Legislature(1997 - 1998)
04/15/1998 01:39 PM Senate JUD
| Audio | Topic |
|---|
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
SENATE JUDICIARY COMMITTEE
April 15, 1998
1:30 p.m.
MEMBERS PRESENT
Senator Robin Taylor, Chairman
Senator Drue Pearce, Vice-Chairman
Senator Mike Miller
Senator Sean Parnell
Senator Johnny Ellis
MEMBERS ABSENT
All members present
COMMITTEE CALENDAR
CS FOR HOUSE BILL NO. 116(FIN)
"An Act relating to workers' compensation self-insurance."
- MOVED SCS CSHB 116(JUD) OUT OF COMMITTEE
SENATE BILL NO. 305
"An Act establishing a standard for determining when an injured
worker is eligible for reemployment benefits and establishing a
procedure for adopting a new, revised, or replacement standard for
determining when an injured worker is eligible for reemployment
benefits."
- SCHEDULED BUT NOT HEARD
SENATE CONCURRENT RESOLUTION NO. 26
Relating to the policy on use of a state right-of-way for fiber-
optic cables.
- HEARD AND HELD
PREVIOUS SENATE COMMITTEE ACTION
HB 116 - See Labor and Commerce minutes dated 3/3/98.
SB 305 - See Labor and Commerce minutes dated 3/10/98.
SCR 26 - No previous action to report.
WITNESS REGISTER
Representative Pete Kott
State Capitol
Juneau, AK 99801-1182
POSITION STATEMENT: Presented HB 116
Mr. Alan Wilson
PO Box 22797
Juneau, AK 99802
POSITION STATEMENT: Supported HB 116
Ms. Marianne Burke
Director, Division of Insurance
Department of Commerce and Economic Development
PO Box 110805
Juneau, AK 99811-0805
POSITION STATEMENT: Opposed HB 116
Mr. Bill Taylor
2340 Loren Circle
Anchorage, AK 99516
POSITION STATEMENT: Supported HB 116
Mr. K. Scott McEntire
6530 East 16th Ave.
Anchorage, AK 99509
POSITION STATEMENT: Opposed HB 116
Ms. Barbara Williams
PO Box 771754
Eagle River, AK 99577
POSITION STATEMENT: Opposed HB 116
Mr. Gelard Milbrett
2801 East 18th Ave.
Anchorage, AK 99508
POSITION STATEMENT: Opposed HB 116
Mr. Michael Hinchen
2555 First Avenue
Ketchikan, AK 99901
POSITION STATEMENT: Commented on HB 116
Mr. Paul Grossi
Director, Division of Workers' Compensation
Department of Labor
PO Box 25512
Juneau, AK 99802-5512
POSITION STATEMENT: Opposed HB 116
Mr. Edward Smith
Regional Marketing Manager
Safety National Casualty Co.
3441 Woodland Parkway
St. Louis, MO
POSITION STATEMENT: Supported HB 116
Mr. Wilson Hughes
Vice President, GCI
2550 Denali St., suite 1000
Anchorage, AK
POSITION STATEMENT: Commented on SCR 26
Mr. John Shively
Commissioner, Department of Natural Resources
400 Willoughby Ave, 5th Floor
Juneau, AK 99801-1724
POSITION STATEMENT: Commented on SCR 26
Ms. Jane Angvik
Director, Division of Land
Department of Natural Resources
3601 C Street, suite 1122
Anchorage, AK 99503-5947
POSITION STATEMENT: Commented on SCR 26
Mr. Steve Giani
Marketing Director, KANIS Telecom
4041 13th Ave.
Anchorage, AK 99503
POSITION STATEMENT: Commented on SCR 26
Ms. Phyllis Johnson
Alaska Railroad Corporation
PO Box 107500
Anchorage, AK 99510
POSITION STATEMENT: Commented on SCR 26
Mr. Kim Jacobs
Director, World Net Communications
San Francisco, CA
POSITION STATEMENT: Commented on SCR 26
Mr. Eric Yould
Executive Director, Alaska Rural Electric Cooperative
703 West Tudor Rd.
Anchorage, AK 99503
POSITION STATEMENT: Commented on SCR 26
Ms. Sandra Ghormley
Homer Electric
3977 Lake Street
Homer, AK 99603
POSITION STATEMENT: Commented on SCR 26
Mr. Jimmy Johnson
Attorney, GCI
2550 Denali St., suite 1000
Anchorage, AK
POSITION STATEMENT: Commented on SCR 26
ACTION NARRATIVE
TAPE 98-33, SIDE A
Number 001
CHAIRMAN ROBIN TAYLOR called the Judiciary Committee meeting to
order at 1:30 p.m. and announced HB 116 was the first order of
business.
CSHB 116(FIN) - WORKERS COMPENSATION SELF-INSURANCE GROUP
REPRESENTATIVE PETE KOTT came forward to present HB 116 and discuss
changes made in the proposed committee substitute. HB 116
establishes a workers' compensation self-insurance pool for various
groups of 10 or more players. The bill contains layers of
protection to assure that employees hurt on the job are afforded
the same compensation provided to them under any other arrangement.
Several layers of protection would fall under the purview of the
director's control. Before receiving a certificate of approval
from the director the group must: be properly organized; consist of
10 members; ensure that payment of at least 25 percent of the
annual premium can be made; show at least $1 million in net worth;
provide a security of at least $450,000; ensure aggregate excess
insurance in an amount determined by the director; and have joint
and several liability and a performance bond. The director can
revoke the certificate and examine the group's books at any time.
A board of trustees must pay all workers' compensation benefits; 70
percent of the premiums collected must be used for payment of
claims and the remaining 30 percent must be deposited into an
administrative fund. Annual audits on approved forms must be
submitted to the director. Representative Kott explained how an
insured worker would use the workers' compensation self insurance
group process.
CHAIRMAN TAYLOR asked if the safeguards fail, whether the existing
fund (the Alaska Guarantee Fund), paid into by all insurers in the
state, would come into play.
REPRESENTATIVE KOTT responded he would have to refer that question
to an expert. He explained this self insurance pool would be
established with about $187,000 (25 percent of $1 million minus 30
percent for administrative funds).
REPRESENTATIVE KOTT noted the proposed changes in the committee
substitute are the result of consultations with other parties on
what works best in other states. The changes are as follows. On
line 19, page 2, a reference to specific IRS provisions was
deleted. The current language is generic so that it will not be
affected by changes to the IRS code, which is in a state of flux.
The annual premium amount was increased to $1 million on page 3,
line 28, to satisfy concerns about having sufficient start-up
funds.
A provision on page 4, lines 5-6, adds a professional liability
policy for trustees. REPRESENTATIVE KOTT indicated it is his goal
to assure employees injured on the job receive the same
compensation they would receive under any other arrangement.
The word "member" was replaced by the word "group" on page 8, line
25, and on page 10, lines 12 and 13, to correct a technical
oversight. On page 10, line 5, the 25 percent additional premium
for the first year was deleted, as it is now required up front. On
page 10, lines 14 and 15, a provision was added requiring the group
to obtain reinsurance for the fund as approved by the director, and
it gives the director the authority to set the amount of
reinsurance required.
On page 10, line 25, the 25 percent additional payment from the
reserve was deleted, and the start-up amount was increased to $1
million. On page 13, lines 23 and 24, the phrase, "who have been
engaged in the same or similar type business in the state for at
least three years" was deleted. Employers must meet minimum
requirements to join the group which should assure members are not
high-risk. The legal drafter expressed concern that the three year
requirement might create an equal protection issue.
Number 279
SENATOR MILLER moved to adopt SCSHB 116(JUD) (the X version, dated
4/7/98 by Mike Ford), for the purpose of discussion. There being
no objection, SCSHB 116(JUD) was adopted.
CHAIRMAN TAYLOR took public testimony.
