Legislature(1999 - 2000)
09/24/1999 09:05 AM Senate MER
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
JOINT SPECIAL COMMITTEE ON MERGERS
September 24, 1999
9:05 a.m.
MEMBERS PRESENT
Senator Rick Halford, Chair
Senator Drue Pearce
Senator Johnny Ellis
Representative Joe Green, Vice-Chair
Representative Brian Porter
Representative Beth Kerttula
Representative Jim Whitaker
MEMBERS ABSENT
All members present
OTHER LEGISLATORS PRESENT
Senator Mike Miller
Senator Loren Leman
Senator Kim Elton
Senator Georgianna Lincoln
Senator Lyda Green
Representative Allen Kemplen
Representative John Coghill
Representative Scott Ogan
Representative John Harris
Representative Lisa Murkowski
Representative John Davies
Representative Sharon Cissna
Representative Bill Hudson
Representative Gail Phillips
Representative Beverly Masek
Representative Norman Rokeberg
Representative Eric Croft
Representative Hal Smalley
Representative Ethan Berkowitz
Representative Jeannette James
Representative Reggie Joule
Representative Jerry Sanders
Representative Gene Therriault
Representative Fred Dyson
Representative Gary Davis
COMMITTEE CALENDAR
British Petroleum-ARCO Merger
Executive Session: Legislative Briefing
PREVIOUS ACTION
See the Joint Special Committee on Mergers minutes dated 6/11/99
and 7/28/99.
WITNESS REGISTER
BRUCE BOTELHO, Attorney General
Department of Law
PO Box 110300
Juneau, Alaska 99811-0300
Telephone: (907) 465-2133
POSITION STATEMENT: Discussed the proposed merger.
FRED BONESS, Attorney
Preston, Gates & Ellis
420 L Street, Suite 400
Anchorage, Alaska
Telephone: (907) 276-1969
POSITION STATEMENT: As outside counsel for the committee, he
provided the committee with a brief status report.
ACTION NARRATIVE
TAPE 99-5, SIDE A
Number 001
CHAIRMAN HALFORD called the Joint Special Committee on Mergers
meeting to order at 9:05 a.m. All committee members were present
at the call to order. Other Senators present were Senators Miller,
Leman, Elton, Lincoln, and Green. Other Representatives present
were Representatives Kemplen, Coghill, Ogan, Harris, Murkowski,
Davies, Cissna, Hudson, Phillips, Masek, Rokeberg, Croft, Smalley,
Berkowitz, James, Joule, Sanders, Therriault, Dyson, and Davis.
Number 016
BRUCE BOTELHO, Attorney General, Department of Law, noted that
Assistant Attorney General Jack Griffin, Oil, Gas & Mining Section,
Civil Division, Department of Law, was also present. Assistant
Attorney General Griffin is the chief lawyer on the state's team
regarding the merger. Attorney General Botelho commented that it
seems, as indicated by the executive and legislative branches, most
appropriate to do as much as possible in public session. The only
reason to enter into executive session would be to specifically
discuss matters which are, as specified in the Open Meetings Act,
appropriate for closed session. Such matters may include
discussions about confidential documents, documents which are
confidential by federal or state law. Other matters appropriate
for closed session may be correspondence between the state and the
Federal Trade Commission (FTC).
ATTORNEY GENERAL BOTELHO explained that when the acquisition by BP-
Amoco was announced, the Governor requested that four cabinet
officers lead a task force of the Administration in order to
evaluate the merger. The task force, in addition to Attorney
General Botelho, includes Commissioner Condon, Department of
Revenue; Commissioner Shively, Department of Natural Resources;
John Katz, Director of State/Federal Relations and Special Counsel.
The task force was given the task to review the merger with regard
to its impacts on the competitive environment in Alaska as well as
social responsibility issues. Most of the attention was focused on
the impacts the merger would have on the competitive environment in
Alaska. He noted that the task force's primary vehicle for
analyzing the acquisition was an anti-trust; in other words, would
the merger have a likelihood of lessening competition in the
relevant markets? Therefore, the task force reviewed production
and transportation, with less emphasis on the marketing aspects or
so called downstream issues.
ATTORNEY GENERAL BOTELHO informed everyone that, from the task
force's respective staff, six subgroups were formed in order to
assist in the evaluation. He identified the subgroups as value
issues, facilities issues, marine transportation, the Trans-
Atlantic Pipeline System (TAPS), the gas project, and leasing.
