Legislature(2003 - 2004)
05/20/2003 10:38 AM Senate FIN
| Audio | Topic |
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ 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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