Number 288
ALAN WILSON, a Juneau general contractor and member of the Alaska
Homebuilders' Association, stated he has been working on this issue
for some time and that this bill is very important to him as an
employer. HB 116 has the potential to: significantly decrease
workers' compensation premiums; provide for more direct control
over administrative costs and a higher degree over claims reserves;
provide for self audits of safety conditions without negative
repercussions; give groups control to aggressively investigate
fraud; use proactive claims management; lower attorneys' costs;
allow for the quick return of claimants to work; improve
communication regarding safety; and allow for more adaptability of
funds to suit the industry. He pointed out the Alaska Timber
Insurance Exchange (ATIE) operates as a pool that focuses on one
aspect of the industry. ATIE has become very successful and is
underwriting approximately five percent of the business in the
state - businesses comprised of people involved in the timber
industry. ATIE has reserves of approximately $8 million and it
returns 63 percent of premiums to its members. He believed part of
the reason for its success is its knowledge of the timber industry.
Number 328
BILL TAYLOR, an Anchorage homebuilder, emphasized that HB 116 does
not reinvent the wheel because it is based on model legislation
that has proved successful in approximately 15 states. The bill
provides every possible layer of protection. Model legislation in
other states only requires $500,000 up front. Because members have
an individual stake in each claim, they will be proactive in
handling fraud and loss control, as well as safety issues. He
stated insolvency of the fund would occur if three catastrophic
claims were filed in one day, which is statistically improbable.
The Division of Insurance will have regulatory authority where
statutory authority stops.
Number 360
MARIANNE BURKE, Director of the Division of Insurance, stated she
is most concerned about this legislation and focused her testimony
on points made by previous speakers during today's testimony. The
increase from $500,000 to $1 million for the first year premium is
a move in the right direction, however the net effect is zero
because under the former version of the bill, the pool was required
to put up a 25 percent deposit. The effect on cash in hand to pay
claims has not changed. Reinsurance, or stop-loss insurance, is a
valid way of spreading risk and is standard practice, however the
pool must pay all claims up to that attachment point. A $250,000
claim would bankrupt the association right away. Ms. Burke stated
all insurers doing business in Alaska must belong to the Alaska
Insurance Guarantee Association (AIGA)to do business here. A
statute change would be necessary to allow self insured plans to
join this group. She would not advise allowing a self insured plan
into that group because AIGA would be fully liable for any other
insurance company that becomes insolvent. She clarified the AIGA
consists of cash while reinsurance is an agreement to pay money if
a contingency occurs. Regarding similar statutes in other states,
Ms. Burke noted the first similar pool was established in North
Carolina but it had 4,000 employers, not 10. The State of Florida
had a proliferation of these types of pools and is now facing
multi-million dollar uninsured claims. She described differences
between the proposal before the committee and similar legislation
that was enacted in New Mexico which has since increased its start-
up requirement from $1 million to $3 million.
MS. BURKE stated the surety bond required in HB 116
can only be used if the fund is insolvent. She pointed out the
entitlement of compensation to an injured worker is established by
statute, not by an insurer. The amount of medical cost is
determined by the provider, not by the employer, worker, or
insurer. The one way an employer can impact this entire cost
package is through loss control. Any insurance company in Alaska
that writes workers' compensation insurance must provide assistance
in loss control when asked.
MR. K. SCOTT McENTIRE, an Anchorage general contractor and an
injured worker, stated he takes exception to the bill. He
disagreed that the possibility of three catastrophic accidents
occurring in one day was improbable. He expressed concern that
this legislation would exempt the newly established groups from
complying with most of the Division of Insurance's regulations.
TAPE 98-33, SIDE B
Number 001
MR. McENTIRE continued. He pointed out 50 percent of employers in
Alaska are uninsured and the Division of Insurance cannot enforce
existing regulations because it has only one investigator. He
strongly recommended that no action be taken on HB 116.
MR. McENTIRE read the following written testimony submitted by
BARBARA WILLIAMS, who was unable to be present.
I am Barbara Williams and my husband has been in the
workers' compensation system. First off, let me start by
saying how dare you for purposefully leaving out key
components to pressure the [indisc.] injured workers,
that is, injured workers are aware of how poorly this
system is working. I noticed that Pete Kott is a sponsor
for this bill. This doesn't surprise me because I have
waited four years for empty promises of help from him.
This is a prime example of how government has gone awry.
The [indisc.] defendants and the corporations stand to
gain from this, not the injured worker. You guys aren't
even following your own rules. Where does that leave us,
the injured workers, but with less rights than we
started? Shame on all of you.
Number 511
GERALD MILBRETT made the following comments. When he received a
catastrophic injury, the current system did not work for him. He
does not believe $1,000,000 in coverage is enough as his physician
expenses alone were $400,000. He is in a wheelchair and constantly
worries about his finances. This bill is designed to save the
employers money. The insurance company that covered him
manipulated him into what it wanted him to do, which has barely
kept him and his family afloat. He stated he does not believe this
bill will work.
MICHAEL HINCHEN, general manager and comptroller of the Alaska
Timber Insurance Exchange (ATIE), stated ATIE supports the concept
of allowing employers to get together to insure their workers'
compensation obligations as a group. It has been ATIE's experience
that its members of substantial size and net worth have supported
an "industry together" concept which has made affordable workers'
compensation available to both large and small employers involved
in the timber industry. ATIE was formed in 1980 as a reciprocal
insurer under Title 21. ATIE has had to follow Alaska insurance
statutes, including those involving capitalization and insolvency.
The income generated by its operations have been returned to its
policyholders, in the form of dividends. As a result of the
dividends, the net cost of workers' compensation to ATIE's
policyholders has been significantly less. More importantly, as a
result of the efforts of policyholders, the number of time-loss
accidents decreased by over 200 during the 10 year period ending in
1998.
MR. HINCHEN stated ATIE is concerned about some of the language in
HB 116. The bill lacks a requirement for adequate capitalization
to form a self-insured group. In ATIE's experience, a single claim
can result in cash payments in excess of $200,000 in a single year.
ATIE has had to cover several catastrophic injuries in one year.
The self-insured group must pay claims out of pocket first, and
then request reimbursement from the reinsurer. The reimbursement
process has taken over one year. ATIE's second concern is joint
and several liability and assessable policies. What has helped to
make ATIE a success is that large employers, with substantial net
worths, have been willing to participate in the ATIE, thus helping
develop the premium volume needed to obtain economies of scale and
spreading of risk. They have been willing to do this because their
liability has not been joint and several, and their policies have
not been assessable. A third concern with joint and several
liability and assessable policies is the collection of funds when
and if it is necessary for a group to levy assessments against its
members. The provisions of HB 116 might require the group to have
a minimum net worth, but will the members be able to come up with
the cash needed to pay their assessment? The most important
concern ATIE has is whether injured workers will receive their
benefits in a timely manner. The Board of Governors of ATIE is
very concerned about who will ultimately pay the bill if a group
formed under the provisions of HB 116 fails and adequate funds are
not available from its members. HB 116 should contain specific
provisions to protect insurance carriers who have met sound
capitalization requirements from assessment in the event of the
failure of a self-insured group formed under HB 116.
Number 445
CHAIRMAN TAYLOR noted his understanding from Ms. Burke was that the
Division of Insurance would not be able to access funds from the
AIGA to make payments to injured workers if a self insured group
became insolvent becaused the self insured group is not considered
to be an insurance company. He asked Mr. Hinchen if that was
correct.
MR. HINCHEN explained that is correct, but he noted ATIE's concern
is that if a group does fail, someone will look for the "deep
pocket" and insurance companies will likely be called upon to bail
out the failed group.
Number 430
CHAIRMAN TAYLOR commented he was not sure that could happen because
once the joint and several assets are gone, and the guarantors' and
reinsurers' obligations are fulfilled, there would be no other
asset base to turn to.
MR. HINCHEN noted ATIE wanted confirmation of that.
CHAIRMAN TAYLOR noted he requested a legal opinion on that
question, and the opinion verified Ms. Burke's opinion.
CHAIRMAN TAYLOR indicated he had an amendment prepared that would
make the state the final backup.
