Legislature(1993 - 1994)

02/26/1993 03:40 PM RES

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
                   SENATE RESOURCES COMMITTEE                                  
                        February 26, 1993                                      
                            3:40 p.m.                                          
  MEMBERS PRESENT                                                              
  Senator Mike Miller, Chairman                                                
  Senator Drue Pearce                                                          
  Senator Al Adams                                                             
  MEMBERS ABSENT                                                               
  Senator Loren Leman, Vice Chairman                                           
  Senator Steve Frank                                                          
  Senator Fred Zharoff                                                         
  Senator Dave Donley                                                          
  COMMITTEE CALENDAR                                                           
  SENATE BILL NO. 104                                                          
  "An Act directing  the commissioner of natural  resources to                 
  accept,  under  certain  circumstances,  the contract  price                 
  agreed to between  a lessee  of federal  land and  a gas  or                 
  electric utility as  the value  of the federal  government's                 
  royalty share from  natural gas  production when royalty  is                 
  payable  to  the  state under  applicable  federal  law; and                 
  providing for an effective date."                                            
  PREVIOUS SENATE COMMITTEE ACTION                                             
  SB 104 - No previous action to consider.                                     
  WITNESS REGISTER                                                             
  Jim Eason, Director                                                          
  Division of Oil and Gas                                                      
  Department of Natural Resources                                              
  P.O. Box 107034                                                              
  Anchorage, Alaska 99510-0734                                                 
  POSITION STATEMENT:  Supported SB 104                                        
  Jon Tillinghast                                                              
  Chugach Electric Association                                                 
  One Sealaska Plaza, Suite 301                                                
  Juneau, Alaska 99801                                                         
  POSITION STATEMENT: Supported SB 104.                                        
  Dave Hutchens, Executive Director                                            
  Rural Electric Co-Op Association                                             
  237 E. Fireweed                                                              
  Anchorage, Alaska 00501                                                      
  POSITION STATEMENT:  Supported SB 104.                                       
  ACTION NARRATIVE                                                             
  TAPE 93-11 , SIDE A                                                          
  Number 001                                                                   
  SENATOR  MILLER called  the Resources  Committee meeting  to                 
  order  at  3:40 p.m.  and announced  SB  104 STATE  SHARE OF                 
  FEDERAL GAS ROYALTIES to be up for consideration.                            
  SENATOR PEARCE, sponsor,  said if this bill were  enacted it                 
  would constrain the department  from abandoning the contract                 
  price  as  a means  for  determining  gas royalty  value  on                 
  federally leased land.   Currently, DNR is  interpreting its                 
  obligation to adopt an average Cook  Inlet area price as the                 
  gas royalty price  on federal  leases.  They  wish to  apply                 
  that standard retroactively.  The legislation is directed at                 
  changing the statute, thus relieving DNR from that perceived                 
  obligation.   It we don't enact  this, the financial impacts                 
  of royalty  reevaluation could impose  a considerable burden                 
  on consumers.  Gas lease owners would have to pay roughly $5                 
  million in retroactive royalties and an estimated $5 million                 
  in additional  interest.   Utility and  gas lease  contracts                 
  provide  for  such costs  to be  passed  directly on  to the                 
  consumer, she said.                                                          
  Number 170                                                                   
  SENATOR  ADAMS  said  he thought  this  legislation  was bad                 
  public  policy.   He  wanted  a legal  opinion  on Chugach's                 
  appeal and to go over some of the contract prices.  He asked                 
  if  there  would be  an  evaluation  of the  impact  of this                 
  legislation since it is retroactive to 1959.  SENATOR PEARCE                 
  said she would be happy to get any legal opinion he wanted.                  
  JIM EASON, Director, Division of Oil and Gas, testifying via                 
  teleconference from Anchorage, said they  couldn't tell what                 
  revenues were lost for  a period other than that  covered by                 
  the  audit  which   prompted  this  legislation.     To  his                 
  knowledge, no other piece of legislation affecting royalties                 
  has had such a retroactive provision in it.                                  
  Number 170                                                                   
  SENATOR  ADAMS  asked  if  we  believe   the  state  is  due                 
  approximately  $10.4  million  for  the  audit  period  from                 
  October 1, 1984  until June 30,  1987?   MR. EASON said  the                 
  principal  amount  would  be half  that,  but  including the                 
  interest that is the approximate amount.                                     
  SENATOR  ADAMS  asked   what  his   position  was  on   this                 
  legislation.  MR.  EASON said the Administration  is neutral                 
  on whether or not the legislature adopts this bill.  He said                 
  his  department  has  an  obligation  under present  law  to                 
  protect our natural resources, but the legislature could act                 
  Number 234                                                                   
  SENATOR ADAMS asked him what were the financial implications                 
  of  the  1959  retroactive date  to  the  state  and federal                 
  government.  MR. EASON said he  couldn't answer that, but he                 
  didn't think it  would be significantly different  than what                 
