Legislature(1995 - 1996)
03/06/1996 03:40 PM Senate RES
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* first hearing in first committee of referral
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= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
SENATE RESOURCES COMMITTEE
March 06, 1996
3:40 P.M.
MEMBERS PRESENT
Senator Loren Leman, Chairman
Senator Drue Pearce, Vice Chairman
Senator Steve Frank
Senator Rick Halford
Senator Robin Taylor
Senator Georgianna Lincoln
Senator Lyman Hoffman
MEMBERS ABSENT
All Members Present
COMMITTEE CALENDAR
SENATE BILL NO. 112
"An Act establishing a discovery royalty credit for the lessees of
state land drilling exploratory wells and making the first
discovery of oil or gas in commercial quantities."
SENATE BILL NO. 199
"An Act relating to environmental audits and health and safety
audits to determine compliance with certain laws, permits, and
regulations; and amending Alaska Rules of Appellate Procedure 202,
402, 602, 603, 610, and 611."
SENATE BILL NO. 284
"An Act relating to the four dam pool transfer fund and the power
development fund."
PREVIOUS SENATE COMMITTEE ACTION
SB 112 - See Resources minutes dated 3/08/95, 3/10/95, 3/17/95,
and 3/27/95.
SB 199 - See Resources minutes dated 1/31/96.
SB 284 - No previous action to consider.
WITNESS REGISTER
Bill Stewart, President
Stewart Petroleum Company
3111 C Street
Anchorage, AK 99501
POSITION STATEMENT: Supported SB 112 with changes.
Ken Boyd, Director
Division of Oil and Gas
Department of Natural Resources
3601 C Street
Anchorage, AK 99503-5948
POSITION STATEMENT: Commented on SB 112.
Kathryn Thoma
P.O. Box 3005
Kenai, AK 99611
POSITION STATEMENT: Supported SB 112.
Mike Pauley, Staff
% Senator Loren Leman
State Capitol Bldg.
Juneau, AK 99801-1182
POSITION STATEMENT: Staff to sponsor of SB 199.
Jeff Carpenter, Industrial Hygienist
Alaska Occupational Safety and Health Program
3600 C Street
Anchorage, AK 99503
POSITION STATEMENT: Opposed SB 199.
Paul Grossi, Director
Division of Workers Compensation
Department of Labor
P.O. Box 25512
Juneau, AK 99802-5512
POSITION STATEMENT: Commented on SB 199.
Ken Donajkowski, Audit Consultant
ARCO Alaska, Inc.
Representing AOGA
700 G St.
Anchorage, AK 99503
POSITION STATEMENT: Supported SB 199.
Pam La Bolle
Alaska State Chamber of Commerce
217 2nd St.
Juneau, AK 99801
POSITION STATEMENT: Supported CSSB 199.
David Hutchens
Alaska Rural Electric Cooperative Association
703 West Tudor Road
Anchorage, AK 99503
POSITION STATEMENT: Supported SB 199.
Janice Adair, Director
Division of Environmental Health
Department of Environmental Conservation
555 Cordova St.
Anchorage, AK 99501
POSITION STATEMENT: Opposed SB 199.
Stephen White, Assistant Attorney General
Natural Resources Division
Department of Law
P.O. Box 110300
Juneau, AK 99811-0300
POSITION STATEMENT: Commented on SB 199.
Mark Wheeler
Alaska Environmental Lobby
419 6th Ave.
Juneau, AK 99801
POSITION STATEMENT: Commented on SB 199.
Nancy Weller
Division of Medical Assistance
Department of Health and Social Services
P.O. Box 110660
Juneau, AK 99811-0660
POSITION STATEMENT: Opposed on SB 199.
David Rogers
Council of Alaska Producers
P.O. Box 22653
Juneau, AK 99802
POSITION STATEMENT: Commented on SB 199.
Randy Simmons, Development Finance Manager
Alaska Industrial Development Export Authority(AIDDEA/AEA)
2360 Lord Baranof
Anchorage, AK 99517
POSITION STATEMENT: Supported SB 284.
Dennis Lewis
P.O. Box 329
Petersburg, AK 99833
POSITION STATEMENT: Supported SB 284.
Dick Olson, President
Thomas Bay Power Authority
P.O. Box 1318
Wrangell, AK 99929
POSITION STATEMENT: Supported SB 284.
ACTION NARRATIVE
TAPE 96-24, SIDE A
Number 001
SB 112 DISCOVERY ROYALTY CREDIT
CHAIRMAN LEMAN called the Senate Resources Committee meeting to
order at 3:40 p.m. and announced SB 112 to be up for consideration.
ANNETTE KREITZER, staff to the Senate Resources Committee,
explained the proposed committee substitute. She said she worked
with the Division of Oil and Gas and with industry to come up with
another phrase for the terms "in commercial quantities and in a
geologic structure" regarding their current relevance and that is
reflected in the committee substitute.
The current meaning of discovery royalty connotes drilling
activity, even production and the original law was instituted to
encourage new development and that's reflected with the inclusion
of discovery royalty in the exploration licensing program.
