Legislature(2009 - 2010)SENATE FINANCE 532

04/06/2010 09:00 AM Senate FINANCE

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<Bill Hearing Postponed>
                 SENATE FINANCE COMMITTEE                                                                                       
                       April 6, 2010                                                                                            
                         9:09 a.m.                                                                                              
9:09:36 AM                                                                                                                    
CALL TO ORDER                                                                                                                 
Co-Chair Stedman called the Senate Finance Committee                                                                            
meeting to order at 9:09 a.m.                                                                                                   
MEMBERS PRESENT                                                                                                               
Senator Lyman Hoffman, Co-Chair                                                                                                 
Senator Bert Stedman, Co-Chair                                                                                                  
Senator Charlie Huggins, Vice-Chair                                                                                             
Senator Johnny Ellis                                                                                                            
Senator Dennis Egan                                                                                                             
Senator Donny Olson                                                                                                             
Senator Joe Thomas                                                                                                              
MEMBERS ABSENT                                                                                                                
ALSO PRESENT                                                                                                                  
Chris Maisch, Director, Division  of Forestry, Department of                                                                    
Natural  Resources;  Senator   Bill  Wielechowski,  Sponsor;                                                                    
Kevin Banks, Director, Division of  Oil & Gas, Department of                                                                    
Natural Resources                                                                                                               
PRESENT VIA TELECONFERENCE                                                                                                    
Erin McLarnon, Board of Forestry, Willow; Carl Portman,                                                                         
Deputy Director, Resource Development Council; Dick Coose,                                                                      
Retired Forester, Ketchikan                                                                                                     
HB 162 SOUTHEAST STATE FOREST                                                                                                   
     HB 162 was heard and HELD in Committee for further                                                                         
SB 208 DNR STUDY ON NATURAL GAS                                                                                                 
     SB  208 was  heard and  HELD in  Committee for  further                                                                    
9:10:36 AM                                                                                                                    
HOUSE BILL NO. 162                                                                                                            
     "An Act establishing the Southeast State Forest and                                                                        
     relating to the Southeast State Forest; and providing                                                                      
     for an effective date."                                                                                                    
CHRIS MAISCH, DIRECTOR, DIVISION  OF FORESTRY, DEPARTMENT OF                                                                    
NATURAL   RESOURCES,   addressed    the   Senate   Committee                                                                    
Substitute  for  HB  162, which  establishes  the  Southeast                                                                    
State  Forest.  He said  he  would  go through  a  sectional                                                                    
analysis of the bill.                                                                                                           
9:11:34 AM                                                                                                                    
Co-Chair  Stedman  suggested  explaining  the  bill  so  the                                                                    
people  listening at  home could  understand it.  Mr. Maisch                                                                    
agreed to do so.                                                                                                                
Mr. Maisch read the sectional analysis:                                                                                         
     This bill would establish  a new Southeast State Forest                                                                    
     (SESF). The SESF would be  managed as part of the State                                                                    
     Forest  System under  AS  Lands in  the                                                                    
     State  Forest would  continue to  be open  for multiple                                                                    
     uses,  including  wildlife   habitat  and  harvest  and                                                                    
     recreational activities.  The State  Forest designation                                                                    
     would  not   affect  the  Wrangell   Borough  municipal                                                                    
     entitlement,  nor   would  it  affect   calculation  of                                                                    
     entitlement  acreage   for  future   municipalities  in                                                                    
     southeast Alaska.                                                                                                          
     Section 1 - Southeast State Forest                                                                                         
     Legal descriptions. Section 1,  subsections (a) and (d)                                                                    
     provide  legal   descriptions  for  the  lands   to  be                                                                    
     designated  as  the   Southeast  State  Forest  (SESF).                                                                    
     Designated   lands   include    20   parcels   totaling                                                                    
     approximately  25,291 acres  (see chart)  on Prince  of                                                                    
     Wales,   Tuxekan,  Kosciusko,   Heceta,  Revilla,   and                                                                    
     Gravina  islands, and  on  the  mainland at  Crittenden                                                                    
     Creek.  These  parcels are  an  important  part of  the                                                                    
     state timber  base, but are  classified as  General Use                                                                    
     land, which  may be sold  in the  future. Legislatively                                                                    
     designating a State Forest would  ensure that some land                                                                    
     will remain available  for long-term forest management,                                                                    
     and  enable   thinning  to  increase   timber  volumes.                                                                    
     Designated lands exclude  areas identified as important                                                                    
     sites for future state land disposals.                                                                                     