With respect to each area, the staff was instructed to categorize
the issues that needed to be resolved. To assist in that
categorization, a nationwide search was conducted in order to
identify experts that would assist in analyzation of the issues as
well as advocate the state's position in court or before the FTC.
Foremost among those experts is David Boies who has been the lead
lawyer for the United States in the Microsoft trial. Mr. Boies is
one of the more prominent anti-trust lawyers in the nation.
ATTORNEY GENERAL BOTELHO pointed out that the task force spent some
months reviewing documents from BP and ARCO. In general, the task
force has received cooperation from both companies in obtaining
those records. He noted that extensive resources have been
utilized for the analyzation of those records. In doing so,
Alaska's task force has worked closely with the multi-state task
force which has been reviewing this merger. The primary states in
the multi-state task force are California, Oregon, and Washington.
The work load, with regard to the analyzation of the documents, has
been divided up on the basis of upstream issues and downstream
issues. The upstream issues would be primarily of concern to
Alaska, and therefore the downstream issues were primarily left to
the west coast states. Following those reviews and extensive
internal debate, the Governor announced his formal conditions on
Alaska's acquiescence in BP-Amoco's acquisition of ARCO.
Number 116
ATTORNEY GENERAL BOTELHO specified the Governor's conditions.
First, BP would be required to divest sufficient North Slope
production and leases to guarantee another oil company operator in
production and exploration. The notion was to have another
operator who would exercise independent control over a portion of
the North Slope in order to maintain a competitive environment
there. Secondly, there was the condition to have open access to
oil production and transportation facilities. He explained that
the desire was to avoid any company having a strangle hold on
access to facilities on the North Slope itself as well as
transportation, TAPS and marine transportation. Thirdly, the
Governor identified his condition of a reduction of the existing
tariff on TAPS. Attorney General Botelho noted that high tariffs
are a disincentive for new entrants, competitors, into the market
because of the higher cost of operating in Alaska. Part of the
higher costs relate to the transportation of oil from distant areas
to distant markets. Fourthly, the Governor specified the need for
access to Alaska's natural gas resources for development.
ATTORNEY GENERAL BOTELHO informed the committee that the following
social responsibility issues were also identified by the Governor:
(1) BP's continued commitment to hire locally and use Alaska
businesses.
(2) BP's environmental policy.
(a)Conversion to the "Millennium" class tankers in order
to comply with the Oil Pollution Act of 1990 (OPA 90).
(b) Commitment to an assessment and clean up of
contaminated sites on the North Slope.
(c) Continued commitment and plan dealing with erosion
issues on feeder pipelines.
(3) Continued and increased commitment to important civic and
community causes.
ATTORNEY GENERAL BOTELHO pointed out that although the
aforementioned conditions are broad, there was a fairly extensive
list of demands to implement each condition. Those were presented
to BP shortly after the Governor's presentation to the Anchorage
Chamber of Commerce. Last week, there was a second meeting with BP
officials in order to receive initial responses. During a meeting
between the Governor and Dick Olver, there was the decision not to
have any ongoing discussions during this special legislative
session. Therefore, dialogue is expected to resume next week.
Returning to the meeting between the Governor and Mr. Olver,
Attorney General Botelho said that the Governor stressed the need
for the public to have viable input before there is a deal. Mr.
Olver acquiesced on that point. Therefore, there will be a process
which looks to the state in negotiating with BP. Attorney General
Botelho said that there is only the expectation, over the next few
weeks, that there would be a determination as to whether an
agreement can be reached. If a draft agreement can be reached,
there would be an extensive effort to get the tentatively agreed
upon terms to the public via a variety of media. There would be a
series of town hall meetings around the state. He indicated that
teleconferencing would probably also be used to reach more remote
areas of the state.
[NOTE: The ending of the meeting, during which the meeting was
recessed to the call of the chair was inadvertently taped over a
small portion of Attorney General Botelho's comments. The tape
over is less than one minute.]
ATTORNEY GENERAL BOTELHO said, "...to the Chief Executive of
British Petroleum - Amoco, Sir John Browne, for final resolution."
Attorney General Botelho believed that before the final step is
taken, the Governor intends to consult with the legislative
leadership of this committee.
ATTORNEY GENERAL BOTELHO reiterated that the task force is working
as a state team as well as with the multi-state task force.
Furthermore, there is daily contact with the FTC in the sharing of
information and views. The FTC has not yet committed to a final
schedule. Originally, BP-Amoco and ARCO expected that there would
be approval before the end of this year. Attorney General Botelho
sensed that the FTC is now aiming for November. In conclusion,
Attorney General Botelho stated:
Again, the Governor, ..., would want me to underscore
that we do not have a deal. That if we're unable to
reach an agreement which he believes is in the state
interest, that we are prepared to use any and all forums;
that is both in court and before the FTC to achieve
results which we believe will create the kind of
competitive environment that will maximize the
developments of our North Slope resources.