Number 417
PAUL GROSSI, Director of the Workers' Compensation Division, stated
the Department of Labor supports HB 116 in concept, but it has two
basic problems with the bill. Its first concern is a lack of
adequate funding in the form of cash to pay claims; the second is
who will pay outstanding claims in the event of insolvency. He
agreed increasing the initial premium to $1 million is a step in
the right direction, however eliminating the reserve of 25 percent
of the premium is a step in the wrong direction. For the first
month, the group will have $175,000 available to pay claims, and
although catastrophic injuries are not the commonplace injuries,
they do occur. Although stop-loss insurance covers the excess over
that amount, the minimum retention is usually around $500,000 to $1
million, which this group will not have as start up funds. In the
event of insolvency, if only one group is participating, it will
only be able to cover $25,000. The $1 million in net worth is
likely to be in the form of equipment and property which will have
to be liquidated before it can be used to pay claims.
MR. GROSSI also mentioned that the previous committee asked the
Department of Labor to get independent sources to evaluate this
legislation. NCCI and Bruno Czyrka, Administrator of the Bureau of
Workers' Disability Compensation in Michigan, both reported the
proposed legislation contains problems with insolvency and funding.
CHAIRMAN TAYLOR expressed concern that within the building
industry, general contractors hire subcontractors who are self-
employed and do not have workers' compensation insurance. He
questioned how the non-union, small businessperson is being helped
if the state makes no adjustments to the existing program.
MR. GROSSI replied the subcontractor who is a sole proprietor may
not be covered under workers' compensation, however, if the general
contractor uses that method of employment to prevent paying
workers' compensation, the general contractor may be liable for
those benefits.
CHAIRMAN TAYLOR thought many general contractors cannot hire the
subcontractors as employees because it is unaffordable.
MR. GROSSI said that may be so, but the new program will still need
to be adequately funded.
Number 307
EDWARD SMITH, regional marketing manager for Safety National
Casualty Corporation (SNCC) of St. Louis, Missouri, informed
committee members he was invited to speak on behalf of group self
insurance because it is a specialty coverage that his company
underwrites. His company was founded in 1942 for the specific
purpose of writing excess workers' compensation insurance for
reinsurance. SNCC currently provides such insurance for over 100
self insured groups nationwide. SNCC believes the self insurance
group concept does offer the smaller to mid-size employer the
opportunity to enjoy the benefits of self insuring their workers'
compensation, when individually they would not be large enough to
take on that responsibility. SNCC believes two aspects of HB 116
are very favorable. HB 116 provides the regulator with the
opportunity to enforce some strict regulations. The group is
required to submit actuarial reports, annual financial statements,
and other types of data that will give the director the ability to
quickly ascertain whether the group is getting into trouble.
Although the State of Florida does have problems right now, its
regulations were written over 50 years ago and they are quite loose
in nature. Many of the groups in Florida are heterogeneous which
allows different types of employers to join together. One firm
takes care of all administrative duties and firm members hold seats
on the Board of Governors. The result is that 50 to 60 percent of
the contribution paid by each member is available to pay claims,
rather than 70 percent. NSCC provides excess coverage for some
public entities, and it provides statutory excess coverage above a
$300,000 self insured retention. The stop loss, or reinsurance,
provides that if the claims experience from a given year is very
high, that experience will be capped at a certain dollar amount
stated in the policy. He explained how SNCC would calculate the
payment of claims when a group has reached its payout limit. A
self insured group would be liable to pay usually $300,000 to
$350,000 from any one catastrophic occurrence, and 85 to 90 percent
of their total contributions for the year in the aggregate.
Reimbursement typically takes 8 to 10 years to pay for catastrophic
occurrences.
CHAIRMAN TAYLOR asked Mr. Smith why reimbursement takes 8 to 10
years.
MR. SMITH clarified that a large catastrophic loss, or a group of
large losses, often takes 8 to 10 years to mature or to add up to
a total cost of $300,000.
Number 177
REPRESENTATIVE KOTT concluded the testimony on HB 116 by explaining
that he worked laboriously with the director of the Division of
Workers' Compensation and a senator on Ms. Williams' husband's case
but unfortunately that case required a massive overhaul of the
workers' compensation statutes. He noted some injured workers'
situations may not have been as dramatic had they been members of
a workers' compensation insurance group. In past committee
meetings, the second 25 percent was not acknowledged, but now that
the money has been put up front, the Administration has
acknowledged it. He indicated one of the benefits of a pooling
arrangement is that it requires self policing. The result in other
states has been that costs have decreased, as well as accident
rates. The director of the Division of Insurance will have the
"hammer" in most cases, and if funding gaps exist, the certificate
will not be issued. He added the National Association of Insurance
Commissioners (NAIC), of which Alaska is a member, provided model
legislation in 1993 that requires a minimum of five or more
employers in each group. He described how HB 116 follows much of
that model legislation. He emphasized that business and labor
have joined hands to support this legislation.
CHAIRMAN TAYLOR read the following amendment he had prepared.
"If the director is unable to fully collect an assessment
imposed on a group that is liquidated, the director may direct
the Legislature to make up the deficiency by appropriation
from the general fund."
SENATOR ELLIS asked if the director has any authority to seek other
funds to fulfill claims without this amendment giving specific
statutory authority.
CHAIRMAN TAYLOR said he did not believe so.
SENATOR PARNELL asked if the director would have authority under
current law to make this kind of request so that everyone is
treated equally.
MS. BURKE informed committee members that question has never arisen
because the guaranteed fund is backed by $3.5 trillion worth of
assets within the insurance industry.
TAPE 98-34
SIDE A
CHAIRMAN TAYLOR noted if the Legislature can contemplate taking
care of the economic disaster in Bristol Bay, it might contemplate
taking care of economic disasters in other types of businesses.
SENATOR MILLER moved SCSHB 116(JUD) out of committee with
individual recommendations. There being no objection, the motion
carried.
SCR 26 - FIBER-OPTIC CABLE RIGHT-OF-WAY POLICY
CHAIRMAN TAYLOR explained the committee introduced SCR 26 because
significant discussion has taken place among members of the
Administration and the Legislature about the varying prices paid
for fiber optic cable rights-of-way. An ongoing investigation to
look into a right-of-way agreement with the Alaska Railroad is
being conducted by Charlie Cole as independent counsel. The price
paid for the right-of-way along the Alaska railroad was 50 cents
per foot. A similar right-of-way across DNR lands cost six cents
per foot, while other state agencies and federal agencies charge
other amounts. Chairman Taylor questioned what the state policy
is, why agencies charge different amounts to different entities,
and why fair market principles are not used to determine what a
right-of-way is worth.
SENATOR PEARCE noted for the record that her husband is a board
member and officer of one of the companies that has at least one
right-of-way across state public lands, and his company could be
affected in the future by whatever the state does regarding rights-
of-way.
Number 100
WILSON HUGHES, vice president and general manager of GCI, gave the
following testimony. In 28 years of building facilities throughout
Alaska, he has never seen a utility or its agent promote a higher
rate for state rights-of-ways. GCI is building a new fiber optic
network that connects Anchorage, Fairbanks, Juneau and Seattle,
scheduled to be completed at the end of 1998. Additionally, a
company named Ruralnet plans to build a system connecting the same
population centers. SCR 26 states the Alaska Railroad Corporation
(ARRC) has obtained a right-of-way lease from fiber optic cable
providers based on market value. GCI believes the rate paid for
the ARRC right-of-way by the Alaska Fiber Star Group is based on
the exclusive use of the highest value portion of the right-of-way,
the need not to provide additional conduits for future users,
optimum construction conditions, a single contiguous land owner,
and a negotiated procurement process. SCR 26 further states that
it appears that DNR supports fiber optic cable right-of-way pricing
policies that fail to seek lease terms based on market value.
After a lengthy negotiation with lots of interested parties, DNR
and the Division of Parks have tentatively agreed to lease
approximately 18.5 miles of right-of-way to the Chugach State Park
at a rate of 50 cents per linear foot to GCI. Additionally, GCI
will provide two extra conduits for future users, thus avoiding re-
entry for construction purposes, trail improvements, inspection
costs paid for by GCI, and a non-exclusive use of the right-of-way.