There is a change from 10 years to primary or initial term of lease
to retain the discovery aspect of the royalty reduction - that it's
not a long term provision, but is meant to reward discoveries of
new pools.
SENATOR TAYLOR moved to adopt the committee substitute to SB 112
for purposes of discussion. There were no objections and it was so
ordered.
Number 100
BILL STEWART, President, Stewart Petroleum Co., said he has
approximately 26 years of oil and gas industry experience in
Alaska. Their company is a small Alaska based independent company
in Alaska. Their primary interest within Alaska is Cook Inlet
Basin and their current production averages almost 5,000 barrels
per day. Total production since start-up in 1993 has exceeded 2
million barrels. Their project is small by industry standards in
Alaska, although it would be sizeable almost anywhere else.
Investment to date exceeds $50 million. Taxes and royalties paid
thusfar to the State of Alaska total approximately $3.2 million.
They employ 15 - 60 Alaskans depending on activity and they do
business at all times possible with Alaskan vendors and service
companies who employ Alaskans. However, the operation is on the
marginal side due to its remoteness and high operating costs per
barrel and chronically low oil prices in Cook Inlet.
MR. STEWART said that about 60 wells have been drilled in Alaska by
independents including the first well in Alaska (in 1898). He said
that SB 112, if enacted, would reestablish a discovery royalty
program and he thought it would result in implementation of more
aggressive development schedules by the operators than otherwise
would have taken place.
Encouragement is needed from government with natural obstacles such
as weather conditions and remoteness; the man made obstacles
include a regulatory system which is improving, but is still filled
with road blocks to development. The man made obstacles are the
tougher ones resulting in high costs. SB 112 with certain
modifications would provide part of the needed encouragement for
renewed industry activity in Cook Inlet Basin, at least from the
independents.
Much of the bill deals with leasing matters not related to
discovery royalty. The language that does relate to discovery
royalty, in his opinion, falls short in a couple of respects.
First, reduced royalty for the primary term only is not much of a
benefit. Recent leases in Cook Inlet have been issued for primary
terms of seven years rather than the usual 10 and finding oil takes
time. Geological studies and field work, often seasonal,
integration of geological and geophysical data for prospect
delineation, selection of bottom hole objective, well planning,
permitting, drilling rig arrangements, acquisition of supplies, and
actual drilling are among the activities involved - not to mention
huge amounts of money and luck in finding oil.
He didn't have a precise study at hand, but he thought that most of
the discoveries in Alaska were made in the last few years of the
primary term of the oil and gas lease involved or more often during
the term extended by unitization. While SB 112 is a good concept,
the time limitation in large part removes the benefit, he said.
Second, unless the act is retroactive, the applicability provision
will exclude all currently issued leases. Those leases which are
most ready for development will not receive the benefit of reduced
royalty. Operators can only look at future leases and lease sales
which may or may not occur. At the risk of obvious self-service,
it's appropriate to have an effective date that picks up west
McArthur River and Sunfish, the two wells that got the second wave
of exploration going - around January 1, 1991.
The McArthur River development would definitely continue at a more
rapid pace with quicker recovery of capital and expansion of
activities there. Other activities in Cook Inlet Basin could
commence earlier, like at Anchor Point.
He proposed reinstatement of the original 10 year program which
would apply to discoveries made after January 1, 1991 effective
upon date of discovery. Previous royalty payments paid subsequent
to such discovery date which exceed the five percent royalty will
constitute a credit against future royalty payments. Suggested
language is attached to his testimony which he is handing out. The
suggested language applies only to Cook Inlet Basin as a means of
revitalizing Alaska's oldest petroleum producing province.
Number 260
SENATOR LINCOLN asked him to comment on the phrase "The payment of
royalty under this paragraph is authorized only to the holder of
the lease who first files." MR. STEWART responded that would be
the operator who discovered and that mechanism is already in place,
for example, they filed on their discovery well verification of a
well capable of producing in commercial quantities (a finding
issued from DNR).
SENATOR LEMAN said it was his intent to do all he could to help
encourage independents like him to explore and be successful. MR.
STEWART thanked him and said he was in touch with quite a few
independents who are waiting to see what is going to happen here.
SENATOR TAYLOR asked what the dollar downside would be to the State
of Alaska with the reduction. He asked if it was 7 1/2 percent.
MR. STEWART answered yes and it would be hard to estimate without
knowing the extent of the find and oil prices at the time. He said
it would stimulate activity and the State would be well ahead in
the long term.
SENATOR FRANK asked how many leases Prudhoe Bay has. MR. STEWART
answered that he didn't know that, but there are 1,700 wells
involved. SENATOR FRANK said there is no chance that we would give
away a royalty on a huge field, because it would require many
leases only the first of which would have the reduction. MR.
STEWART said that was correct.
SENATOR TAYLOR noted that the language was written so that it would
encompass the oil or gas within a pool and the pool is defined
somewhat broadly. MR. STEWART responded that logically a pool
would extend beyond the lease. He thought that a well capable of
producing in commercial quantities should establish discovery. The
"pool" takes years to define.
