Legislature(1997 - 1998)

04/15/1998 01:39 PM JUD

Audio Topic
* first hearing in first committee of referral
+ 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                
     - 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                 
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                  
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            
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                  
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            
CHAIRMAN TAYLOR asked Mr. Smith why reimbursement takes 8 to 10                
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              
         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-            
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               
CHAIRMAN TAYLOR asked what the Administration recommends on this               
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               
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             
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              
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                  
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              
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                
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            
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                
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             
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              
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                    
     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                           
     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             
     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                         
     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              
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