Regarding the submerged portion of the right-of-way, DNR has issued
at least two leases during the past six months for fiber optic
cables in the submerged lands at the historical rate of $100 per
acre. GCI anticipates this same rate will be available to it. SCR
26 declares that the Legislature wishes the state to provide a
stable and appropriate regulatory environment to give fiber optic
cable projects the best opportunity to compete on a neutral and
non-discriminatory basis. GCI agrees wholeheartedly with the
Legislature. GCI's current fiber optic project, and others in the
state, were developed and financed based on historical standards
for right-of-way pricing. The policy and method used for 30 years
are GCI's basis for attracting additional capital to invest in
Alaska. If the Legislature wishes to change the law, he encouraged
it to use an open and well thought out process. Any change to the
current approach to right-of-way pricing needs to take into account
the state's approach to encouraging development of a much needed
infrastructure and the changing competitive telecommunications
structure. Current and future fiber optic cable projects will be
owned by both local and long distance companies. Current pricing
is consistent and competitively neutral. Further discussion and
resolution only serves to delay and confuse those who are
attempting to build a competitive fiber optics system in Alaska.
GCI intends to pay market rate on both the Chugach State Park and
the submerged portion of its right-of-way. If the Legislature
would like to explore new legislation to change the current method
of right-of-way pricing, GCI would appreciate the opportunity to be
part of the process.
CHAIRMAN TAYLOR asked how the difference between the 50 cents
charged by ARRC, and the six cents charged by DNR, can be explained
to the public.
MR. HUGHES replied the six cents charged by DNR is for tidelands
and for the right-of-way underwater, and is actually calculated at
$100 per acre. It is difficult to compare the $100 per acre price
for the completely submerged property to the property at the end of
the tie at the Alaska Railroad, particularly when the ARRC price
includes exclusivity off the end of the tie on the optimum
construction area.
CHAIRMAN TAYLOR asked if different rates are being charged for
crossing dry land.
MR. HUGHES responded to his knowledge there is a Department of
Transportation and Public Facilities' (DOTPF) rate, an ARRC rate,
a Mental Health Lands' rate, a University of Alaska (UA) rate, a
Division of Parks' rate, a Forest Service rate, a Corps of
Engineers' rate, and probably several other rates.
CHAIRMAN TAYLOR asked how those rates are established.
MR. WILSON answered each one is set through an attempt to comply
with different types of legislation and regulations.
CHAIRMAN TAYLOR asked if each state department has passed a
regulation dealing with fiber optic cable right-of-way rates.
MR. HUGHES thought the rates are driven by different regulations
that apply to each situation. He explained on the submerged
portion, two leases were let within the last six months. Both were
set at $100 per acre.
CHAIRMAN TAYLOR asked if the rate on Division of Parks' lands have
routinely been 50 cents per linear foot.
MR. HUGHES replied to his knowledge, GCI has been the first company
to ask to lay a fiber optic cable in park lands.
CHAIRMAN TAYLOR asked why GCI did not get a six cent rate.
MR. HUGHES said GCI was not a good negotiator.
CHAIRMAN TAYLOR asked if the rate was determined by whatever amount
DNR could negotiate.
MR. HUGHES stated he believes regulation guided DNR to look at
market value.
Number 235
JOHN SHIVELY, Commissioner of the Department of Natural Resources,
gave the following testimony. At least six entities in state
government have the opportunity to enter into leases regarding
fiber optic cable: the University; the Mental Health Land Trust;
ARRC; the Division of Lands; the Division of Parks and Outdoor
Recreation; and the Department of Transportation (DOTPF). All of
the entities are driven by different enabling legislation and
different goals. DOTPF does not charge for the right-of-way
itself, it charges a processing fee set by legislation. The
processing fee is capped at a one time fee of $2900 for a permit.
The Division of Lands has traditionally charged $100 per acre for
rights-of-way over public lands and underwater. That amount
equates to about six cents per linear foot. The Division is
leasing a use of the land, not the entire piece of land. The
Division of Parks has never negotiated a utility right-of-way until
now, and it is only negotiating this one because there is an
existing utility line through the Chugach State Park. Park lands
have a higher value since they have been set aside, which is why a
different rate was negotiated. ARRC negotiated its arrangements
as a quasi-business agency. While SCR 26 suggests that rates be
stabilized for all customers situated somewhat equally, Mr. Shively
believed that is occuring. If the Legislature wants to stabilize
the rate at a higher
amount, it will have to pass legislation to change the way DOTPF
must charge.
Number 300
CHAIRMAN TAYLOR asked if this policy is new and whether any debate
took place within DNR about whether the rate should be driven by
market value.
COMMISSIONER SHIVELY said a lot of debate has taken place within
DNR. DNR decided to continue setting the rate in the same way it
had in the past, rather than change to a 50 cent rate. DNR
believes it uses a market rate in terms of the way it determines
the value of the right-of-way. The other option is to determine
the value of the use.
CHAIRMAN TAYLOR stated the state used a similar formula when it
made decisions about oil leases - it attempted to find out the
value of each lease.
COMMISSIONER SHIVELY responded the initial value of oil and gas
leases is set in a much different way because DNR competitively
seeks bonus bids on those leases. Setting up right-of-way leases
in a competitive manner would be difficult because those leases are
requested at different times. In terms of SB 207 and doing an
economic analysis to determine whether a royalty reduction was
justified, that differs from determining a market rate. He noted
he believes either methodology is valid. DNR chose one.
CHAIRMAN TAYLOR stated the Legislature is forced to review a very
diverse rating structure that appears to have no rational basis.
The policy seems to be determined by which agency owns the land and
what rate was imposed in the past that particular agency. He
expressed concern that it must be very difficult for the customer
who is trying to develop a fiber optic cable to calculate what the
price of a lease across state land will be. He questioned how he
would know whether the ARRC's price of 50 cents per foot is the
market price, as some people purport.
COMMISSIONER SHIVELY said no one knows whether that is true, but
the companies who have applied for rights-of-way can do their own
appraisals and challenge the rates. He agreed the rate structure
is confusing, but he noted the situation is not unique to Alaska.
CHAIRMAN TAYLOR expressed concern that the rate is based on a
number picked by whoever is in charge at the time.
COMMISSIONER SHIVELY explained the Division of Lands has
longstanding regulations that provide for the fee charged, but the
Division of Parks has not issued any prior rights-of-way and has no
regulations because to govern this new situation. GCI was required
to install a conduit in case future users wanted to use the same
right-of-way which affected the price it paid.
CHAIRMAN TAYLOR asked if the Governor did not want the Legislature
to take up this resolution.
COMMISSIONER SHIVELY replied the Administration wanted to lay the
situation out as best as it could, and to explain the different
options. The Administration decided it would work with the
Legislature if it decided a uniform policy was necessary, and that
it would not finalize any of its decisions until that policy was
implemented.
CHAIRMAN TAYLOR asked what the Administration recommends on this
issue.
COMMISSIONER SHIVELY replied the Administration is comfortable with
leaving different jurisdictions under existing law and that a
consistent state policy would require statutory changes. He added
previous legislation has driven DNR to encourage utility
development by providing low rates on state land for good reason.
He stated the Administration is not willing to change that policy
on its own.
CHAIRMAN TAYLOR said the Administration already did because the
state policy was supposed to let utilities go in at a very low
rate. He asked if the varying rates have no effect on non-profit
utilities that apply for a permit.
COMMISSIONER SHIVELY replied that issue is arising because fiber
optic cable may be hung on existing rights-of-way in certain areas.
DNR has not finalized its decision on whether that will be
allowable without an amendment to the lease. Commissioner Shively
emphasized DNR would not even consider leasing the right-of-way in
the Chugach State Park except that there is an existing utility
line through it.
Number 468
CHAIRMAN TAYLOR specified that the only action the Legislature took
was to direct the agencies to set a flat rate. The agencies then
set different amounts and that history has guided current rates.