SENATOR TAYLOR said they might need a redefinition of "pool" as it
impacts the royalty question. MR. STEWART thought the language
used in the early '60s was adequate. SENATOR LEMAN said it was his
understanding that there were some challenges to the definition of
discovery used in the '60s and that's part of the reason the
royalty reduction was withdrawn. The other reason was that Prudhoe
Bay was just discovered and the legislature thought they didn't
need it.
Number 370
KEN BOYD, Director, Division of Oil and Gas, said he thought the
committee substitute was an improvement over the original bill, but
he thought there were still several problems. The first one is
"first discovery" is not properly defined and this has resulted in
quite a number of law suits. There is no guidance in determining
the amount and type of data you might need, the size of the pool,
or any standards of productability.
As a technical point, the bill seems to conflict with AS 30.05.180
(f) (4), page 3, line 7, which seems to beg the question of a
discovery royalty on leases that carry royalty.
The term of the lease is not clear to either mean the whole term of
the lease or the primary term of the lease.
The major problem he has is with the large and unintentional
economic impact this bill may have. You get about $275,000 in
reduction per well per year, so for a 10-year term that would be
$2,700,000. Leases can have more than one well. For 10 wells
there would be $27 million roughly in forgiven royalty over that
period of time. The problem is that this could happen without ever
adding an incremental barrel of oil because you can drill in
Kuparek and have a perfectly good Kuparek producer, but then make
a "discovery" in the shallow part of the well. Here there is no
standard; it doesn't have to be produced or anything else. So if
you discover it on that lease, then that entire lease and all the
production that comes from it is subject to a five percent royalty.
In the example he's using, that comes out to $27 million. He
thought a better way to do it, if you're looking for new
discoveries, is to have the royalty reduction apply to the newly
discovered horizon. In other words, you have incremental
production that was discovered being given a five percent royalty,
but not that oil that is on the lease and which is perhaps very
well known.
Number 440
SENATOR LEMAN noted that Mr. Stewart's suggestions only applied to
Cook Inlet for discoveries made after January 1, 1991. MR. BOYD
responded that it depends on what benefits you are actually
achieving by it. There are royalty reductions in HB 207
ADJUSTMENTS TO OIL AND GAS ROYALTIES which gives the opportunity
for royalty reductions, even prospectively, for newly discovered,
delineated fields. There is also a Cook Inlet type provision that
provides for three percent royalty for extending the life of a
field. He hadn't thought of Cook Inlet in particular. He thought
you could still run some of the numbers, although they would
probably be smaller. If it comes from a lease, all you have to do
is make a small discovery; it doesn't have to be producible, just
something different, and then all the production from that lease
gets the five percent royalty. He didn't think that was the
intention of the bill.
SENATOR LEMAN said that was not his intention and asked for his
help with language so that that doesn't happen. MR. BOYD said he
would be glad to help.
SENATOR TAYLOR said he was particularly concerned with the
definition of geologic structure or pool and some definition so
that a mere strike of a small amount in a new area might not open
up the entire field for the discovery benefit. MR. BOYD replied
that with some hesitation he would be pleased to try and help, but
he related a true story when years ago the then Attorney General
Wilson Condon and his assistant Jeff Lowsenfeld asked themselves
the same question. They went on a tour of the U.S. interviewing
people and wrote a seven volume, 2,000 page tome addressing those
points. He hoped those volumes could help them with the
definitions.
Number 490
SENATOR PEARCE said she didn't think they dealt with first
discovery last year, but asked if they didn't sufficiently define
pool in those discussions concerning SB 207. MR. BOYD replied that
although they got a definition, he is not sure it works here. He
thought it worked better in the original bill, because it begs the
question if a pool is defined by the OGC is a separate entity, how
big is that entity. He used the example of Kuparek where a new
discovery might be found because it might be a separate little
piece of Kuparek that's in a separate pool in an adjacent lease, by
this definition.
SENATOR FRANK asked what the difference between a pool and a field
was. MR. BOYD answered a field may contain several pools, but a
pool is a separate entity unto itself.
KATHRYN THOMAS, Kenai Peninsula businesswoman, said her small
construction and trucking business is located there. The majority
of their revenue is earned from the oil and gas industry in Kenai.
Because of their age, many of the producing wells in their area are
not very profitable. This has resulted in Cook Inlet wells being
shut in. The loss of steady good paying jobs and the accompanying
buying power is felt throughout her community as evidenced by the
empty store fronts and slack economy. They have not been able to
stimulate a commitment for additional exploration investment. SB
112 provides this opportunity.
MS. THOMAS said a discovery royalty in the Cook Inlet Basin would
be one of the most exciting prospects they have had to offer
resource developers in many years. Exploration work provides high
paying jobs and relies heavily on the support services that her
community's small businesses can provide. She said this bill has
been discussed with North Peninsula Chamber members and Kenai
Chamber members, with Mayor Williams of Kenai and Mayor Gilman of
the Kenai Peninsula Borough. The key components of the bill's
merits show a value to the stimulation of the Kenai Peninsula
economy that everyone agrees on.
