Legislature(1993 - 1994)
03/30/1994 09:07 AM Senate FIN
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
MINUTES
JOINT SENATE AND HOUSE FINANCE COMMITTEE
March 30, 1994
9:07 a.m.
TAPES
The Cambridge presentation is on:
SFC-94, #57, Side 1 (000-end)
SFC-94, #57, Side 2 (end-350)
SB 190 is on the following:
SFC-94, #55, Side 2 (345-000)
SFC-94, #59, Side 1 (000-250)
CALL TO ORDER
Senator Drue Pearce, Co-chair, convened the meeting at
approximately 9:07 a.m.
PRESENT
The following Senate and House Finance members were present:
Co-chair Pearce Co-chair Larson
Co-chair Frank Representative Martin
Senator Kelly Representative
Grussendorf
Senator Kerttula Representative Kay Brown
Senator Jacko
Senator Rieger
Senator Sharp
(Representatives MacLean, Foster, Hanley, Hoffman, Parnell
and Therriault did not attend.)
ALSO ATTENDING: Representatives Joe Green, Cliff Davidson
and Ed Willis; Darrel J. Rexwinkel, Commissioner, Department
of Revenue; Dr. Charles Logsdon, Chief Petroleum Economist,
Oil and Gas Audit Division, Department of Revenue; Terry
Lauterbach, Legislative Legal Counsel, Division of Legal
Services, Legislative Affairs Agency; Chris Christensen,
Staff Counsel, Administration, Alaska Court System; Susan
Miller, Manager, Special Projects, Alaska Court System,
Alaska Court System; Laraine L. Derr, Deputy Commissioner,
Treasury, Department of Revenue; Donna Page, Senior Hearing
Officer, Department of Revenue; Jetta Whittaker, fiscal
analyst, and Mike Greany, Director, Legislative Finance
Division; representatives of the media, aides to committee
members and other members of the legislature.
VIA TELECONFERENCE: Kevin Lindemer and Jim Placke,
Cambridge Energy Research Associates, Inc., gave their
presentation via teleconference from Cambridge,
Massachusetts.
SUMMARY INFORMATION
CAMBRIDGE ENERGY RESEARCH ASSOCIATES, INC.
Oil Price and Forecast & Other Market
Predictions
CSSB 190(JUD): An Act relating to income withholding and
other methods of enforcement for orders of
support; and providing for an effective date.
CSSB 190(FIN) work draft "U" was ADOPTED.
Terry Lauterbach, Legislative Legal Counsel,
Division of Legal Services, Legislative
Affairs Agency, read from her memo outlining
changes from CSSB 190(JUD) to CSSB 190(FIN)
version "U". Discussion was had by Senators
Rieger, Sharp, Kelly and Co-chair Pearce
regarding Sec. 26, employer penalties, and
the accompanying fiscal note. The bill was
HELD in committee.
CAMBRIDGE ENERGY RESEARCH ASSOCIATES, INC.
Oil Price and Forecast & Other Market Predictions
Co-chair Pearce invited Kevin Lindemer and Jim Placke,
Cambridge Energy Research Associates, Inc., to speak to the
committee.
KEVIN LINDEMER referred the committee to the booklets
provided (see Attachment A, copy on file in the committee
minute book). He said he would speak to the short term
fundamentals of the oil market and their expectation of the
price. Also, he would speak to oil politics including the
largest uncertainty looming in the oil market - Iraq.
At their recent meeting, OPEC faced three options. Judging
by the drop in oil prices last Monday, it seemed the outcome
was somewhat of a surprise. OPEC was in a difficult
position. It could have managed a cut in barrels but in the
long run, if the cut had not been maintained, the market
would have suffered even lower prices. He felt OPEC took
the most logical course and held to a volume reality of
24.5-24.7 million barrels per day. This was the agreed
number, as it was last year, based on the production
requirements by the individual countries. If OPEC adhered
to this quota throughout the year, it had the potential for
changing the price dynamic in the oil market. In the second
quarter, the production level of 24.5-24.7 would be greater
than the demand for OPEC oil. He expected some weakness in
price over the second quarter. He saw the new game plan for
OPEC as basically straight line production. It kept the
market constant and allowed the market to absorb the risk in
price. In the third quarter, he expected demand to be close
to production if the quota was held, resulting in some
firming of the price. If it was held into the fourth
quarter, the price again was expected to firm. This would
shift the burden of meeting consumer demand onto consumer
inventories.