COMMISSIONER SHIVELY responded DOTPF is required to set a one-time
administrative fee. DNR, through regulation, can get value for the
land. Non-profit utility companies are charged a one-time fee of
10 cents per linear foot. DNR has charged for-profit agencies the
value of the actual right in the land. DNR has the option, under
regulation, to charge rates set on the value of the use of the
land. ARRC is guided by its own authorizing legislation, as are
the Mental Health Trust and the University, which he assumed
directed those entities to maximize income.
CHAIRMAN TAYLOR asked what would prevent the rates from being
increased to $2 or more per foot in a few years since DNR has the
power to create new regulations. He asked why the state would not
want to create a level playing field so that those people in
telecommunications could pick a route and know what the cost would
be, based on a flat rate.
COMMISSIONER SHIVELY replied that although that sounds good in
theory, in practice it would be difficult. He was not sure the
Legislature would be interested in setting policy for the Mental
Health Trust on fiber optic cable rights-of-way.
CHAIRMAN TAYLOR noted the legislative members are the ultimate
trustees of the Mental Health Trust and he did not think they would
have a problem setting such a policy.
COMMISSIONER SHIVELY thought that fiber optic cable owners must
deal with a whole variety of landowners in many states. The fact
that Alaska has so much public land actually benefits these
companies as they do not have as many landowners to deal with. It
also dramatically helps the state in attracting companies that want
to lay fiber optic cable to develop infrastructure. He did not
believe utility companies find anything unique in having to deal
with landowners with different policies, even if all of those
landowners are state entities.
CHAIRMAN TAYLOR referred to a memo written by Jane Anvik in which
she stated that the marketplace indicates that rights-of-way for
fiber optic facilities are quite valuable in Alaska and elsewhere,
and that compensation for fiber optic cable facilities on state
lands must be fair and reasonable, assessed on a competitively
neutral and non-discriminatory basis, consistent with the Federal
Telecommunications Act of 1998. He asked her whether she supported
a market driven approach to establishing value on state lands for
these rights-of-way.
JANE ANVIK, Director of the Division of Lands, DNR, stated the memo
that he referred to was one of many draft policies that was
considered by the Division of Lands. The Federal
Telecommunications Act requires that rights-of-way must be
competitively neutral. The market driven issue was examined by
reviewing what different organizations are paying in different
parts of the state. The Division of Lands laid out all of the
options. It began at 10 cents per foot for non-profit utilities
and looked at the appraisal of the value in use of lands for a
fiber optic cable.
CHAIRMAN TAYLOR referred to page 4 of the memo, which stated, "If
the Legislature decides not to change that policy during this
session, the Division of Lands will grant fiber optic rights-of-way
at the $50 per year rate, set out above." He asked Ms. Anvik
whether she did that.
MS. ANVIK said they did not select that option and decided to
continue with the existing policy which is $100 per acre, or six
cents per foot.
CHAIRMAN TAYLOR stated that is a dramatic difference. He asked
what process she went through on behalf of the people of the State
of Alaska to assure that the State got the highest and best market
value for this lease.
MS. ANVIK explained the Division of Lands evaluated information
from different landowners in the state, including ARRC, the Mental
Health Trust, and DOTPF, and it looked at the experience of other
jurisdictions around the United States, such as the Bay Area
Transit Authority, in setting the level of compensation for rights-
of-way for fiber optic cable. In evaluating the range of
experiences, it is vast in the State of Alaska, but it is extremely
vast in the world. In Anchorage, the local government traded a
route along the bike trail in exchange for illumination of the
trail system. Although ARRC negotiated 50 cents, in fact the rate
of compensation is five percent of gross and the 50 cents is the
minimum.
CHAIRMAN TAYLOR stated his frustration lies in the fact that the
lands do not belong to those agencies, the land belongs to the
public. He repeated a business ought to be able to come to the
state and know to expect. He asked whether the Division of Lands
actually hired an appraiser to determine what the right-of-way was
worth.
TAPE 98-34
SIDE B
MS. ANVIK reminded Chairman Taylor that at the time the draft memo
was written, the Division of Lands was trying to coordinate with
the Bureau of Land Management (BLM), which owns the other portion
of the right-of-way for MFS. BLM and the Division of Lands were
going to jointly prepare appraisal instructions to determine the
value of the MFS right-of-way. Since this draft was written, the
direction from the Governor has been that the Division of Lands is
to use the traditional method as found in its regulations, which is
to assess the value of rights-of-way at $100 per acre. Therefore,
the appraisal methodology described in the draft memo was not used
by the Division of Lands, but was used by BLM for its portion of
assessing the value of the right-of-way for the MFS fiber optic
cable route along the TransAlaska pipeline.
Number 570
COMMISSIONER SHIVELY added he discussed the issue with the
Governor's Office, but he basically made the decision. He noted
the four Finance co-chairs wrote a letter suggesting the
appropriate method was to keep the traditional rate.
CHAIRMAN TAYLOR indicated Ms. Anvik wrote the draft memo on
February 25. He asked if BLM initiated the discussion about hiring
an appraiser to determine the value of the land.
MS. ANVIK explained that BLM is required to get a fair market value
appraisal before it issues a right-of-way. At the time the
Division of Lands was originally exploring the MFS right-of-way, it
was trying to figure out a way to facilitate the development of
this facility in Alaska by having all of the government entities
along the route cooperate with one another. The regulations in
place in 1996 indicated that the State of Alaska would issue a
right-of-way to MFS for $100 per acre. The Division of Lands was
trying to streamline the process so that it and BLM would use the
same numbers, and MFS would have had to pay for the appraisal.
Number 544
CHAIRMAN TAYLOR noted BLM would not call up President Clinton to
find out what amount he would use. That only occurs on the state's
side of the fence. MSF would still have to pay for BLM's appraisal
and pay whatever price the appraisal determined. He asked Ms.
Anvik if when she wrote the memo in February of 1998, she knew
what the decision was about setting up an appraisal system.
MS. ANVIK explained the co-chairs of the House and Senate Finance
Committees wrote a letter to DNR in February asking it to retain
the structure as it existed in regulation. Her letter was in
response to that request.
CHAIRMAN TAYLOR asked when MFS was granted its permit.
MS. ANVIK replied MFS does not have its permit yet. It has an
early entry authorization which gives it the opportunity to install
the fiber optic cable before the snow falls. The final decisions
with respect to the rights-of-way for MFS, GCI, and Northstar have
not been made, and every company is aware that DNR is grappling
with the method it should use to determine the compensation.
Unless the Legislature directs DNR to do differently, the
Administration will continue to use the existing regulations and
charge $100 per acre.
CHAIRMAN TAYLOR noted that rate will not apply to state park land,
DOTPF land, University land, or Mental Health land. He asked Ms.
Anvik if she was attempting to develop a policy to create uniform
treatment.
MS. ANVIK said she was not, she was trying to develop a policy to
determine what the appropriate rate of compensation for general
state purpose lands managed by the Division of Lands. The Division
of Lands staff worked with staff from the Division of Parks, the
University, the Mental Health Lands Trust, private entities, and
ARRC in order to ascertain what policies were currently engaged in
by different land managers, especially in regard to activities
changed by the Federal Telecommunications Act of 1996. That Act
changed the playing field for this industry. The Division of Lands
was trying to ascertain how to be in "sync" with the intent of the
federal legislation.
Number 502
CHAIRMAN TAYLOR asked if that Act is guiding BLM in doing its
appraisal.
COMMISSIONER SHIVELY responded the Federal Telecommunications Act
does not offer guidance as to whether an appraisal is to be done or
how much is to be charged. It does say that state and local
governments should be consistent and cannot create obstacles. DNR
interpreted the requirement to be consistent as requiring
consistency within each entity of state government. That issue may
be litigated at some point in time. If the court determined that
all state agencies should use the same rate, Alaska's state
agencies would be forced to charge the DOTPF rate.
CHAIRMAN TAYLOR assumed legislation would be proposed at that point
to establish a policy for all state lands.
COMMISSIONER SHIVELY noted that might not be possible because of
existing leases.
CHAIRMAN TAYLOR asked Ms. Anvik if she is working on any appraisal
system at this time.