SENATOR LEMAN said they would work on this draft and have it before
the committee soon.
SB 199 ENVIRONMENTAL & HEALTH/SAFETY AUDITS
SENATOR LEMAN announced SB 199 to be up next for consideration.
SENATOR TAYLOR moved to adopt the committee substitute to SB 199
for purposes of discussion. There were no objections and it was so
ordered.
MIKE PAULEY, Staff to Senator Leman, said the committee substitute
incorporates some of the changes suggested by administration
witnesses. A number of technical changes were made that tightened
the privilege and immunity provisions.
TAPE 96-24, SIDE B
JEFF CARPENTER, Anchorage Industrial Hygienist with Alaska
Occupational Safety and Health Program, said they believe this bill
will adversely affect the enforcement activities of the Alaska
Occupational Safety and Health Program by restricting their access
to documents relevant to an employers compliance with their
regulations. The committee substitute defines non-privileged
documents as documents required by a regulatory agency to be
maintained while the AOSHP only requires certain regulations
information found in audits not specifically required by
regulations to establish employer knowledge of an unsafe condition
and be the basis for a willful citation. If this information were
to be considered part of an audit report, it could be withheld from
an inspector. Additionally, employers would be immune from the
penalties if they voluntarily disclose an audit report. Alaska
statutes establish penalties for violations of our standards and
makes no provisions for immunities from penalties, but they can be
reduced by as much as 97.5 percent as provided for in their
compliance manual.
PAUL GROSSI, Division of Workers Compensation, said they support
any legislation that makes the work place safer. They have some
concerns with the present legislation. They think it could
negatively impact the Division fiscally and negatively impact
employees, cause delay and burden of cases, and negatively impact
employers by adding additional litigation expenses. Their concern
has to do with the restrictive privilege and the broad definition
of audits themselves. They are concerned that a lot of information
that may be contained in audits may be germane to a workers
compensation case. It may be difficult because of the restricted
privilege to obtain that information; it is difficult to determine
the impact completely.
SENATOR LEMAN commented that he met with Commissioner Cashen (DOL)
early in the session and he and Mr. Perkins agreed conceptually
with this approach of self audits. They are trying to encourage
businesses and people to come into compliance with environmental
and health and safety laws and regulations. He asked why they had
not come back with suggestions for making the bill work.
MR. GROSSI replied that he had submitted his suggestions and
perhaps they hadn't received them, yet. He asked if they intended
to make information restrictive to the workers compensation
process. He said the Department did not want to punish anyone who
is making the work place safer.
SENATOR LEMAN asked him how it is different from application of
some existing privilege like the attorney client privilege, the
doctor patient privilege, or work product privilege that they have
to deal with also. MR. GROSSI replied that information, as far as
the actual events, is open for discovery right now. SENATOR LEMAN
replied that the privilege does not extend to all information; the
underlying facts are not privileged.
Number 495
KEN DONAJKOWSKI, AOGA, supported the intent of SB 199. The
majority of their members currently conduct self audits as a means
of ensuring compliance and that is why they see value in this
legislation. There is more awareness now of health, safety, and
environmental issues in the work place and in communities.
Interpretation of the regulations, in an effort to achieve
compliance, has become correspondingly more difficult. Self
auditing serves to identify areas of inadvertent non-compliance,
allowing for corrective action. This legislation also furthers the
climate of cooperation between industry and state agencies and
appropriately places the emphasis on voluntary compliance.
This bill encourages companies who do not currently conduct self
audits to do so and encourages those who do to continue. The
ultimate goal of improving worker health and safety and minimizing
environmental impacts.
Number 468
PAM LA BOLLE, President, Alaska State Chamber of Commerce,
supported CSSB 199. It provides businesses with an opportunity to
conduct self audits in a effort to assure they are in compliance
with environmental health and safety laws. This creates an
incentive for businesses who find they have inadvertently been out
of compliance to voluntarily correct their actions and strive to
operate in the acceptable and prescribed manner.
The issue of disclosure and privileged information and the
presumption of immunity are important when voluntarily disclosing
evidence of a selfincriminating nature.
Number 444
DAVID HUTCHENS, Executive Director, Alaska Rural Electric
Cooperative Association, supported SB 199. They think it is very
important that businesses be encouraged to find out what their
problems are in complying with the regulatory environment and take
corrective action. As it is today, if results of self audits can
be discovered for regulatory purposes for penalty impositions, they
are afraid there are entirely too many businesses that don't want
to know what kind of problems they may have and if they don't know,
obviously corrective action is not being taken.
SENATOR LEMAN asked if he had any specific concerns that he could
suggest changes for. MR. HUTCHENS replied that the language in the
committee substitute addressed his concerns.
Number 420
JANICE ADAIR, Department of Environmental Conservation, testified
that they do agree with the concept behind this bill. Conducting
self audits is an important way to insure compliance with
environmental laws. They appreciate the changes made to the
committee substitute, but they still have some concerns. The
definition of environmental health and safety law has not been
clarified. The more traditional environmental programs within DEC
such as air and water quality and contaminated sites they would
expect to fall within the scope of SB 199. Less clear for their
agency are the impacts on the other programs within DEC that are
primarily public health related, such as seafood processing, other
kinds of food commodity processing, sanitation, public facilities,
and drinking water.