Mr. Lindemer said that one of the factors to watch was the
psychology of the market. He asked the members to turn to
page 27 of Attachment A. He noted the quick drop of oil
prices after the OPEC meeting and felt that was due to the
vacating of the market by those that thought OPEC was going
to cut production. So he felt the psychological
fundamentals had been relatively discounted into the
marketplace.
Iraq was a major factor both as a physical and psychological
reality. He felt that Iraq had already been somewhat
discounted into the market. OPEC's behavior would be the
key to the market over the next three quarters. He said
that if OPEC's production moved above the 24.5-24.7 range, a
dollar weakness in price was expected. If OPEC managed to
stay below that range, there could be another $1 on the high
side of the expected range which he would address later.
Physical fundamentals were relatively minor at this time. A
couple of unknowns were how much oil would get into the
market due to low oil prices. He felt that would not be
more than 200 barrels a day. The Russians remained a
question mark. Russian supplies seemed lower than expected
but no one knew if Russia had been stockpiling oil. This
might not effect the absolute price of oil but could effect
the difference between the Alaska price and the OPEC basket
price. Russian oil was more similar in quality to Alaskan
oil than to OPEC oil. Individual country production levels
were another uncertainty over the next few months. It was
doubtful that Iran would be able to maintain its quota level
of 3.6 million barrels a day. It was also unlikely that
Nigeria was going to keep producing over its quota. Those
two factors would add strength and credibility to the OPEC
production of 24.5-24.7 over the next few months.
Overall, the view of the market was positive. He expected
strength in the market and possibly a rise of $1-$2.5 a
barrel but, still, the main unknown was Iraq.
Mr. Lindemer asked the committees to turn to pages 28 and 29
of Attachment A which illustrated the outlook for OPEC and
Alaska prices. There was a summary of the Alaska prices by
fiscal year, and the various prices were outlined in the
graphs on page 30.
JIM PLACKE reiterated Mr. Lindemer's statement regarding
OPEC's meeting and the decisions made there. He mentioned
that Saudi Arabia stood firm and said it would continue to
produce at 8 million barrels a day. Saudi Arabia did not
believe that OPEC could effectively cut its production and
was not willing to see any of its own production lost. OPEC
production stood at what was called volume reality. He
defined volume reality as a number for each OPEC producer
that reflected its production capacity, its financial
situation, and any domestic or political factors. At this
point, the volume reality for OPEC was 24.5-24.7
barrels/day.
He identified the major disruptive factor in oil prices to
be Iraq and gave two reasons. It could have a physiological
impact as early as the fourth quarter of 1994 which could
spoil the favorable outlook. There had been an on-going
contest between Iraq and the U.S. that Iraq did not resume
oil exporting as long as Sadam Hussein was in power because
of the trouble it would cause if it had hold of oil
revenues. This fundamental policy had not changed in the
U.S. The Iraq objective had not changed either as it
continued to try to get out from under the oil embargo. In
the sanctions review committee in March, the council
considered Iraq's behavior and continued sanctions. On page
7, three possibilities were outlined regarding Iraq. About
six months ago, he felt that Iraq had moved to the middle
graph. Iraq was determined to push through the U.S.
requirements to lift the embargo. Several other countries,
France, Russia and China, had deserted the U.S. philosophy
to hold the line on sanctions. There was a consensus among
the members that if Iraq could meet the requirements, in six
months there would be the possibility of Iraq coming on
line. This would certainly have a physiological impact on
the market and tension would increase with that scenario.
He estimated Iraq's export capacity at about 1-1/2M barrels
a day which it would achieve as quickly as it could.