Number 480
MS. ANVIK replied the Division of Lands has many options under
existing law and regulations to choose from on how to pursue this
question. By statute, the Director of the Division of Lands has the
ability to determine what the value is and/or set a value in unique
circumstances, and the applicant who disagrees with that value has
the opportunity to seek an appraisal to disprove that the value set
is incorrect. She asserted the division uses many methods, and the
appraisal method will continue to be used in some cases. She
repeated that unless the Legislature directs the Division of Lands
differently by April 24, it will issue rights-of ways across
general state lands at the rate of $100 per acre. After that
action occurs, in her opinion, the state will no longer have the
opportunity to change the rate. The Division of Lands has
purposely not issued any permits, in order to make sure that when
the rights-of-way are finally issued, all future applicants will be
treated equally when crossing state land.
CHAIRMAN TAYLOR said the fact that many options exist in these
unique situations for the Commissioner of DNR, the Executive
Director of the Mental Health Trust, the Board of Regents of the
University, and the ARRC Board must be frightening for those out in
the marketplace. Consequently, once a policy is established, the
Telecommunications Act will not allow the state to consider these
situations unique because permits have been granted, therefore
everyone will be locked into existing rates.
COMMISSIONER SHIVELY agreed, as long as the Telecommunications Act
does not change.
CHAIRMAN TAYLOR asked why the state would want to put the current
system in stone. The current system could do terrible damage to
the telecommunications industry by making it far too expensive to
run cables to parts of the state.
COMMISSIONER SHIVELY responded the Administration is setting what
it thinks is the best policy given the information available at
this time. It has been looking at how to increase the rate.
CHAIRMAN TAYLOR stated he is not interested in increasing or
decreasing the rate, he is trying to find out how the numbers were
picked. He expressed frustration that he has not heard one
explanation about the large discrepancy in the rates.
COMMISSIONER SHIVELY disagreed that no explanation has been given.
ARRC determined the value of the use, as did the Division of Parks.
The Division of Lands looked at the value of the right. He
repeated many landowners are involved in the negotiations in other
states, and that the rates vary.
Number 425
CHAIRMAN TAYLOR stated that is why the state has exercised its
right to eminent domain. He asked what part of the public process
was used in this decision.
COMMISSIONER SHIVELY pointed out notice was given, and public
hearings were held about the Chugach State Park. He added once the
value is determined and a final arrangement is made with GCI, then
it is subject to appeal to the Commissioner for reconsideration.
The $100 per acre rate was set by regulation and all regulations
are open to public process.
MS. ANVIK added that a public notice was issued on the NorthStar
route, the MSF route, and the GCI route, although the main issue in
that notice was the route, not the rates.
CHAIRMAN TAYLOR asked if the hearing was held shortly after the
public notice was issued and whether the decision was made quickly.
COMMISSIONER SHIVELY answered the process is not finished yet.
CHAIRMAN TAYLOR said as far as the Governor was concerned, the
process was finished until he received a letter from the House and
Senate Finance co-chairs, at which time he dumped it back into the
Legislature's lap.
COMMISSIONER SHIVELY clarified the intent of the Governor's letter
was to say if the Legislature wanted to work on this, the issue
should be resolved by April 24th for the benefit of the companies
involved.
CHAIRMAN TAYLOR said he wants to know why they are going to pay it.
Number 380
STEVE GIANI, Director of Marketing for Kanis Telcom, testified via
teleconference from Anchorage. MFS is Kanis' contractor. First,
Kanis supports the letter sent by the Governor to the Legislature.
Kanis understands the Governor to support historical pricing.
Kanis' issues are not with the University of Alaska, or any federal
landholders. Kanis believes that if the state starts setting
market rates, very little infrastructure will be built, especially
if rates start at 50 cents per foot. The 50 cents per foot rate
along the ARRC corridor was for an exclusive right. Kanis could
have asked for the same thing, but it opted for the six cents per
foot rate. He disagreed with Chairman Taylor's assumption that the
various rates are difficult for the fiber optic companies to deal
with. It was not a problem until the 50 cents per foot rate came
up, and Kanis started comparing exclusivity with common use rights-
of-way. Kanis understands it has the right to do an evaluation of
the right-of-way if it disagrees with the cost of the right-of-way.
Kanis has chosen not to do so as it assumes it will continue to pay
six cents per foot.
CHAIRMAN TAYLOR asked Mr. Giani what price Kanis will pay BLM for
its land.
MR. GIANI said he could not answer that at this time.
CHAIRMAN TAYLOR asked how that price is being established.
MR. GIANI said he was unsure, but Kanis did not take issue with it.
CHAIRMAN TAYLOR asked if it is being done on an appraisal basis,
based on fair market value.
MR. GIANI said he could not answer that question.
CHAIRMAN TAYLOR said he was referring to information contained in
Ms. Anvik's memo.
MR. GIANI said he understood that memo was in draft form.
CHAIRMAN TAYLOR stated although the memo was a draft, BLM is
probably going to get an appraisal. He asked Mr. Giani how Kanis
is negotiating its rate with the University.
MR. GIANI said he could not answer that question either. He
offered to get that information for Chairman Taylor. He clarified
that the right-of-way will travel across a very small piece of both
University land and state park land, so Kanis probably would not
have contested the rate if it thought it was reasonable.
CHAIRMAN TAYLOR stated his only concern is that even though those
portions of the right-of-way are very small, the rates will become
locked in once they are issued. Some company may want a right-of-
way across 500,000 acres of University land in the future, and the
rate will be too costly. He asked Mr. Giani to get him the
requested information.
PHYLLIS JOHNSON, Vice President and General Counsel of ARRC,
discussed the railroad's experience with right-of-way rate
establishment. The first fiber optics line that was laid in the
railroad right-of-way was contracted right before transfer in 1985.
That right-of-way was from Whittier to Portage, and possibly to
Anchorage, with ATU. That right-of-way was the first of its kind
negotiated by the federal railroad. The federal railroad got a
certain number of pairs of copper line it could use, so it
negotiated an in-kind trade. After the state took ownership of the
railroad, Alascom, under the ownership of PTI, negotiated a route
down to Seward in 1988. Considering the complications surrounding
the APUC proceedings, ARRC decided the right-of-way was worth more.
ARRC spoke to other railroads with similar corridors and decided to
charge a flat rate of $600 per mile. In the mid 1990's, ARRC
signed a contract with Alascom which it terminated after one year.
Nunat (ph) then signed a contract which became the first modern day
fiber optics permit. ARRC hired an outside appraisal firm to
evaluate the fair market value of a right-of-way along its
corridor. The fact that use of the corridor would alleviate the
need to gain rights-of-way on adjoining pieces of land increased
the value. The rate of 50 cents per foot is at the high end.
CHAIRMAN TAYLOR asked if ARRC traded the right-of-way permit for a
share of the use of the cable in its first lease; and the next
lease was let at a cost of $600 per mile, or about 11 cents per
foot.
MS. JOHNSON said that was correct, however the second lease also
provided for some usage by ARRC.
CHAIRMAN TAYLOR asked if the cost was a one time rate.
MS. JOHNSON said it is an annual cost. She clarified that permit
was pre-existing and was entered into around 1989. ARRC's newest
permit has a dollar amount tied to fair market value as its base
amount plus five percent of adjusted gross.
CHAIRMAN TAYLOR asked if ARRC will get 50 cents per foot plus a
percentage of the gross each year.
MS. JOHNSON replied it would.
CHAIRMAN TAYLOR asked if ARRC can estimate what the projected
growth will be.
MS. JOHNSON noted the contract contains a maximum, which she
guessed was $3 million per year. She indicated ARRC is projecting
several million dollars per year, and that the amount will increase
over the life of the contract.
Number 151
CHAIRMAN TAYLOR asked if the minimum threshhold is the 50 cents per
foot.
MS. JOHNSON thought the 50 cents is probably an average. She noted
it is stated as a flat dollar amount in the permit.
CHAIRMAN TAYLOR asked what the flat dollar amount is in the permit.
MS. JOHNSON replied ARRC has three separate permits in place. One
permit covers the area from Eielson to Anchorage and it contains a
flat dollar amount of around $1 million.