Number 266
CHAIRMAN HALFORD inquired as to when the FTC could expect a state
position from the Administration.
ATTORNEY GENERAL BOTELHO reiterated that there is daily contact
[with the FTC]. The FTC knows the nature of the terms with respect
to the competitive issues. However, the Alaska hire issue and the
environmental issues aren't issues "on the FTC table." The FTC
knows what the state is seeking. The state is informing the FTC
with regard to what information has been exchanged. The state is
aware of the dialogue between the FTC and BP-Amoco. With regard to
the official state position, Attorney General Botelho indicated
that if a draft agreement is reached, it would be shared with the
FTC simultaneous [with the public process] if not slightly before
the public process. If a final agreement is reached the state will
meet with the FTC to share that. Furthermore, if no agreements are
reached that will also be shared with the FTC. Attorney General
Botelho noted that a formal presentation to the FTC in mid October
to early November is within their [FTC's] time frame.
REPRESENTATIVE PORTER commented that the Governor or the
legislature has the ability to "just say no" to the deal. If no
agreement is reached, what options are left?
ATTORNEY GENERAL BOTELHO answered that the state, on its own, has
the ability to file a lawsuit in state superior court under the
state anti-trust law in order to block the portion of the merger
which affects Alaska. The state may also file a lawsuit in federal
district court under federal anti-trust law. An anti-trust case
under federal law may only be brought in federal courts. He
reiterated that the state can make its views known to the FTC, who
regards the state executive, in particular the attorney general's
office, as a sister law enforcement agency. While the state
couldn't enter as a party or litigate before the FTC, the purpose
would be to explain the state's concerns from an anti-competitive
standpoint. He noted that, theoretically, there could be
congressional action. However, such would be highly unusual.
Number 321
REPRESENTATIVE GREEN returned to the mid-October to early November
time frame and inquired as to the reasons for that time frame.
ATTORNEY GENERAL BOTELHO commented that the Exxon Mobil merger may
play a slight role with regard to timing, but stressed that the FTC
is actively working the BP-ARCO merger. He noted the FTC has two
different staffs which may indicate some sharing and may have
caused a slight delay. Attorney General Botelho, parenthetically,
noted that the state is also involved in the multi-state task force
regarding the Exxon Mobil merger and the potential impacts to
Alaska.
REPRESENTATIVE GREEN inquired as to what would happen if the
legislature and the state do not agree.
ATTORNEY GENERAL BOTELHO specified that the responsibility for
anti-trust enforcement is an executive branch action. Of course,
the goal is to make certain that the state and the legislature
aren't at odds. He pointed out that certain powers rest
exclusively with each branch of government. For example, the
legislature has the power to tax.
SENATOR PEARCE commented that she was struck by the fact that
almost all of the Governor's conditions, Alaska's interests, are in
direct competition with downstream interests. Therefore, she
inquired as to Alaska's role in the multi-state task force. What
is the multi-state task force expected to achieve in relation to
the FTC? Furthermore, has Alaska made any promises to other states
that would be adverse to Alaska's interest as a part of that
process?
ATTORNEY GENERAL BOTELHO acknowledged that there are nominal issues
of divergence between the upstream, Alaska, and the downstream
states. Obviously, the primary concerns for California, Washington
and Oregon are low gas prices and much gas. On the other hand,
Alaska would like to receive as high a well-head price as possible.
Therefore, there is at least a theoretical divergence of interest.
However, he believed that many of the interests are the same such
as the interest to maintain low transportation costs. He explained
that Alaska's tax structure and royalty structure is based on a
net-back value which means that there is a price at the distance
refinery gate from which the transportation costs are subtracted
out to arrive at the well-head value. That works as a direct
revenue advantage to the state. However, the overriding concern
has been the competitive issue in that new entrants would be
deterred if they face higher transportation costs, marine
transportation costs, and TAPS. He said that Alaska has a
congruence of interest with the downstream states in looking at
those costs or barriers to entry in Alaska. Attorney General
Botelho stated that there hasn't been a commitment to downstream
states which would be adverse to Alaska's interests.