How the audits are done and who may conduct them and the scope of
the audit remains problematic. Environmental audits are still a
relatively new management tool undertaken only by the most
sophisticated companies. This is the reason behind the shop sweep
program they discussed with the committee in another hearing.
Even though they recognize there are no generally accepted
standards for audit, the department does not want to adopt
regulations that dictate how audits ought to be done. They believe
a more cooperative method is better to develop guidelines with a
particular industries or sectors. This becomes even more critical
if there is a privilege or an immunity associated with the audit.
It has to be a creditable exercise.
The proposed cs allows the audit to be done by an employee even if
that employee has no ability to carry out the audit
recommendations. They think the audit needs to be done by someone
who knows what's going on; knows how the facility operates, how it
should operate, what the rules are, and someone who can or works
for someone who can commit the company to whatever corrective
action may be necessary.
The definition of audit report hasn't changed. A particular
concern is the inclusion of the corrected action plan as a part of
that report. In order to receive the immunity a facility has to
voluntarily disclose any violations discovered as a part of the
audit. To be considered voluntary, the disclosure has to be made
promptly, the violation must be corrected, and the facility must
cooperate with the agency in connection with an investigation of
the issues identified in the disclosure. They interpret this to
mean working with the agency on a corrective action plan. Under
the privileged section, they can't ask for the audit and the
corrective action plan is a part of the audit. It may disclosed to
them, but it remains confidential. The report of the violation is
not confidential and they are concerned this will undercut the
public's confidence that the facility and the agency are dealing
with the corrections adequately.
Another important consideration is how the federal courts have
defined the critical self analysis privilege. Ms. Sansone
testified about the Reichhold Chemicals vs. Textron decision, but
one of the things they didn't talk about very much in the court's
ruling was the privilege applied only for retroactive analyses. It
did not apply for prospective analyses of the company's actions.
The court was very clear that the evaluations of potential
environmental risks of a proposed course of action made in advance
of the decision to adopt that course of action are not protected by
a privilege.
By the terms of the proposed legislation, as in the original, the
privilege is not limited to critical self analysis of past actions.
A facility operator could undertake an audit, find that a certain
course of action might result in environmental damage, go ahead and
take that course of action, yet benefit from the privilege.
They believe that protecting criminal actions through a privilege
or through an immunity is bad public policy. The bill seems to
recognize that criminal actions should not be protected in that it
says among other stipulations the immunity doesn't apply if the
person intentionally or knowingly committed or was responsible for
the action that lead to the violation. Therefore, it seems to
recognize that those elements generally looked for in a criminal
case (a certain state of mind) would exclude the person from the
benefits of the immunity. But that's contradicted in other
sections of the bill. In the first section that establishes the
privilege, it states the privilege applies in criminal proceedings.
Therefore, the audit would not be discoverable even if it could
demonstrate criminal intent. The section that establishes the
immunity states that it is also available for criminal penalties.
It goes on to apparently exclude those elements looked for to
decide criminal action.
They also believe that establishing a privilege for environmental
audits is unnecessary. All testimony has been such that an
immunity would encourage people to disclose and they have concurred
in the past that immunity is not problematic for them, but they do
have problems with the privilege. They currently, as policy, offer
people immunity from civil and administrative actions in certain
circumstances. They think a privilege that creates a secret would
only serve to increase public skepticism of both the industries
operating in Alaska and how the agency deals with them.
The question of whether or not the critical self analysis privilege
should apply is best decided by the courts which can take the
specifics of each case into account. A state established privilege
would do nothing to protect industries from potential action on the
part of federal agencies such as EPA. In fact, it's probable that
privilege would lead to increased federal enforcement.
EPA has already testified that this legislation could negatively
impact the State's ability to retain its delegation of federal
programs such as the Clean Air Program, drinking water, or solid
waste. In order for the State to receive program delegation, we
have to have the ability to enforce the provisions of the program.
They understand EPA's concern is with the mandatory immunity
provisions for all criminal, civil, and administrative actions.
Loosing delegation would result not only in the loss of funding for
the variety of programs delegated from EPA, but it would also
result in increased federal enforcement and dual requirements, both
in state and federal rules that regulate the public.
The legislation continues the idea that a disclosure is not
voluntary if it is required solely by a specific provision of an
enforcement order or decree, but it does not mention leases,
contracts, permits, statutes, or regulations.
There are different standards for harm determining if a closure is
voluntary as opposed to whether or not the immunity applies. In
some cases you must find substantial harm and injury. In other
cases you have to find substantial injury and harm.
The provision on the circumvention by regulation being prohibited
they believe is unnecessary. The Administrative Procedures Act
does state that a regulation adopted is not valid or affective
unless consistent with statute.
Number 283
STEVE WHITE, Assistant Attorney General, noted that Ms. Marie
Sansone, Assistant Attorney General, had testified earlier
regarding their concerns.