CHAIRMAN TAYLOR said if the flat rate is approximately $1 million
for the first year and possibly a few years thereafter, the company
has protection built in that it will cap out at a certain point,
which may be as high as $3 million.
MS. JOHNSON said that was correct, and that the permit contains
provisions for reappraisal as well. She stated if pricing is
established based on appraisal and reappraisal, treating everyone
similarly situated in that manner would allow room for some growth
consistent with the federal statute.
MS. ANVIK added if ARRC treats all future competitors the same,
meaning all rights-of-way will be appraised and reappraised, then
it is complying with the requirements of the Telecommunications
Act.
CHAIRMAN TAYLOR asked Ms. Johnson what she thinks about the state's
policy of establishing an historic value for given parcels of land,
and how it will be treated under the Telecommunications Act should
the state wish to change its method.
MS. JOHNSON replied she does not know much about the federal act,
and that ARRC administers different kinds of land because it has a
corridor.
Number 104
MR. KIM JACOBS, Director of Worldnet Communications, Inc., which
owns 65 percent of Alaska fiber optic stock, testified via
teleconference from San Francisco. He stated Worldnet wishes to
construct a fiber optic cable between Anchorage and Fairbanks
between the corridor of the Alaska railroad. Mr. Jacobs added he
is the Director of WCI Cable, which has constructed an interstate
fiber optic cable system that runs between Anchorage and Whittier
along the ARRC corridor. WCI is in the process of constructing an
undersea fiber optic cable between Whittier and the "Lower 48". He
read the following testimony into the record.
WCI, which is Worldnet Communications, Inc., and WCI Cable,
are recent entrants in the Alaskan telecommunications
industry. We have already spent, and/or committed to spend,
in excess of $150 million to the industry in connection with
the State of Alaska. I am testifying here today because I am
very concerned about the State of Alaska's proposed policy to
grant certain fiber optic rights-of-way across the state lands
at a price of six cents per linear foot per year. This
pricing policy, if adopted, would put Alaska FiberStar and WCI
Cable at a significant competitive disadvantage to other
companies providing fiber optic capacity in Alaska. It would
also appear to change our understanding of how Alaskan policy
generally operates, which is one of a level playing field.
I'm sorry Mr. Chairman, you've stolen a bit of my thunder in
some of the expressions you've used but I will be probably
stealing a bit of that thunder back if I could. Alaska Fiber
Star's fiber optic cable between Anchorage and Fairbanks was
constructed pursuant to a permit which requires a minimum
price of 49 cents per linear foot per year with the railroad,
and WCI's interstate fiber optic cable between Anchorage and
Whittier was constructed pursuant to a permit which requires
a minimum price of 47 cents per year per linear foot. Both
contracts were negotiated on the basis of market price. GCI
and Kanis are constructing fiber optic cables and have an
agreement to swap [indisc.] which will allow both companies to
provide capacity between Anchorage and Fairbanks in
competition with Alaska Fiber Star, as far as we're aware. If
the State of Alaska grants rights-of-way to GCI and MSF Kanis,
at the price of six cents per linear foot per year, the Alaska
Fiber Star and WCI Cable will be paying a significantly higher
price for rights-of way between the same locations. Alaska
Fiber Star's and WCI Cable's cost of providing capacity would
therefore be significantly higher than GCI's and MSF Kanis'
cost of providing capacity, which would result in Alaska Fiber
Star and WCI Cable being at a significant competitive
disadvantage. We're aware that sometimes, as you stated in
[indisc.] Kanis also agreed to pay an appraised price for the
rights-of-way along the route of the TransAlaska Pipeline
system. Now after Alaska Fiber Star's already constructed the
fiber optic cable between Anchorage and Fairbanks, and after
WCI Cable has already constructed the terrestrial segment of
the interstate fiber optic cable from Anchorage to Whittier,
the State of Alaska apparently is considering a change of the
policy for pricing rights-of-way and granting GCI's and MSF
Kanis' permits at six cents per linear foot per year. As
stated, Alaska Fiber Star and WCI Cable have made, and
continue to make, a very significant investment in the
telecommunications infrastructure of Alaska. This
infrastructure investment has been noticed at the national and
international level. Consequently, any discriminatory policy
that is adopted will open [indisc.] both nationally and
internationally. Also, it would be highly contrary to the
direction that the telecommunications industry has travelled,
and continues to travel internationally, as is evidenced by
the WTO agreement on telecommunications that was recently
agreed to by the [indisc.] nation. Instead of virtually
subsidizing certain companies in preference to other
companies, the State of Alaska should maintain its policy of
having a healthy and equally competitive environment in the
telecommunications industry. The only way to maintain a
healthy, competitive environment in our opinion, is to ...[end
of tape].
TAPE 98-35
SIDE A
MR. JACOBS continued.
... along the corridor of the Alaska Railroad differently from
rights-of-way along the Seward Highway or along the
Transatlantic Pipeline. All of this land, including the land
of the Alaska Railroad, is state land, and should be valued
using the same approach. In addition, Alaska Fiber Star and
WCI Cable, do not have, contrary to what has been stated,
exclusive rights-of-way along the corridor of the Alaska
Railroad. The Alaska Railroad corridor is 150 feet wide and
with its rights-of-way - there are six parallel rights-of-way
- which are 25 feet wide within that right-of-way, five of
these six rights-of-way are, as far as we are aware, still
available to be leased. Based on our acceptance, and that of
others - including GCI, to a market-driven pricing policy, the
low price of six cents per linear foot is certainly not
necessary to encourage development of telecommunications
infrastructure between the larger population centers in Alaska
and between Alaska and the Lower 48. We did it based on
market price. [Indisc.] below pricing achieved, is to lower
the return to the ultimate shareholders of state land, being
the residents of Alaska. It provides an unnecessary subsidy
to certain companies for infrastructure development, and
discourages investment into the state by new entrants, be they
national or international. The State of Alaska may want to
consider a price which gives an economic incentive to
encourage development of telecommunications infrastructure in
more rural areas of Alaska. Therefore a market based approach
to pricing fiber optic rights-of-way is the best way to ensure
that the appropriate price is charged for each fiber optic
cable project. However, when the State of Alaska disposes of
its rights-of-way at six cents per linear foot, or at a market
price, in certain respects is not the issue. The issue is
that the State should treat telecommunications participants
equally and fairly, and should not charge different prices for
rights-of-way between the same location. It is sort of like
adopting the policy to grant rights-of-way for fiber optic
cable at a price of six cents per linear foot per year, then
this policy should be applied to rights-of-way across all
state lands, including Railroad lands and all
telecommunications participants should be charged the same
price to rights-of-way between the same locations. In
summary, our companies were attracted to the State of Alaska
for two main reasons. The first was an excellent business
opportunity in the telecommunications infrastructure industry.
The second was that we were investing significant capital in
what we believe is a state which has international outlook,
has a policy of consistency, and a commitment to an even
handed approach to its new entrants. Based on these premises,
we made our commitment in hard cash resources, and local
employment, with the result [indisc.]. We ask the State to
maintain its commitment so that the true competition and
market forces can work to the benefit of the State and its
residents, both old and new. Finally Mr. Chairman, I'm aware
of the proposed SCR 26 proposed by Senator Robin Taylor. This
resolution would receive our full support in that it adheres
to the issue which we have great concern, and addresses those
issues, being equality for all participants, consistency of
policy, and the ability of market forces to dictate pricing.
The resolution, if implemented, would enable Alaskan residents
to receive fair value for the state's resources, and provide
the players in the industry comfort that further investment
is, and will continue to be, encouraged and supported by the
State. Thank you Mr. Chairman for the opportunity to address
the Judiciary Committee today, and I apologize for it being a
little bit lengthy but I thank you for the time.