     Management    plan    and   transportation    corridor.                                                                    
     Subsection  (b) directs  DNR  to  prepare a  management                                                                    
     plan  for   the  Southeast   State  Forest.   Under  AS                                                                    
     41.17.230 a  management plan  is required  within three                                                                    
     years  after  a  State  Forest  is  established.  State                                                                    
     Forest  management  plans   must  consider  and  permit                                                                    
     multiple uses, include  recreation and tourism, mining,                                                                    
     use of  fish and wildlife, and  other traditional uses,                                                                    
     unless the Commissioner  issues a site-specific written                                                                    
     finding that  a use  in incompatible  with one  or more                                                                    
     other uses. Public, interagency,  and Board of Forestry                                                                    
     review is required prior to adoption of a State Forest                                                                     
     management plan. As in  other state forests, Subsection                                                                    
     (c)  states   that  the   DNR  Commissioner   may  also                                                                    
     establish  transportation  corridors within  the  State                                                                    
     Municipal  entitlements. Subsection  (e) clarifies  the                                                                    
     relationship of the Southeast State  Forest to  current                                                                    
     and  potential  municipal entitlements.  State  Forests                                                                    
     can  affect  the  amount  of  land  a  municipality  is                                                                    
     entitled  to   select,  and  the  land   available  for                                                                    
     selection.  The  amount  of  land  a  municipality  may                                                                    
     select  is  based  on  the  maximum  total  acreage  of                                                                    
     vacant,  unappropriated, unreserved  (VUU) land  in the                                                                    
     borough boundaries  within two years after  the date of                                                                    
     incorporation (AS 29.65.030).  Municipal selections are                                                                    
     limited  to VUU  land. Land  classified as  General Use                                                                    
     land is VUU land, but State Forests are not.                                                                               
     The  SESF is  designed to  have no  impact on  Wrangell                                                                    
     Borough  land  selections.  The  amount  of  land  that                                                                    
     Wrangell  Borough may  select is  already fixed  by its                                                                    
     date  of incorporation,  and this  bill specifies  that                                                                    
     the  Wrangell  Borough  may select  State  Forest  land                                                                    
     within the borough boundary. Three  parcels in the SESF                                                                    
     are within the Wrangell Borough boundary.                                                                                  
     If new municipalities are  incorporated before June 30,                                                                    
     2019, the SESF will not  affect the amount of land that                                                                    
     they can  select. The bill specifies  that State Forest                                                                    
     lands that  were VUU land  before establishment  of the                                                                    
     State  Forest will  be included  in the  calculation of                                                                    
     the entitlement  acreage. However, parcels in  the SESF                                                                    
     may  not  be  selected. If  municipalities  form  after                                                                    
     2019,  the amount  and  location  of their  entitlement                                                                    
     would be based on the VUU land at that time.                                                                               
     Section 2. Regulations. This  section authorizes DNR to                                                                  
     immediately adopt regulations to implement the bill.                                                                       
     Section  3.  Effective   date  for  regulations.  Under                                                                  
     Section 3  the authority to adopt  regulations (Section                                                                    
     2) takes effect immediately.                                                                                               
     Section 4.  Effective date for State  Forest. Section 4                                                                  
     provides for an effective date of July 1, 2008.                                                                            
9:16:20 AM                                                                                                                    
Mr.  Maisch   explained  the   process  of   developing  the                                                                    
legislation. It is a project that  has been in the works for                                                                    
about   four  years.   There  has   been  extensive   public                                                                    
Mr.  Maisch related  that  he has  spoken  at two  Southeast                                                                    
Conference  annual  meetings   about  the  legislation,  and                                                                    
Southeast Conference  has submitted a letter  of support. He                                                                    
also  reported  speaking  to  Tongass  Futures  on  numerous                                                                    
Mr.  Maisch  pointed out  that  the  Board of  Forestry  has                                                                    
discussed the  legislation. The Board is  comprised of eight                                                                    
members  who represent  Alaska  Native corporations,  forest                                                                    
industry      trade      associations,      non-governmental                                                                    
organizations, a professional  forester, a professional fish                                                                    
and wildlife biologist, a  mining organization, a commercial                                                                    
fish organization,  a recreation seat, and  an environmental                                                                    
organization. He  referred to a  letter of support  from the                                                                    
Board. He also  listed letters of support  from the Resource                                                                    
Development Council, the Society  of American Foresters, the                                                                    
City of Wrangell, Community of  Coffman Cove, and the Alaska                                                                    
Forest Association.                                                                                                             
Mr. Maisch  said the department  has discussed  the proposal                                                                    
in numerous forums throughout the state.                                                                                        