ATTORNEY GENERAL BOTELHO commented that the members of the multi-
state task force work together to gather information. He indicated
that the states may ultimately take a joint position with the FTC
or each state would seek anti-trust remedies in their respective
state courts. He noted that, theoretically, states could move to
federal court in each respective state. Most often, state attorney
generals utilize their own state courts to resolve anti-trust
issues. In response to Senator Pearce, Attorney General Botelho
agreed that at this point he didn't know whether the multi-state
task force will provide one submission to the FTC or whether each
state will provide their own submission to the FTC. He indicated
that the multi-state task force is still in the fact-finding and
analyzation stage, and therefore it is still too early to know.
Number 402
REPRESENTATIVE WHITAKER commented that some believe the filing of
an anti-trust suit at this time would strengthen the state's
bargaining position. He inquired as to the reasoning behind why
such a suit hasn't been filed.
ATTORNEY GENERAL BOTELHO responded that one doesn't file until one
fully has the case. If one files, he/she has to be prepared to
litigate, which is a major commitment of time and resources. He
pointed out that most anti-trust cases never go to trial, but
rather are resolved by negotiation. That is the case at the
federal level as well as the state level. Attorney General Botelho
said that no state has filed a case yet because there have been
overtures of settlement, and furthermore for a state to bring an
anti-trust case would require more work. He noted that BP is aware
that the state is prepared to exercise such action at the
appropriate time.
REPRESENTATIVE WHITAKER asked if, given the proposed takeover, the
state has a strong anti-trust suit, in light of the current state
and/or federal statutes.
ATTORNEY GENERAL BOTELHO replied, "My judgement is that we do."
SENATOR ELLIS recalled the mention of a two to three week period
for public comment for which many have said is too abbreviated for
an issue of this magnitude. Is there a reason for such a short
time frame? He requested that there be consideration of extending
that time frame if it becomes obvious that would serve the state's
interests.
ATTORNEY GENERAL BOTELHO acknowledged that it is a delicate
balance. He expressed concern that the state is working against a
clock, the FTC itself, for which it has little control. He said
that the time frame has been structured in order to work on a
fairly parallel track with the FTC. He indicated that there is a
high level of confidence that the FTC isn't expected to take action
before early November after which the process could move quickly.
SENATOR ELLIS inquired as to when the details of the public process
would be provided.
ATTORNEY GENERAL BOTELHO responded that the answer to Senator
Ellis' question would be dictated by two things. First, the speed
at which the state engages. He believed it to be counterproductive
to announce when the meetings will be held because that presupposes
that there will be a draft deal. Attorney General Botelho said
that there would be as much notice given as possible in as many
forms as possible.
CHAIRMAN HALFORD encouraged the consideration of the legislative
process to be part of the public process.
REPRESENTATIVE GREEN noted that there was a significant delay in
the receipt of some records to the legislative oversight committee.
He asked, "Is there any bias that could be established, if in order
to try and meet the FTC time schedule, there is one position taken.
They're [FTC] operating on that basis and doing their thing. Does
that adversely affect any of the state's options, if we are behind
that."
ATTORNEY GENERAL BOTELHO identified a possible adverse consequence
as the FTC deciding to allow the merger to proceed without change,
without change that affects Alaska. He believed it substantially
lessens the state's leverage which is of concern. Although it
doesn't preclude the state from going to state court, he suggested
that a state court would take note of the FTC's judgement as to
whether there are FTC problems or not. Attorney General Botelho
specified that he was speculating about many things.
REPRESENTATIVE GREEN asked if the Administration feels it will be
adequately prepared by mid-October or early November.
ATTORNEY GENERAL BOTELHO said, with regard to whether the
Administration would be prepared to proceed to trial, that the
Administration would be ready in terms of preliminary proceedings.
However, in terms of long-term protracted litigation, he didn't
feel prepared. He indicated that the FTC is probably in the same
position. If there is litigation, it will be a multi-month or
multi-year time frame.
Number 497
REPRESENTATIVE CROFT said that he believed that at least three of
the Governor's conditions were already required by state statute or
federal law. Those conditions are the divestiture of acreage, the
OPA 90 double hull "Millennium" class tankers, and the cleanup of
contaminated sites. How is it a concession to request the
companies to comply with state or federal law?
ATTORNEY GENERAL BOTELHO explained that the divestiture of acreage
sought by the Governor isn't simply the divestiture of excess
acreage. The Governor seeks to have a major role in determining
which acreage to divest. The Governor has also said that he would
not only be reviewing state acreage, but also National Petroleum
Reserve-Alaska (NPR-A) acreage which is not subject to state law
requirements. Therefore, the divestiture condition seeks in excess
of what the state law requires. With regard to contaminated sites,
BP has a responsibility to its sites but not to anyone else's
sites. The Governor is looking to BP to take the lead role with
regard to all contaminated sites. He then turned to OPA 90 for
which there is a specific schedule. He informed the committee that
the Governor's condition has an accelerated schedule.