Number 078
ERIC YOULD, Executive Director of the Alaska Rural Electric
Cooperative Association (ARECA), gave the following testimony via
teleconference from Anchorage. ARECA represents 95 percent of the
utility companies in the State of Alaska. ARECA's main concern
with SCR 26 is its possible precedent-setting implications for
other utilities. The previous speaker spoke about equity within
his own industry, and as an industry that regularly utilizes
transmission corridors, ARECA is quite concerned with how market
pricing may be imposed on the utility industry as well. Any
revenue resources to the State will ultimately be passed back to
the customers. He read the last two lines of a resolution passed
at ARECA's last board meeting which are:
A use of these right-of-ways is for the general well-
being of the people of the State of Alaska. They should not be
used as a revenue source in excess of reasonable administrative
costs for permitting.
MR. YOULD stated his industry does not object whatsoever to paying
the reasonable cost of the expense of an agency to administer land,
nor to ensure that the land is properly maintained in an
environmentally sensitive way. However, any revenue collected by
the State, over and above what is set by the agencies, is viewed as
a tax. ARECA is concerned that if the fiber optics cable industry
is taxed, the electric, gas, and water and sewer industries will be
next. ARECA does not want to see market rates charged for access
across state lands. ARECA would like to see the last clause of SCR
26 to ask Governor Knowles to consider state right-of-way costs
based on agency costs to administer and preserve the integrity of
the land consistent with a normal, public right-of-way, rather than
on market price.
CHAIRMAN TAYLOR asked Mr. Yould to comment on the rate charged by
ARRC.
MR. YOULD said, in his personal opinion, he does not think it was
appropriate for ARRC to set its rates as high as it did, however
ARRC is an authority with a specific responsibility to make a
profit so it can be viewed differently than the Division of Lands.
CHAIRMAN TAYLOR asked Mr. Yould how he felt about the rate of 50
cents per foot in a state park.
MR. YOULD said he would personally oppose that rate as the state
can get revenue from its extractive resources.
Number 191
CHAIRMAN TAYLOR said he agreed. He asked how ARECA charged for
leasing its cable poles out for cable television.
MR. YOULD said in one instance DNR wanted to charge ARECA to allow
an entity to hang a fiber optics cable on the existing transmission
towers for which ARECA already owned the right-of-way from DNR.
CHAIRMAN TAYLOR asked what ARECA planned to charge the fiber optic
cable company.
MR. YOULD said he did not know the answer to that question.
CHAIRMAN TAYLOR noted the Ketchikan, Wrangell and Petersburg
utility companies charged a rate per pole based on the market value
of the product to be sold.
MR. YOULD said ultimately, given the fact that those utilities are
subject to APUC regulation, the profit would have to be put back
into the rate base which would lower electrical rates.
Number 218
SANDRA GHORMLEY, representing Homer Electric, read the following
statement on behalf of Mr. Norm Story, general manager, via
teleconference.
Mr. Chairman and committee members, first we respectfully
request that you do not pass this resolution. If passed,
it could have far reaching consequences, and there are
eight issues I would like to bring forth for your
consideration that will clarify and justify our position.
Again, this resolution is in conflict with the present
state and municipal right-of-way requirement, and I refer
here to AS 42.05.251. By Public Utilities Commission
ruling, within municipal boundaries, a municipality is
limited to only charging a reasonable administrative fee
for the use of public rights-of-way. [Indisc.] at a
minimum sets a precedent for the State to follow. The
State should not be able to level unreasonable and
unnecessary charges. For example, this is presently a
consistent interpretation with the treatment of utilities
within state rights-of-way that are under DOT's
jurisdiction.
Secondly, modern infrastructure development within our
state should be encouraged, not discouraged, as this
resolution will do. Charging fair market value for fiber
optic right-of-way would have a killing affect on
development using fiber optics. Not only would utilities
be more reluctant to install fiber optics because of the
dollar cost involved, but also they would realize, as HEA
has learned, that when the entity granting the right-of-
way is concerned about receiving fair market value, there is an
additional cost associated with determining just what that fair
market value is, and whether the charge is appropriate. Making
applications for permits and dealing with the increased time lag
involved in obtaining a permit is also an added financial burden.
By singling out fiber optic cable for special treatment with
respect to right-of-way charges, the state could create a conflict
between fiber optic and copper lines. The price signal, which
would then be sent to the firm installing telecommunication lines,
would be that copper is preferred over fiber. I do not think this
is the message that was intended to be sent because it would
completely be opposite to the current policy of the state. Or, a
conflict also would be set up between the treatment of electrical
utility facilities and telecommunications facilities using fiber.
No logical distinction exists for preferring one type of wire over
another.
Point five, this policy would be setting a precedent for
charging all utilities fair market value for all work
done in state right-of-ways, resulting in increased
utility costs which ultimately affect all Alaskan
consumers.
And six, fiber services are intended to directly serve
the people of Alaska as are all other utility facilities.
By increasing the cost of utilizing state rights-of-ways,
the state is, in effect, levying a hidden tax on the
people of Alaska, and only on the people of Alaska.
Seven, the policy would create a conflict where none now
exists. Fair market value is not easy to define.
Utility companies faced with large dollar charges, or
easement costs, would no doubt have to hire their own
appraisers to check out the fair market value costs
established by the state's appraisers. In the event of
conflict, the state's charges would either be challenged
in court or through an appeal process, resulting in
increased costs to state operations, as well as utility
operations, in the form of experts and attorneys, not to
mention the additional staff and management time which is
a real, but perhaps not as obvious, cost to the consumer
for such a policy.
And finally the last point - and probably the most
important - encumbering and discouraging the development
of a fiber infrastructure means that many of Alaska's
remote areas may not have the same access to health and
education systems as those who are fortunate to live in
the higher density areas. And isn't this resolution
actually a step backwards, away from Lt. Governor Fran
Ulmer's vision for the children of Alaska, as stated in
the Alaska 2000 plan, in that all children of Alaska
shall have equal access to a quality education via an
interconnected state of the art telecommunications
system. This is only feasible with a fiber optic
infrastructure and an unencumbered use of state rights-
of-ways. I thank you Mr. Chairman and committee members for
hearing our concerns, and again, I urge you not to pass SCR 26.
CHAIRMAN TAYLOR asked how Homer Electric Association charges for
the rental of its poles to the local cable operator.
MS. GHORMLEY thought the charge is by pole.
CHAIRMAN TAYLOR asked if HEA charges a one time administrative fee,
similar to DOTPF.
MS. GHORMLEY was unsure.
CHAIRMAN TAYLOR thought HEA was charging whatever the market will
bear to hang the cable TV on its poles.
MS. GHORMLEY said she believes cable TV is provided by microwave to
the Homer area. She offered to get Chairman Taylor an answer to
his question.
CHAIRMAN TAYLOR asked Ms. Ghormley if HEA believes a competitor
should be precluded from offering a higher price, such as $1.50 per
foot, and force it to pay six cents per foot because that rate has
been traditional and fair.
MS. GHORMLEY replied she believes the 50 cents per foot charge is
in conflict with the historical attitude of the state to promote
economic development and development of infrastructure.
CHAIRMAN TAYLOR stated the latest charge to cross state park land
is 50 cents per foot. He asked Ms. Ghormley if she is opposed to
that.
MS. GHORMLEY stated she has no direct knowledge or experience with
state park land permits so she could not answer.
CHAIRMAN TAYLOR noted state agencies are charging whatever the
traffic will bear, or charging less if they feel compelled to do so
by historic precedent, or charging just an administrative fee, such
as DOTPF. He agreed with HEA that the state should be charging the
least amount possible to encourage competition.
JIMMY JACKSON, attorney for GCI, informed committee members that
the APUC regulations and FCC regulations contain a formula which
establishes the rates that cable television utilities pay for the
use of the poles of electric and telephone companies. The formula
is essentially based on a percentage of the electric companies'
cost of investment in the poles, and the percentage of the pole
space taken up by the cable television facility.
MR. JACKSON commented that GCI would not mind if the rates were
decreased but what is more frightening than the possibility of
paying 50 cents per foot for Chugach State Park is the possibility
of the permits being held up while the issue of a consistent state
policy is dealt with.
CHAIRMAN TAYLOR adjourned the meeting at 5:30 p.m.
| Document Name | Date/Time | Subjects |
|---|