9:18:29 AM                                                                                                                    
Senator Thomas  asked if the  RS 2477 trails  are preserved.                                                                    
Mr.  Maisch   reported  that  they  were.   Access  will  be                                                                    
Senator Olson inquired about an  additional selection by the                                                                    
Wrangell Borough.  Mr. Maisch reported on  negotiations with                                                                    
Wrangell  through the  Division of  Mining, Land,  and Water                                                                    
which led to a compromise  on the parcels selected. He noted                                                                    
a parcel  near Wrangell  that the borough  will select  as a                                                                    
part of their entitlement selection.                                                                                            
Senator Olson  asked if Wrangell  was in favor of  the bill.                                                                    
Mr. Maisch reported a letter of support from Wrangell.                                                                          
9:20:34 AM                                                                                                                    
Co-Chair  Stedman   noted  one  zero  fiscal   note  by  the                                                                    
Department of Natural Resources.                                                                                                
Co-Chair Stedman  asked if there  was any opposition  to the                                                                    
bill. Mr. Maisch addressed parcels  that were opposed; SEACC                                                                    
did not want  to see two parcels on Gravina  Island used for                                                                    
forest  management purposes,  and  there  was opposition  to                                                                    
Crittenden  Creek.  He said  the  two  parcels were  already                                                                    
owned by  the state  and had been  through an  area planning                                                                    
process  in Southeast  Alaska. There  were extensive  public                                                                    
meetings  and  the lands  were  established  as general  use                                                                    
lands in  the area plan with  intent to use them  for forest                                                                    
9:22:16 AM                                                                                                                    
ERIN    MCLARNON,   BOARD    OF   FORESTRY,    WILLOW   (via                                                                    
teleconference), spoke in favor  of the bill. She emphasized                                                                    
that not  only will the  new state forest  provide long-term                                                                    
forest  management,   it  will  also   provide  recreational                                                                    
activities. As  a representative  of the Willow  Dog Mushers                                                                    
Association,  she appreciated  the  more accessible  trails.                                                                    
She shared  her personal  story and  listed reasons  why she                                                                    
supports  the creation  of state  forests. She  stressed the                                                                    
importance of the jobs the new state forest would provide.                                                                      
9:24:38 AM                                                                                                                    
CARL PORTMAN, DEPUTY  DIRECTOR, RESOURCE DEVELOPMENT COUNCIL                                                                    
(via  teleconference), testified  in support  of HB  162. He                                                                    
stated that with the establishment  of a new state forest in                                                                    
Southeast Alaska, the Division of  Forestry would be able to                                                                    
manage  state lands  for  a long-term  supply  of timber  to                                                                    
local processors and retain the  land in state ownership for                                                                    
multiple use.  The forest  would be managed  as part  of the                                                                    
state forest system.                                                                                                            
9:26:28 AM                                                                                                                    
DICK    COOSE,    RETIRED     FORESTER,    KETCHIKAN    (via                                                                    
teleconference), spoke in favor of  HB 162. He stated that a                                                                    
Southeast Forest  would maintain some semblance  of a forest                                                                    
industry while  practicing multiple-use management  on state                                                                    
lands. He  suggested obtaining  additional acreage  from the                                                                    
Tongass National  Forest and designating it  as state forest                                                                    
in order to build back what has been lost.                                                                                      
9:28:17 AM                                                                                                                    
HB  162  was  heard  and   HELD  in  Committee  for  further                                                                    
SENATE BILL NO. 208                                                                                                           
     "An Act requiring the Department of Natural Resources                                                                      
     to   evaluate   current    incentives   and   recommend                                                                    
     additional   incentives   that   would   increase   gas                                                                    
     exploration, development, and production in the Cook                                                                       
     Inlet sedimentary basin; and requiring the Department                                                                      
     of Natural Resources to evaluate the means by which                                                                        
     the department may explore for, purchase, and sell                                                                         
     natural gas from newly proved gas reserves in the Cook                                                                     
     Inlet sedimentary basin."                                                                                                  
9:28:46 AM                                                                                                                    
SENATOR  BILL WIELECHOWSKI,  SPONSOR, introduced  SB 208  to                                                                    
the committee:                                                                                                                  
     SB 208 calls on the departments of Natural Resources                                                                       
    and Revenue to complete two tasks by December 1 of                                                                          
     this year.                                                                                                                 
     The first is to evaluate the effectiveness of existing                                                                     
    incentives designed to increase exploration for and                                                                         
     production of natural gas in Cook Inlet.                                                                                   