REPRESENTATIVE WHITAKER expressed concern with regard to
divestiture. He indicated the need to ensure that divestiture not
mean divestiture of control. He was concerned that through unit
operating agreements, control would be maintained. Furthermore, he
expressed concern that a partial divestiture of ownership in a
particular acreage would still allow for effective control beyond
unit operating agreements. He asked Attorney General Botelho to
comment on the state's position thus far.
ATTORNEY GENERAL BOTELHO acknowledged that he was well aware of
that issue, but believed further discussion of that issue should be
held in executive session.
SENATOR PEARCE posed a situation in which an agreement is signed
and the merger proceeds. What happens if, a year later, there
isn't a second operator on the North Slope.
ATTORNEY GENERAL BOTELHO answered that there are ways to structure
merger approvals in order to satisfy conditions that could have
consequences later.
SENATOR PEARCE interjected that the participants wouldn't become
two companies again.
ATTORNEY GENERAL BOTELHO agreed with Senator Pearce's assessment.
However, in other circumstances an agreement may require a trustee
to be appointed if a company obligated to divest an asset hasn't
been able to do so within the requisite time. Perhaps, there is no
taker at the prices offered. He indicated that the trustee would
have complete latitude to sell at whatever price to bring in a
player. He clarified that he wasn't suggesting such would apply in
this case, but such would be a typical mechanism to deal with such
a problem. Obviously, if there is difficulty in obtaining another
operator, then it would suggest that there are other problems with
the competitive environment.
REPRESENTATIVE KEMPLEN informed everyone that he recently received
a partial list from BACKBONE regarding concerns with the merger.
How is the Administration addressing BACKBONE's concerns during the
negotiations with BP?
ATTORNEY GENERAL BOTELHO said that he hadn't seen BACKBONE's list
of concerns and couldn't comment to that end. He noted that
Commissioner Shively is present as are other members of the
Governor's team, if there are questions for them. Attorney General
Botelho offered to review the list and speak to it.
CHAIRMAN HALFORD requested that Attorney General Botelho come back
to this list. He also requested the attorney general specify
whether a question or certain information would require executive
session under the law.
SENATOR LINCOLN expressed interest in the Administration's view
with regard to career ladders. She asked if there are specific
numbers to be reached by a specified time.
ATTORNEY GENERAL BOTELHO replied that he would be prepared to
respond to that in executive session. He did note that BP hasn't
received the Administration's negotiating position yet.
REPRESENTATIVE GREEN turned to the Governor's condition with regard
to providing BP with open access to facilities and pipelines. He
asked if there would be any criteria which would establish what
that might be.
ATTORNEY GENERAL BOTELHO commented that the Administration is well
aware of that concern and intends to address it. He clarified that
the job of the negotiating team is to reach a draft agreement that
would be legally enforceable, not simply a statement of principle.
He noted the importance of potential entrants into Alaska or those
present who may be interested in expanding. The role would be to
evaluate whether there are open markets, which counter the anti-
competitive aspects of the merger.
SENATOR LEMAN inquired as to the Administration's position with
regard to the tariff on the pipeline. Does the Administration view
that as settled back in 1985 or is that on the table?
TAPE 99-5, SIDE B
ATTORNEY GENERAL BOTELHO stated that the Governor has made it clear
that one of the task force's objectives is to lower tariffs,
however that doesn't necessarily mean the reopening of the
settlement reached in 1985. He reiterated the concern surrounding
the impacts of high tariffs on new entrants. There are different
ways in which to deal with that issue.
CHAIRMAN HALFORD announced that the committee would address the
BACKBONE list in some way today, and therefore requested that the
attorney general review that list.
ATTORNEY GENERAL BOTELHO agreed to do so, but noted that
Commissioner Shively or Mr. Griffin may have to address that.
