms. Tindell  indicated other representatives  of GCI were  available                                                            
to speak to the incompliance of this bill with federal law.                                                                     
                                                                                                                                
AT EASE 12:22 PM / 12:28 PM                                                                                                     
                                                                                                                                
Senator Taylor  asked for an explanation of the differences  between                                                            
"bundled" and "unbundled".                                                                                                      
                                                                                                                                
Ms. Tindell  informed of the separate  issues of "bundled  packages"                                                            
and  "unbundled  elements".  She  explained  that  under  commission                                                            
regulation, a dominant  carrier with monopoly power is not permitted                                                            
to bundle  its local services  market with  other offerings  because                                                            
the regulation presumes  that this carrier has all the customers for                                                            
the  local service  and  that it  would be  unfair  to provide  that                                                            
carrier  with "a  leg up"  in attracting  those  customers to  other                                                            
services for  which competition exists.  She qualified that  the RCA                                                            
granted  provisions  to  allow  the  dominate   carrier  to  request                                                            
exemption.                                                                                                                      
                                                                                                                                
Ms. Tindell then defined  unbundled elements as "a notion of carrier                                                            
to carrier costs", explaining  this relates to a competitive carrier                                                            
entering the  market and leasing the  existing carrier's  network in                                                            
order  to  provide  service.  Because the  existing  carrier  has  a                                                            
"bottleneck facility"  and has monopoly control over  that facility,                                                            
she  stated  that the  U.S.  Congress  has ruled  that  the  network                                                            
facilities  should  be  "broken  down  into  its  smallest  elements                                                            
possible" to allow a competitive  carrier to lease only the elements                                                            
necessary to provide service.                                                                                                   
                                                                                                                                
Senator Taylor thanked the witness for the explanation.                                                                         
                                                                                                                                
ADJOURNMENT                                                                                                                 
                                                                                                                                
Co-Chair Gary Wilken adjourned the meeting at 12:30 PM                                                                          
                                                                                                                                

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