     The second is to identify and evaluate additional                                                                          
     steps the legislature could take to increase                                                                               
     production of gas in Cook Inlet.                                                                                           
     It is well known that reserves of natural gas in Cook                                                                      
     Inlet are declining.                                                                                                       
     You have probably all seen this chart - known as the                                                                       
     "waterfall chart" - which depicts a precipitous                                                                            
     decline in the known reserves of Cook Inlet gas.                                                                           
     The chart and testimony indicate that as early as                                                                          
     2012, homes and businesses in Southcentral Alaska                                                                          
     could be without sufficient supplies of natural gas.                                                                       
     Earlier this year, we received encouraging news about                                                                      
    this looming gas shortage when DNR completed a new                                                                          
     assessment of known, possible, and probably reserves                                                                       
     in the Inlet.                                                                                                              
     This review concluded that if sufficient investment in                                                                     
     Cook Inlet exploration were made, supplies could last                                                                      
     a great deal longer.                                                                                                       
     While the new assessment provides welcome news, the                                                                        
     challenge remains - What actions can and should the                                                                        
     state take to encourage producers to invest more in                                                                        
     the Inlet?                                                                                                                 
     Which incentives are likely to work and which simply                                                                       
     transfer revenue from the state treasury to companies                                                                      
     which may already have sufficient incentive to drill,                                                                      
     given proper market conditions.                                                                                            
     Are there steps the state can take other than lowering                                                                     
    tax rates or increasing credits which might have a                                                                          
     greater effect on private sector behavior?                                                                                 
     This question is particularly compelling in light of                                                                       
    the very modest tax rates and generous tax credits                                                                          
     that producers in the Inlet already enjoy.                                                                                 
     The legislature has already gone to lengths to                                                                             
     encourage more production in Cook Inlet.  To what                                                                          
     extent are these incentives working?                                                                                       
    This bill seeks to answer this question and others.                                                                         
    For example, what are other jurisdictions doing to                                                                          
     promote more investment?                                                                                                   
     If the small size of the market in Alaska is an                                                                            
     impediment to new exploration and production - which                                                                       
     we have heard - are there steps the state can take to                                                                      
    "enhance" the market to ensure that producers see a                                                                         
     return on their investment in a reasonable timeframe?                                                                      
     For instance, could the state commit to buying a                                                                           
     percentage of newly proven reserves upfront so                                                                             
     investors don't have to wait decades to reap the                                                                           
     benefits of their investment?                                                                                              
    Earlier this session, you heard testimony that the                                                                          
     state already reimburses companies for 45-65% of their                                                                     
     exploration costs.  Given this, how can the state                                                                          
     partner more effectively with industry to ensure that                                                                      
     the needs of Alaskans for a long-term, affordable and                                                                      
     reliable source of gas are met?                                                                                            
     This bill calls for a quick analysis of these                                                                              
    It asks DNR and DOR to assess the effectiveness of                                                                          
     existing fiscal inducements, propose new incentives it                                                                     
    believes would be useful, and then look broadly at                                                                          
     what other strategies the state might employ to make                                                                       
     sure Alaskans down tumble over the cliff depicted in                                                                       
     DNR's "waterfall chart."                                                                                                   
    Most importantly, it calls for this work to be done                                                                         
     expeditiously - by December 1 - so that the                                                                                
     legislature can act swiftly next year once the                                                                             
     foundation for a more informed decision has been laid.                                                                     
9:32:14 AM                                                                                                                    
KEVIN BANKS, DIRECTOR, DIVISION OF  OIL & GAS, DEPARTMENT OF                                                                    
NATURAL RESOURCES,  explained that a couple  months ago, the                                                                    
sponsor's staff asked if such  a project was feasible and if                                                                    
it could  be implemented in  a short time.  The department's                                                                    
first recommendation was to make  the bill with an immediate                                                                    
effective date. He  informed the committee that  there was a                                                                    
firm already  under contract by  the department  which might                                                                    