MR. WHITE said that all the changes in the committee substitute
were positive ones. Many of them addressed the comments made by
Ms. Sansone. The Department of Law still has some concerns not
addressed by the committee substitute. Those are set out in Ms.
Sansone's letter which he highlighted. He said one of her
remaining concerns with the bill is how the privilege would work in
a federal court action. She describes that on page 3 of her memo.
On page 4 and 5 she discusses the wide breadth of the proposed
privileges. As they are aware, the privilege would govern laws
administered by many agencies, not just DEC. On page 5 and 6 she
talks about the conduct of the audits. It's uncertain who in the
company would have the authority to initiate an audit and who would
have the authority, then, to initiate and oversee corrective
actions.
They have a concern dealing with the definition of an audit report.
An audit report covers a lot of information and maybe some of the
information was not intended, but in any event, it would cover the
raw data, federal surveys and maps that might be discovered, as
well as the conclusions and observations from the audit. It would
cover post-audit activities on not just the audit themselves, but
remedial activities and comments and reports and observations on
those.
Most privileges are an escape valve, so to speak, because if
privilege protects information from disclosure, quite often there
are provisions that allow information to be disclosed in case of
exceptional necessity or extraordinary hardship. This relief valve
is not present for the privilege.
Page 7 through 9 discussed the breadth of the privilege which can
be asserted against the State or by the State or between any third
parties. It can be applied in any kind of lawsuit no matter what
the issue is. It obviously can be applied at all stages of
criminal proceeding. The bill creates an immunity that is very
broad.
Number 220
MARK WHEELER, Alaska Environmental Lobby, said they support efforts
by industry to comply with environmental regulations. In order to
make SB 199 effective they believe it needs some changes.
Environmental audits should not be privileged because it invites
secrecy instead of the openness need to build public trust in
industry's ability to self police. Furthermore a privilege would
invite defendants to claim as audit material evidence DEC needs to
establish a violation or determine who is responsible.
Non-compliance which results in economic gain should not be
tolerated. DEC should seek to recover such economic gain. While
filing for immunity a self audit must have a number of additional
requirements. It must secure before notice of a citizen suit the
filing of a complaint by a third party and before the reporting of
a violation to DEC by a whistle blower employee. The responsible
party must correct any violation discovered under the self audit
within 60 days, certify in writing the corrections have been made,
and take appropriate measures to remedy any environmental or human
harm due to the violation.
A violation discovered by a self audit must not have presented an
imminent and substantial endangerment to public health or the
environment. The regulated entity must agree in writing to take
steps to prevent the recurrence of violation discovered under the
self audit and any violation discovered in the self audit must not
have occurred previously within the past three years at the same
facility.
SENATOR LEMAN noted that the bill does cover some of his concerns
and the committee would take his recommendations and make sure the
bill had been tightened adequately.
Number 212
NANCY WELLER, Division of Medical Assistance, said the Commissioner
sent them a letter asking for a possible exclusion from this bill.
The Division of Medical Assistance performs two functions which
guarantee the safety of all Alaskans when they are receiving health
care services in facilities in the State. That's licensing of
health care facilities under State law and certifying health care
facilities which allows them to build the medicare or medicaid
program for services they receive. The certification is performed
under a contract with the federal health care financing
administration under a very broad and vague federal law. They
don't have regulations that govern that function; they operate with
policy and procedure manuals that are issued by the medicaid
program.
They do encourage self audits of the health care facilities and
want them to correct their deficiencies before they are discovered
by the survey teams. They work with them very carefully so they
know what they are looking for when they certify the facilities.
They think it's very important for the safety of all Alaskans and
especially for the expenditure of public funds that they don't give
any of the facilities the ability to hide anything from the survey
teams. They have had some problems in the past with records being
hidden.
SENATOR LEMAN asked what the requirements for reporting are now for
these facilities. He said that would not be privileged
information. MS. WELLER answered that all information in the
facilities is available to the surveyors. Not only do they look at
the physical plant, they go through all of their records. She said
they have no State regulations that cover this function because it
is done under contract with the Health Care Financing
Administration and it's not done under federal regulations, but
under procedure manuals.
Number 156
DAVID ROGERS, Council of Alaska Producers, supported the intent of
SB 199. Unfortunately, he hadn't had time to review the committee
substitute, but would get back to the committee with any
suggestions.
Number 143
GERON BRUCE, ADF&G, said they support the idea of encouraging
voluntary compliance and disclosure. Some ADF&G programs would be
adversely affected under SB 199. Their program for protecting
anadromous fish streams which has been a law in the State since
statehood began has worked very effectively. It has been their
philosophy to work up front with operators to make sure their plans
and projects are able to go forward on schedule while protecting
anadromous fish habitat. They have a very high rate of issuance
for permits that are requested and they have a very low violation
rate. They are concerned an unintended consequence of this
legislation would be to encourage some people to withhold
information they might otherwise disclose because they might
perceive it would be in their interests to hold it back in case
they did have an audit done. They are concerned it would dampen
the spirit of cooperation they actually have in implementing Title
16 right now.