REPRESENTATIVE MARTIN said his concern was that there was
too much emphasis on Iraq and OPEC and not enough on the
other players. Secondly, when Iraq did come on line, why
would anyone buy Alaskan oil when it could be gotten cheaper
from other sources available.
Mr. Lindemer said that by the middle of this year there
would be 1 million more barrels a day from the North Sea
than in the beginning of 1993. This was the exact problem
OPEC faced and one of the short term goals was to maintain
market share. He turned the members' attention to page 10
and 11 of Attachment A. He pointed out that the U.S. was
continuing to find new sources of oil. In response to
Representative Martin's second statement, he said that
Alaskan oil had a transportation advantage to California but
not to the U.S. Gulf Coast. On page 12 and 13, graphs
showed Alaskan production was expected to decline, and when
it declined, the volume competing head to head would be low.
He asked Mr. Placke to comment on the FSU and how it might
be a bigger problem on the crude balance than Iraq.
Mr. Placke said that supplies out of Russia was one of the
burdens the oil market had to bear over the past two years.
Russian production was expected to continue to decline in
1994 at a much lower rate. Russian oil production dropped a
million barrels a day in 1993. In 1994, it should slow to
about half or 500,000 barrels a day, not much of a factor in
the market.
Senator Rieger asked if the graph on page 5 actually showed
growth in aggregate demand between 1993 and 1995 of around 4
or 5 million barrels a day. Mr. Lindemer said what was
expected in total world oil demand in 1995 was around 68
million barrels a day, and the 1992 average was around 66
million barrels a day. He said that not much growth was
expected in 1994. He reminded the members that this
included the FSU. If the FSU was taken out, the demand was
growing at a much stronger rate, and most taking place in
developing countries and the far east.
Senator Rieger compared the graph on page 5 to the one on
page 10. Mr. Placke agreed that essentially the growth
would be seen in Saudi Arabia. He said there was about
750,000 barrels a day of unused capacity outside of Saudi
Arabia. The sustainable capacity of Saudi Arabia was
estimated to be 9.7 million barrels a day, and they could
surge well above that amount. At present, they were
producing 8 million barrels a day and by the middle of this
year, it would have risen to 10 million barrels a day. The
world was becoming more dependent upon Saudi Arabia, and how
Saudi Arabia behaved increasingly influenced the oil market.
Mr. Lindemer referred to page 15 and 16 which showed the
OPEC cushion in terms of surplus capacity available and the
ratio of OPEC to non-OPEC production. There had been a rise
toward parody and it was expected to continue. If all
development for crude oil production expansion would go as
planned, OPEC could still be at 100 percent capacity by
2010. He felt that showed a need for development programs
to sustain a cushion.
REPRESENTATIVE LARSON asked the projected average price for
Alaskan oil in FY95. Mr. Lindemer asked the committee to
turn to page 32 and said the price might be understated a
few cents.
SENATOR SHARP asked where the actual potential of barrels
per day for Iraq was shown. Mr. Placke said that was not
included in Attachment A but they felt Iraq's oil production
capacity today to be a little above 2-2.2 million barrels a
day. A combination of domestic demand, and currently,
limited exports to Jordan plus a certain amount of smuggling
across the Turkish borders were a little less than another
100,000 barrels a day. When Iraq resumed exporting, it
could export approximately 1.5-1.6 barrels a day of crude
using two outlets, the pipeline from Iraq across Turkey to
the Mediterranean (a capacity of 1.6 million barrels a day),
even though they will only be able to deliver 1.1 barrels a
day, and their off-shore sea island terminal at the head of
the Gulf. Iraq claimed that the terminal had been repaired
but he did not believe that statement. The terminal might
be able to handle 400,000 barrels a day. Clearly, Iraq
would do everything it could to increase production and
export capacity as soon as possible but it would take time
and money.
Senator Rieger asked if Saudi Arabia was increasing
production on their own volition or if they were being
pressured from the west. Secondly, he wanted to know why
the market was not more bullish.