Number 575
FRED BONESS, Preston, Gates & Ellis, noted that he is one of the
committee's outside counsel. He announced that he would provide
the committee with a brief status report beginning with a
discussion of the committee's process. Mr. Boness believed that
what this committee has undertaken is relatively unique and rare
for legislatures. This committee has engaged in an investigation
similar to that undertaken by attorney generals. He acknowledged
that in other states with mergers, legislatures have had
investigation committees. However, this committee has gone beyond
that. He indicated that the FTC's initial reluctance to deal with
legislators or representatives of the legislature seems to
illustrate the rarity of this committee. That has clearly changed
and the FTC is very interested in this committee's views as well as
the legislature's views as a whole. One of the vehicles which
enabled the committee to move beyond what is standard for
legislatures is the committee's access to exactly the same
documents that the FTC and the state attorney general have. That
itself was rare and required extensive negotiations with BP and
ARCO. Mr. Boness pointed out that these are very sensitive
documents which are divided into the following two categories:
confidential and highly confidential. The highly confidential
documents are only available to committee members and staff.
Having reviewed those documents, he said that these are the type of
documents that no company or businessman would expect to be made
available in the public. He noted that some of these documents are
very helpful in analyzing the state's position, in relation to the
anti-trust review that the attorney general, the FTC, and the state
are undertaking.
MR. BONESS pointed out that additionally, this committee has
engaged in a number of other activities. For example, the
committee has interviewed state experts with the approval and
cooperation of the attorney general. The committee has also
received briefings from the Governor and his team on many
occasions. The committee has also met with the FTC's staff on many
occasions. Furthermore, the committee has retained its own
independent economic experts and legal consultants. The committee
has received briefings from other in-state specialists as well as
briefings from ARCO and BP personnel, attorneys and experts. The
committee has received information in various public forums.
MR. BONESS turned to the public policy consequences resulting from
the process the committee has engaged in with respect to the
proposed merger. He believed the proposed merger has opened up a
public debate and focused attention on the oil and gas industry in
Alaska such that hasn't occurred since prior to the construction of
TAPS in the 1970s. The committee is reviewing the state's
relationship with the oil industry and the global relationship
between the state and oil and gas production in the world. This is
being done in a fashion that he believed hasn't occurred since the
1970s. Citizen organizations, the Administration, and the
legislature have all asked and sought answers to questions such as
the following: what has been and should be the role of competition
in Alaska, what are the benefits and costs of having both
multinational players and small producers in Alaska, what is the
future of oil and gas development in Alaska? The legislature's
participation has caused BP to provide more information in the
public arena with regard to its future plans and expectations. He
believed [the process] will not end until the legislature, the
Administration, and the Alaskan public are satisfied with the rules
governing the relationship between the state and the oil industry
in today's conditions. Although resolution of the merger is a
short-term issue, it is likely that the merger has triggered long-
term questions which go beyond the merger.
MR. BONESS addressed a few of the substantive conclusions which he
believed could be made even before review of the documents is
complete. Mr. Boness said, "I believe it is fair to say that the
merger as proposed offers few direct benefits to the state." Those
benefits to the state identified by BP-Amoco could be achieved by
means other than the proposed merger. The notion that the merger
could rationalize production activities on the North Slope could be
accomplished without a merger. The companies could achieve such
independently by acting in their own self interest. Perhaps, such
could also be accomplished by the state taking a more forceful role
in assessing that it happens. Furthermore, the process of this
rationalization was already under way before the merger. That is
illustrated by BP's reorganization of its own tanker fleet to
operate more efficiently which occurred before the merger was
announced. The process initiated by BP before the merger could
easily continue.
Number 491
MR. BONESS said there are a number of adverse consequences of the
merger. Although those adverse consequences can be identified,
assessing the seriousness of those consequences is difficult. For
example, there will be one less bidder in future oil and gas lease
sales on the North Slope. There will also be one less TAPS carrier
as well. Furthermore, there will be concentrated ownership of
production facilities, concentrated ownership of the marine tanker
situation, centralized technological development, and centralized
decision-making with regard to natural gas commercialization.
MR. BONESS informed the committee that the vast majority of the
rules that govern the relationship between the state and the
industry, especially those with respect to North Slope producers,
are governed by settlement agreements or other contractual
relationships, not statutes and regulations. He identified other
contractual relationships as the right-of-way lease for TAPS, the
TAPS settlement methodology agreement, the TAPS capacity agreement,
royalty settlement agreements, lease agreements and unit
agreements. The state is a party to all of those agreements. Mr.
Boness said that this situation reduces the number of levers
available to the legislature to set policy. Furthermore, this
situation demands from the legislature creative, well thought out
decisions with respect to the options available to the legislature.
Number 474
MR. BONESS addressed what remains to be done with respect to the
merger. Both the Governor and the FTC have invited the
legislature's advice and input, although the time frame seems to be
short. The Governor has established a number of conditions which
he has said must be met before he will agree to the merger.