  is at stake now.                                                             
  SENATOR ADAMS asked  if SB  104 passed, would  the state  be                 
  paying out dollars to a number of parties other than Chugach                 
  Electric?  MR. EASON answered no.  He said it is conceivable                 
  in the future there could be other utilities.                                
  SENATOR  PEARCE  said the  state  would  not be  paying  out                 
  dollars to  anyone.   MR. EASON  said that  was correct,  we                 
  would be  foregoing the  opportunity to  collect that  money                 
  from the federal lessees.                                                    
  SENATOR ADAMS asked  if SB  104 was limited  to leases  from                 
  natural gas that is used for  electric utilities.  MR. EASON                 
  said  he  understands  that  it  would  be  for  natural gas                 
  produced on federal leases and then sold  by the lessee to a                 
  gas or electric utility.  SENATOR ADAMS said he wanted to be                 
  shown where there is  that strict limitation.  He  wanted to                 
  make  sure  the  language  was  tight.   He  asked  for  the                 
  department's position in writing from Mr. Eason.                             
  Number 289                                                                   
  Jon Tillinghast, Chugach Electric Association, accepting the                 
  contract price  as the  royalty value  for sales  to gas  or                 
  electricity is not a new policy.  It was made in 1986 by the                 
  legislature with the strong  support of DNR.  This  does not                 
  expand the  policy, it merely  applies it to  federal leases                 
  for which there is no rational distinction between the two.                  
  The status  of the  appeal is  that the  Minerals Management                 
  Service (MMS) rejected  the state's  position and held  that                 
  rejecting the  contract price  as  a matter  of federal  law                 
  would be inconsistent with  federal law.  DNR appealed  that                 
  determination within MMS  and they have not  decided whether                 
  they would hear the appeal.                                                  
  Prior to the  audit period, MR. TILLINGHAST said,  any claim                 
  for a refund or  rebate would be barred by two  things.  One                 
  is that virtually  all the Cook Inlet  gas controversies and                 
  the  Beluga  controversy  have  already  been  settled;  and                 
  besides that, there is a six  year statute of limitations on                 
  any  claim by  either party  on royalty disputes  by federal                 
  law.    He said  there  wouldn't  be any  controversy  under                 
  federal law for  any production that  occurs after March  1,                 
  Number 341                                                                   
  SENATOR  ADAMS  asked  didn't the  problem  rise  because of                 
  interpretation of who  we are supposed  to be paying  under?                 
  MR. TILLINGHAST said that was right.  Up until March 1, 1988                 
  the federal  law was fuzzy, and  they said if it's  an arm's                 
  length contract we're going to take  the contract price.  On                 
  the state  law side,  you have  the same  controversy -  the                 
  Armerada-Hess controversy.  In 1986,  the legislature took a                 
  very focused look at that controversy  in the context of the                 
  sale of  natural gas  to public  utilities and  decided they                 
  were going to  end that  controversy.  They  created a  rule                 
  saying that they  would accept  the contract price,  because                 
  even if  the state  lost a  little money  by accepting  that                 
  contract price, that loss of  money would be passed on  to a                 
  majority  of Alaskans.  That was an  integral part of a very                 
  active and successful  state partnership in a  provision for                 
  reasonably priced power.   In Southcentral Alaska  that took                 
  the form of accepting the contract price for gas.   In rural                 
  Alaska it took the form of the cost of equalization program.                 
  The only aspect of the policy we have before us today is the                 
  gas sales for Cook Inlet.                                                    
  SENATOR  ADAMS  asked  if  he  didn't believe  that  Chugach                 
  Electric still has  a contract obligation just  because they                 
  entered into  a long term contract at low prices.  It should                 
  not deprive the  state or federal government from  seeking a                 
  fair royalty for that gas.                                                   
  Number 366                                                                   
  MR. TILLINGHAST answered that there were two contracts.  One                 
  was the contract Chugach has  with Beluga Producers where it                 
  agreed to buy gas at prices that DNR thinks is too low.  The                 
  reason the contract prices were so low, he explained, was to                 
  give  Chugach the financial incentive to build a major power                 
  generation facility at Beluga River.  If Chugach hadn't made                 
  that capital investment, there would have been no market for                 
  the  Beluga  gas  and  the state  wouldn't  have  gotten any                 
  royalties whatsoever.  They  believe strongly about honoring                 
  contractual commitments.  The  one they want to see  honored                 
  is  the promise  made to  them back in  the 1960s  that they                 
  would be paying back on the contract price.                                  
  The second  contract  is the  lease  between the  state  and                 
  Chugach.   It's an  ambiguous document.   It  is bad  public                 
  policy to keep the  fight going in  the context of sales  of                 
  gas to utilities.                                                            
  Number 389                                                                   
  DAVE HUTCHENS, Director,  Alaska Rural Electric  Cooperative                 
  Association, said  SB 104  is of  vital concern  to all  the                 
  utilities in  the Railbelt.   It is  important that  today's                 
  consumers are not burdened with a  dispute that goes back to                 
  yesterday's consumers.   For that reason, they  support this                 
  Number 411                                                                   
  SENATOR  MILLER  thanked everyone  for  their  testimony and                 
  adjourned the meeting at 4:10 p.m.                                           

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