End SFC-93 #57, Side 1
Begin SFC-93 #57, Side 2
Mr. Placke said that Saudi Arabia had been on a campaign to
increase its market share. It had made a statement that it
would increase its production to 10 million barrels a day by
1995. The Gulf War hastened this forecast somewhat and now
it was expected to be at 10.2 million barrels a day by 1995.
Saudi Arabia's capacity served two functions; to provide
revenue, and more importantly, to maintain its place as the
dominant force in OPEC. It instilled a degree of discipline
within that unruly group (OPEC) only as long as it had a
credible threat to upset the market. It was the only
country that had the capacity to put another 1 million
barrels a day on the market on very short notice.
In answer to Co-chair Pearce, Mr. Lindemer said he did not
have an opinion on who would be the new secretary general to
OPEC.
Mr. Lindemer, in answer to Senator Rieger's second question,
said that Mr. Placke had outlined Saudi Arabia's approach to
the market and that was one of the determining factors that
would keep the price from rising too fast. Another
important issue, referencing page 16, was the difference
between average OPEC production capacity and the call on
OPEC to widen in 1995. Longer term, however (on page 15),
it became increasingly apparent that into the late 90s, a
stronger rate of growth in price seemed to be in order as
utilization rates within OPEC rose closer and closer to the
capacity level.
In answer to Representative Martin, returning attention to
page 33, Mr. Lindemer said the price of $12.66 should be a
few cents higher. Representative Martin stated he was not
that optimistic. Mr. Lindemer said this forecast was based
on three factors - that economic growth would continue to be
strong, Iraq would stay out of the market, and that OPEC
would behave itself.
In another answer to Representative Martin, Mr. Lindemer
said he felt that the low oil price's effect on increasing
economic growth had about run its course. He asked him to
keep in mind that the oil prices had dropped several dollars
per barrel but the consumer price had fallen to a $1.50 and
some prices had not dropped at all. He saw the major
triggers in the economy as consumer confidence, interest
rates, and, in the developing world, population growth.
In answer to Co-chair Pearce's earlier question, Mr. Placke
said there were some rumors that Euridio Pera of Venezuela
would be selected for the new secretary general. It would
be decided in June but his election was likely. His
competitor, Iranian minister of oil, did not seem able to
gain enough support.
Co-chair Pearce thanked Mr. Placke and Mr. Lindemer of the
Cambridge Energy Research Associates, Inc. for speaking to
the committees.
Co-chair Pearce invited Darrel J. Rexwinkel, Commissioner,
Department of Revenue, and Dr. Charles Logsdon, Chief
Petroleum Economist, Oil and Gas Audit Division, Department
of Revenue, to join the members at the table.
COMMISSIONER DARREL REXWINKEL said that the revenue forecast
would be published by Monday, April 3, 1994.
Representative Larson stressed the fact that not having the
revenue forecast numbers at this time was making it
difficult to work on the budget. Mr. Rexwinkel said he was
aware of that but the department had wanted to take into
consideration the effect of the OPEC meeting in regard to
the forecast.
In answer to Senator Rieger, Mr. Rexwinkel said the
suggested forecast had been $15.04 or $15.17 per barrel.
Representative Martin said that if he was asked to give a
forecast, it would be $13.40 a barrel at its highest.
In answer to Representative Martin, DR. CHARLES LOGSDON said
that production was expected at 1.65 for FY95.
Co-chair Pearce announced this would end the joint meeting
of the Finance Committees. She called for a recess.
End SFC-93 #57, Side 2
Begin SFC-93 #55, Side 2
Recess 10:00am
Reconvene 10:22am
CS FOR SENATE BILL NO. 190(JUD):
An Act relating to income withholding and other methods
of enforcement for orders of support; and providing for
an effective date.
Co-chair Pearce announced that SB 190 was before the
committee in the form of version "U". Co-chair Frank MOVED
for adoption of CSSB 190(FIN) version "U". No objection
being heard, it was ADOPTED.