Fundamentally, the Governor's conditions seek to ameliorate the
adverse consequences of the merger and to gain certain future
benefits for the state since the state has some bargaining power.
Mr. Boness said that the legislature has two options with regard to
the advice the legislature may choose to give to the Governor and
the FTC. The legislature could tell both the Governor and the FTC
that this merger should be opposed and if there are any legal
grounds to do so, that would be in the state's best interest. The
legislature could also accept the merger as proposed or make
recommendations to modify the conditions.
MR. BONESS commented that whether the merger occurs or not, it is
not likely the process initiated by the merger will end with the
consummation or abandonment of the merger. The state's oil and gas
industry will enter a new phase shortly. He pointed out that the
TAPS right-of-way lease will be up for renewal in a few short years
and may provide a mechanism for adjustment of relationships between
the state and the oil industry. He also pointed out that the TAPS
settlement methodology must be renegotiated between 2006 and 2008.
If the TAPS settlement methodology isn't resolved by 2008, the
settlement methodology terminates. Furthermore, state budget
issues, including taxation policy, loom as a major issue of the
future. Mr. Boness said, "The attention focused upon the industry
and the public awareness gained from that attention provides an
ideal stepping stone for these broader issues, if you choose to
pursue them."
REPRESENTATIVE WHITAKER recalled Mr. Boness' comments regarding
time being short with regard to the legislature's two options. He
inquired as to Mr. Boness' perception of that time frame.
MR. BONESS responded that the legislature is not likely to be an
entity to bring a lawsuit. If a lawsuit is to be filed, it would
be incumbent upon the legislature to persuade the attorney general
to do so. Therefore, Mr. Boness viewed the attorney general as
controlling the time frame with respect to that portion of the
decision. The FTC may or may not be moving as fast as indicated by
the attorney general. "I think to the extent that the FTC and the
judgement of this committee's advisors is that the FTC is not
moving as fast as the attorney general indicated. Your time table,
particularly with respect to conditions or persuading the FTC to
bring a lawsuit may not be quite as short as the attorney general
indicated." He pointed out that the FTC is more accustomed to
working with a state attorney general than with a legislature.
Although the FTC is now eager to have the legislature's input, the
legislature wouldn't want to be in conflict with the attorney
general since he is establishing the time table. Mr. Boness
understood Attorney General Botelho to be setting a time frame of
the next two to three weeks.
CHAIRMAN HALFORD inquired as to the difference a one cent change in
the tariff would make for the state.
MR. BONESS answered that a one cent change amounts to about
$900,000. A one dollar change amounts to about $90 million
annually. He explained that Alaska receives revenues from royalty
and from taxes. One aspect of the tax is a severance tax which
ties into the tariff. He posed a situation in which the price of
oil in California is $15 from which the cost of the tanker and the
tariff would be subtracted. In the case of royalties, an agreed
upon field cost is subtracted which results in the net-back price.
The net-back price, the price on which one pays a royalty, is
typically 12.5 percent. If the full severance tax is being paid,
the net-back price would be 15 percent or less if the economic
limit factor (ELF) kicks in which reduces the severance tax.
Therefore, every dollar increase in the tariff reduces the pump
station one value and thus reduces the royalty and severance tax
payments to the state.
REPRESENTATIVE KERTTULA understood Mr. Boness to mean that the
higher the tariff or the higher the transportation costs, the more
money the state loses in its taxes.
MR. BONESS agreed, but noted the state would also see a loss in
royalties as well.
Number 395
REPRESENTATIVE PHILLIPS inquired as to the effect on the FTC if all
the other states agreed to the merger, save Alaska.
MR. BONESS said that one would have to know what the other states
are telling the FTC with regard to why the merger would be
acceptable in comparison to what Alaska tells the FTC is the
problem. "The underlying analysis is an anti-trust analysis; is
the combination of ARCO and BP likely to result in the lessening of
competition which is adverse to the public interest." If Alaska
was able to persuade the FTC that there are areas of competition in
Alaska which are being lessened and have serious public
consequences, the FTC may proceed to negotiate resolution of those
or file a lawsuit.
SENATOR ELTON surmised from Attorney General Botelho's testimony
that the FTC is fully in charge of the time table. After hearing
Mr. Boness' testimony, Senator Elton surmised that the attorney
general may be in more control than he originally believed.