The other concern they have deals with State hatcheries that are
contracted out to private non-profit regional aquaculture
associations. Those hatcheries, although they are operated by
private entities, are still State property. If there should ever
come a time when one of those facilities wanted to return one of
those facilities to the State, if there was some activity they
conducted that was illegal or environmentally damaging, if they
returned one of those audits before they return the property, they
believe they could shift the cost of any cleanup to the State.
This concerns the Department.
SENATOR LEMAN asked him if he thought that would be covered under
the fraudulent protection provision in the bill. MR. BRUCE said he
thought it might be difficult to prove the person's intention for
performing the audit. SENATOR LEMAN noted that the privilege
applies only if they immediately do the fix.
SENATOR HALFORD said he didn't see how that worked because
basically they are protected from their own information, but not
from their prior acts.
SENATOR LEMAN said it was his intention to keep working on the bill
and asked interested parties to submit language that would fix
their concerns.
SB 284 FOUR DAM POOL & POWER DEVELOPMENT FUND
SENATOR LEMAN announced SB 284 to be up for consideration.
TAPE 96-25, SIDE A
Number 001
RANDY SIMMONS, Development Finance Manager for Alaska Industrial
Development Export Authority, said that the Four Dam Pool is made
up of four hydroelectric projects and the State currently owns
these facilities and they are operated through a long term power
sales agreement by the utilities. Under the agreement the
State(AEA) has obligations for uninsured facility failures and for
substandard facility performance. Under that same agreement the
utilities have the obligations to operate the hydro-projects and to
also pay an annual debt service that is roughly $8 - $11 million
per year. That debt service is allocated by AS42.45.050 three
different ways.
Forty percent of it goes to PCE and the rural electrification
funds; forty percent goes to the Southeast intertie grant program;
and twenty percent to DCRA's power project fund. The bill
addresses specific State responsibilities for repairs to two of the
projects. Those projects are the Tyee Project and the Terror Lake
Project. Right now their best estimate for the Tyee repairs to the
transmission line is $17 million. It is imperative that the Tyee
transmission line be repaired as soon as possible. There have been
three occasions when that line has been out of operation. This
bill also addresses approximately $3.5 million worth of repairs
that are needed to the Terror Lake tunnel.
They are now in engineering to come up with the final numbers and
that should be completed within the next several months. Last
session they understood they had these obligations and worked out
an agreement with the utilities where they would use their self
help right under the power sales agreement to withhold some of that
$8 - $11 million to start the repairs. That agreement fell through
in the last days of the session and the utilities sued the State
for full self help. They were able to reach agreement with the
utilities to withhold $4 million out of the amount of money that
comes into the debt service to start the engineering on the
repairs. Their proposal is that AEA will issue up to $25 million
worth of bonds to make the repairs. The bond term could be no more
than 25 years and the debt service payments must begin by July 1,
1998. They don't know what the length of the bonds would be or
whether they would defer the full two years.
To float those bonds, AEA has two requirements that need to be met.
The first requirement is that the utilities had to waive their self
help rights for the amount of debt service that has to be paid on
these bonds. Their self help rights come from the power sales
agreement that basically allows them to withhold their debt service
to the State if the State is not fulfilling its obligations.
The first agreement is in place.
SENATOR HALFORD asked what was the legal case to withhold the
money. MR. SIMMONS answered that it was provision 5(d) of the
power sales agreement.
SENATOR HALFORD asked if the State contracted away its authority to
collect the money which is required by statute? MR. SIMMONS
replied that the State contracted away, if they didn't uphold their
obligations that they were signing to under the agreement, that the
utilities could withhold that debt service to fulfill the State's
obligations. SENATOR HALFORD commented that wasn't a part of the
statute and he wanted to know what was the legal trail of that
obligation.
MR. SIMMONS said that the State had fulfilled its first
requirement. They have reached agreement with the utilities to
limit their self help rights. Under that agreement they have
agreed with the utilities that they would not bond for any longer
than 25 years and that the amount will not be more than $25
million. They have also agreed that before the State makes a
decision as to the final length or term of the bonds, they would
consult with them. The bill before them today takes care of the
second requirement by making a revenue stream available to pay for
the debt service on the bonds. The bill also clarifies that AEA
may use the money in the power development fund for repairing the
projects.
The benefits they see for floating the bonds is that the State will
meet its obligations on the power sales agreement; and if the bonds
are issued this year and payments aren't made until July 1, 1998,
that's basically a two year deferral which will allow the State to
come up with a long term solution to financing the projects without
affecting PCE or the Southeast intertie or the power development
fund in that two year period.
If the State has to start making payments, MR. SIMMONS said, on
July 1, 1998 depending on what the length and size of the bond is,
the payments could run anywhere from $3 - $5 million. If the
payments are $3 million, the amount of money that will be withheld
from PCE and the Southeast intertie will be roughly $1.2 million
per year each and about $600,000 from the power project fund.
The reason the Administration is introducing this bill is they
figure there are three alternatives to financing these repairs: one
is a general fund appropriation which they don't think is a great
idea; two is floating bonds; and three is letting the utilities
come in for their full self help rights and try to withhold the
full $11 million payment this year and next year which would
basically withhold close to $9 million in those two years from the
Southeast intertie and PCE.