be able  to undertake this  task. He suggested  that Gaffney                                                                    
Cline &  Associates' contract could  be modified  to provide                                                                    
the information needed.                                                                                                         
9:34:34 AM                                                                                                                    
Co-Chair Stedman  asked if there  is any need to  change the                                                                    
time constraint  in order to  meet the December  1 deadline.                                                                    
Mr. Banks  thought the immediate effective  date, along with                                                                    
using the existing contract, would work.                                                                                        
Co-Chair  Stedman  spoke  of a  concern  about  making  good                                                                    
public policy  calls instead of reactionary  calls regarding                                                                    
the natural gas  supply in the Railbelt. He  said that there                                                                    
are  currently many  bills that  offer  incentives, some  of                                                                    
which seem  to be a  little "detached" from a  public policy                                                                    
process,   which  would   define   the   issue  and   target                                                                    
governmental action to  solve the problem of  running out of                                                                    
gas. He requested an opinion  from Mr. Banks about finding a                                                                    
solution in Cook Inlet.                                                                                                         
Mr. Banks  believed that  most tax  policy, with  respect to                                                                    
incentives, either by reducing tax  or by providing a credit                                                                    
is "like  pushing a  string". He  further stated  that there                                                                    
are  contractual relationships  with  lessees that  somewhat                                                                    
limit  what the  department can  encourage producers  to do.                                                                    
This  bill  asks the  department  to  use creative  thinking                                                                    
about whether the  state can have a more active  role in the                                                                    
market  place, in  exploration,  and in  the development  of                                                                    
resources  in the  Cook  Inlet. He  maintained  that it  was                                                                    
worth examining the state's role using a measured approach.                                                                     
Co-Chair Stedman explained  that Cook Inlet does  not have a                                                                    
tax structure  like the North  Slope does. The  credits have                                                                    
been  increased  and  broadened   in  the  past  years.  The                                                                    
legislature  ensured that  Cook  Inlet was  not impacted  by                                                                    
ACES.  There  is  no  direct   connection  between  the  tax                                                                    
structure in  the Arctic  and in Cook  Inlet. He  reported a                                                                    
concern that the taxes in  Cook Inlet were approaching zero.                                                                    
He stressed that he is encouraged by this legislation.                                                                          
9:38:51 AM                                                                                                                    
Mr.  Banks said  he  would consider  those  comments as  the                                                                    
department moves forward on the study,  if it is the will of                                                                    
the legislature.                                                                                                                
Senator   Huggins   complimented   the   sponsor   for   the                                                                    
legislation.  He  questioned  why it  takes  legislation  to                                                                    
produce common  sense action. He  asked what  the department                                                                    
would do  if the bill did  not exist. Mr. Banks  reported on                                                                    
actions taken in the past.  The department has tried to make                                                                    
sure  the  markets  are sustained.  There  were  discussions                                                                    
about the sale of royalty-in-kind gas.                                                                                          
9:40:41 AM                                                                                                                    
Co-Chair   Stedman  asked   if  the   study  would   include                                                                    
regulations  and   involve  the  Regulatory   Commission  of                                                                    
Alaska.  Mr.  Banks  thought  the  instructions  were  broad                                                                    
enough to  consider regulations.  "The marketing  of" allows                                                                    
for the  inclusion of the Regulatory  Commission of Alaska's                                                                    
Co-Chair  Stedman suggested  looking  at a  broader view  of                                                                    
Cook Inlet. Mr. Banks agreed.                                                                                                   
9:42:40 AM                                                                                                                    
Co-Chair  Stedman  noted  two   fiscal  notes;  one  by  the                                                                    
Department  of Natural  Resources  for  $200,000 in  general                                                                    
funds  to hire  outside consultants  to complete  the study,                                                                    
and a zero fiscal note by the Department of Revenue.                                                                            
Senator  Wielechowski  commented  on the  challenge  of  the                                                                    
issue. He agreed with Senator  Huggins' comments. He thought                                                                    
the bill would help in the long term.                                                                                           
9:43:54 AM                                                                                                                    
SB  208  was  heard  and   HELD  in  Committee  for  further                                                                    
The meeting was adjourned at 9:44 AM.                                                                                           

Document Name Date/Time Subjects
RDC Support of HB 162.pdf SFIN 4/6/2010 9:00:00 AM
HB 162
HB 162 Sectional Analysis.pdf SFIN 4/6/2010 9:00:00 AM
HB 162
HB162SSE State Forest Briefing 1-24-10.pdf SFIN 4/6/2010 9:00:00 AM
HB 162
HB0162A.pdf SFIN 4/6/2010 9:00:00 AM
HB 162
HB162 SSE State Forest Map Packet 2-27-09.pdf SFIN 4/6/2010 9:00:00 AM
HB 162
HB162 SAF State Chapter Support Letter.pdf SFIN 4/6/2010 9:00:00 AM
HB 162
HB162 AFA Support Letter 2010.pdf SFIN 4/6/2010 9:00:00 AM
HB 162
AG briefing.pdf SFIN 4/6/2010 9:00:00 AM
SB 208
SB 208 Sponsor Statement.doc SFIN 4/6/2010 9:00:00 AM
SB 208
Cook Inlet Supply and Demand.pub SFIN 4/6/2010 9:00:00 AM
SB 208
Cook Inlet Forecast Chart (exerpt).pdf SFIN 4/6/2010 9:00:00 AM
SB 208
HB 162 Letters of support.pdf SFIN 4/6/2010 9:00:00 AM
HB 162