Co-chair Pearce invited Susan Miller, Manager, Special
Projects, Alaska Court System, Alaska Court System; Laraine
L. Derr, Deputy Commissioner, Treasury, Department of
Revenue; and Terry Lauterbach, Legislative Legal Counsel,
Division of Legal Services, Legislative Affairs Agency, to
join the members at the table.
TERRY LAUTERBACH proceeded to read her memo dated March 29,
1994 which made a comparison between CSSB 190(FIN) version
"U" with CSSB 190(JUD) (see Attachment B, copy on file in
the committee minute book). Senator Rieger asked for an
explanation of Section 26.
Discussion was had by Senators Rieger, Kelly, and Ms.
Lauterbach regarding orders for withholding child support
and how an employer could be sure the order was valid.
SUSAN MILLER said the court would first serve the child
support withholding order by first class mail, and, if
withholding was not begun, then it would be served to the
employer by certified mail. Co-chair Pearce asked about
penalties toward employers if the withholding was not
initiated. Ms. Miller said that existing law contained
penalties for employers.
End SFC-94 #55, Side 2
Begin SFC-94 #, Side 1
Co-chair Pearce said that if an employer would make a
mistake the penalty seemed onerous. Ms. Miller said the
employer must be liable to either the state or the obligee.
Ms. Miller said it was outlined in the federal statutes and
she had written for federal clarification. Ms. Lauterbach
said that part of the question was whether this liability
was in the nature of a fine for not obeying a law (in which
the state would collect it), or whether it was the nature of
a liability of the party that should have been paid money
(which means it would be up to the obligee).
Senator Sharp asked if an order specified pay periods or
read "until further notice." Ms. Lauterbach said the law
required an employer to honor the notice to withhold until
they received a notice that the incoming withholding was
terminated which should happen when the child support order
was satisfied. Senator Sharp said he had knowledge of
employers that continued to deduct child support because the
agency had failed to notify the employer the order was
satisfied. Ms. Lauterbach said there was a section in the
statutes (it did not appear in this bill because it remained
unchanged) that required the agency to return money that was
overpaid. Senator Sharp commented that sometimes the agency
took a long time to do that. He went on to lament the fact
that the employer would be involved in withholding which
added costs to the employer.
Discussion continued by Senator Sharp and Ms. Lauterbach
regarding the fiscal note and fees charged by the employer
and the state. Ms. Lauterbach said she could not explain
the fiscal note but there was nothing in the bill that
authorized a $10 fee by the state. Co-chair Pearce read
from the fiscal note that said the agency would charge a
fee. Ms. Lauterbach assumed that the fee would be against
the obligee. Co-chair Pearce agreed that to allow the
employer to charge $1 fee, and the state $10, seemed
inequitable.
In answer to Senator Kelly, Ms. Miller said the bill did not
authorize a fee but the agency would put it into
regulations. One unidentified woman from the agency said
she believed there was no existing state regulation but a
federal regulation said the agency could effect a fee in
non-4D cases. She believed the fee would be contemplated
being collected from those people that would use the agency
for a bookkeeping, pass-through service for child support
payments. Co-chair Pearce asked if the fee was set or could
it be changed, and reiterated her concern regarding the
employer charging $1 and the agency $10.
Senator Sharp said he would like to see an amendment to make
the fees the same. Co-chair Pearce said the child should be
considered and a cap set on the amount of the fee, since the
money was coming directly out of child support money.
Ms. Lauterbach said that the agency authority to charge fees
was found in AS 25.27.100, and she quoted "the agency may by
regulation impose a fee for services provided under this
chapter." She said it sounded like the fiscal note was
referring to the agency providing the service of sending
income withholding orders for which they could impose a fee
on the obligee. The agency evidently was considering $10 a
month, and whether this was appropriate was subject to
legislative discretion.
Co-chair Pearce announced that CSSB 190(FIN) version "U"
would be HELD in committee in order to pursue answers to
these questions.
ADJOURNMENT
The meeting was adjourned at approximately 11:10 a.m.
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