Number 160
DENNIS LEWIS, Power and Light Superintendent in Petersburg,
Chairman of the Four Dam Pool Project Management Committee, and
Commissioner on the Thomas Bay Power Authority (Tyee Project), said
he was here on behalf of all the purchasing utilities of the Four
Dam Pool. On January 25, 1996 they signed an agreement with the
State supporting their efforts in this bonding which would take
care of the immediate repairs for the Tyee and the Terror Lake
Project.
Number 199
DICK OLSON, President, Thomas Bay Power Authority, said they have
an obligation to make sure this facility continues to operate. He
said it is evident that there will be a catastrophic failure in the
not too distant future. They support the concept AIDA presented to
the Committee.
SENATOR TAYLOR asked when the Thomas Bay Power Authority start
requesting the State to do repairs to the Tyee line. MR. OLSON
answered about 10 years ago.
SENATOR TAYLOR asked how much money the Four Dam Pool had
collectively paid back to the State since they signed the power
sales agreement. MR. OLSON replied $100 million. SENATOR TAYLOR
noted that they now needed $30 million and he asked what had
happened to the $100 million that should have gone for repairs.
MR. OLSON said he couldn't answer that.
SENATOR TAYLOR said it got squandered away on the Alaska Energy
Authority that have 50 some employees at very high rates of pay, on
PCE costs to the bush; it was used for general fund obligations and
a whole lot of things, but not for their obligation which the State
signed up with you to take on, and they had to exercise self help
last year to even get their attention. MR. OLSON replied that was
correct.
SENATOR TAYLOR asked why 25 years for a bond reimbursement was
considered short term. MR. SIMMONS replied there is nothing in the
agreement saying the bond term will be 25 years; it says up to 25
years. There is also a provision that will consult with the
utilities prior to issuing any bonds. The 25 year period was to
give maximum flexibility to the State because they don't know what
the final amount of dollars is going to be. At that point in time
they were in divestiture discussions with the utilities.
SENATOR TAYLOR asked if they had any veto power over the length of
term they came up with. MR. SIMMONS replied that the money they
are using isn't their money. It comes to the State first and then
gets appropriated back out. If the utilities were not to accept
these bonds long term, the cost would be a little bit higher. The
only affect to the utilities is that their self help rights are
limited for a little bit longer for the additional cost of
financing.
SENATOR TAYLOR noted if they exercise self help, they could cash
the entire repair projects out in a little over three years. He
asked what the cost to the subscribers was going to be if the
payment time were stretched out. MR. SIMMONS replied that they
don't pay a penny more, because this is a payment they have already
made and it comes into the State treasury. The only thing that
happens is that the utilities limit their self help right. They
can't use the portion of their self help right that's going to pay
for these bonds to use after this other repair. If the legislature
fails to make the statutory change and they cannot come up with
another way to make the repairs, at that point in time they will
have a self help right that they can exercise.
SENATOR LEMAN said his counsel would be to bond for considerably
fewer than 25 years.
SENATOR TAYLOR said from the State's general fund perspective or
from the cost to the subscribers in the utilities, since they would
not be receiving back 40/40/20, it will be diminished by the cost
of that indebtedness. MR. SIMMONS agreed and said the real effect
would be the longer the bond, the higher the cost will be and it's
that differential that will affect it. He said now they have no
intent to bond for 25 years.
SENATOR TAYLOR noted that even with 6% bonds that would double the
amount of the indebtedness every twelve years. That's close to $50
million that will have to be paid for $25 million worth of repairs
that are necessary today. That's to say nothing of the repair bill
that might accrue during the next 12 years. Why should we want to
do that when we can cash these people out by utilizing that income
stream in a little over two years.
SENATOR TAYLOR wanted to know what happened in divestiture. MR.
SIMMONS replied that they came to the critical point where they
were going to talk about price. They had jointly funded a risk
assessment by HARSA who gave them their information a month ago.
The State proposed a price the utilities thought was very
excessive. The utilities threw out some numbers the State thought
was way too low. They mutually agreed to step away from the table
and to hopefully reconvene later, but no time was set.
SENATOR TAYLOR asked if the agreement was premised on the fact that
there would be good faith negotiations toward divestiture? MR.
SIMMONS replied yes and he thought there were good faith
negotiations, but there wasn't agreement on the value of the
projects.
Number 334
SENATOR HOFFMAN followed up with a question about paying it off
early from the revenue stream asking if there would basically be
fewer dollars in allocation under the formula. MR. SIMMONS replied
that was correct. In the short term they are hurt quicker, in the
long term they are hurt more.
SENATOR TAYLOR asked when they could expect their next meeting on
divestiture. MR. SIMMONS replied that they didn't have plans for
the near future.
Number 359
MR. LEWIS noted that he had given a letter from all the purchasers
to their offices and hoped they would review that to understand
this issue better.
SENATOR LEMAN thanked everyone for their participation and
adjourned the meeting at 5:35 p.m.
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