MR. BONESS emphasized that at the moment, BP and ARCO are in charge
of the time table. He explained that under the federal process
there is an initial filing, after which the FTC requests more
information. That request from the FTC is referred to as a second
request. Under the law, the companies provide the information
requested which is the information the committee has access to. He
stressed that under the law, the next time table doesn't begin
until the companies have substantially complied with providing
information per the second request. After the second request is
complete, he believed the FTC has 20 days to decide whether to
permit the merger or file a lawsuit. He believed that, as a
practical matter, the FTC typically negotiates a time frame with
the company upon completion of the second request.
REPRESENTATIVE ROKEBERG asked if the company can request a
unilateral lowering of the tariff which he assumed would correspond
with the Alaska Regulatory Commission on the feeder pipeline. How
does that happen?
MR. BONESS, in response to Representative Rokeberg, explained that
when the pipeline began operation in June 1977, the parties knew
there would be disputes over the tariff. At the time, the Alaska
Pipeline Commission(Federal Power Commission) regulated intra-state
tariffs. There was a legal framework for establishing those
tariffs. Litigation and disputes occurred for many years. In 1984
or 1985, the parties entered into the TAPS settlement methodology
which is referred to as TSM. The TSM is a contract litigation
settlement agreement which was adopted and approved by the Federal
Energy Regulatory Commission (FERC) and the Alaska Pipeline
Commission. He explained that the TSM establishes its own
methodology for setting tariffs on TAPS. He recalled that Attorney
General Botelho said there were negotiations to have lower tariffs
which didn't necessarily mean reopening the TSM. Mr. Boness
believed that one effective way to lower tariffs is to reopen the
TSM agreement.
SENATOR PEARCE asked if the FTC has free reign in their
requirements. Are there some guidelines? For instance, could the
FTC require divestiture of all ships?
MR. BONESS said that the FTC does have much latitude. The
requirements imposed by the FTC have to be related to the harms
they see. Therefore, Senator Pearce's reference to divestiture of
ships would be a good example to the extent that the FTC sees a
substantial concentration and a problem in the maritime aspect of
transporting ANS oil. The FTC could require the divestiture of
some or all of the ships.
REPRESENTATIVE KERTTULA emphasized, as pointed out by the attorney
general, that the FTC is going to handle anti-competitive issues.
There are a range of issues of interest to Alaska which may be at
odds with other states.
MR. BONESS agreed, however the discussion has substantially
expanded beyond the anti-trust consideration. He attributed that
expansion in the discussion to this committee and the public
debate. The resulting discussion has been a public debate
regarding the policies and relationships between the state and the
industry in the future.
CHAIRMAN HALFORD announced that the next scheduled witness is John
Williams who will provide the committee with a status report in
executive session. He asked for a motion to proceed to executive
session. Chairman Halford clarified that there will be two levels
of executive session. One executive session will be available to
all members of the legislature and doesn't require the
confidentiality agreement. The second question is regarding
executive session on information that is from the confidential
documents and will require the confidentiality agreement. Chairman
Halford specified that the intent is to go with the minimal level
of closure in each level. Therefore, the executive session without
the confidentiality agreement would be first and under which Mr.
Williams could speak. Chairman Halford specified that Mr. Williams
is head of the Washington contract firm which is working on the
merger for the committee.
REPRESENTATIVE WHITAKER informed the committee that he had concern
that in signing the confidentiality agreement he would somehow be
compromised. He requested that Mr. Boness provide an explanation
of that concern.
REPRESENTATIVE KERTTULA spoke to the confidentiality agreement.
She said that none of the legislators who have signed the
confidentiality agreement have lost any ability to talk, have
meetings, or present information to the public. "In fact, all that
we've done is, for the first time, given the state the ability to
have access to the documents ... that really pertain to the
business workings of the companies that the attorney general and
the FTC have." She noted that upon negotiations for the
confidential documents, it was discovered that Congress doesn't
have access to these confidential documents. These documents
provide a fundamental understanding of the situation. She pointed
out that there is no need to sign a confidentiality agreement for
this first level of information because no confidential documents
will be discussed. Representative Kerttula said if, at the next
level, one signs a confidentiality agreement, then the person can't
discuss the confidential information.
MR. BONESS added that, as a practical matter, most of the documents
are being reviewed by legislative staff. He indicated that
legislators will probably review a small number of documents.
Therefore, the agreement shouldn't be a difficulty for legislators
and is a tremendous help to staff in order to formulate
conclusions.
Number 232
REPRESENTATIVE GREEN moved that the committee stand in recess for
the purpose of executive session. There being no objection, it was
so ordered and the committee went into executive session at 10:30
a.m.
CHAIRMAN HALFORD called the committee back to order in open session
and recessed the meeting to the call of the chair at 1:45 p.m.
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