Legislature(1997 - 1998)
04/15/1998 01:39 PM JUD
* first hearing in first committee of referral
= bill was previously heard/scheduled
= 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.