Legislature(1997 - 1998)
05/06/1998 03:45 PM RES
* first hearing in first committee of referral
= bill was previously heard/scheduled
= bill was previously heard/scheduled
SENATE RESOURCES COMMITTEE May 6, 1998 3:45 p.m. MEMBERS PRESENT Senator Rick Halford, Chairman Senator Lyda Green, Vice Chairman Senator Loren Leman Senator Bert Sharp Senator Robin Taylor Senator John Torgerson Senator Georgianna Lincoln MEMBERS ABSENT All members present ALSO IN ATTENDANCE Senator Jerry Ward COMMITTEE CALENDAR OVERSIGHT HEARING - FIBER OPTICS RIGHTS-OF-WAY HOUSE BILL NO. 73 "An Act extending the termination dates of the salmon marketing programs of the Alaska Seafood Marketing Institute and the salmon marketing assessment; and providing for an effective date." - SCHEDULED BUT NOT TAKEN UP CS FOR HOUSE BILL NO. 204(RES) "An Act revising the procedures and authority of the Alaska Commercial Fisheries Entry Commission, the Board of Fisheries, and the Department of Fish and Game to establish a moratorium on participants or vessels, or both, participating in certain fisheries; and providing for an effective date." - SCHEDULED BUT NOT TAKEN UP CS FOR HOUSE BILL NO. 284(FIN) "An Act relating to infestations and diseases of timber." - SCHEDULED BUT NOT TAKEN UP PREVIOUS SENATE COMMITTEE ACTION HB 73 - See Labor and Commerce minutes dated 2/24/98 and 3/3/98 and Resources Committee minutes dated 4/29/98. HB 204 - See Resources Committee minutes dated 4/22/98, 4/28/98. HB 284 - No previous action to record. WITNESS REGISTER Commissioner John Shively Department of Natural Resources 400 Willoughby Ave. Juneau, AK 99801-1724 Ron Duncan, President GCI 2550 Denali St., Suite 1000 Anchorage, AK 99501 Lowell Humphrey, General Manager KANAS Telecom, Inc. Anchorage, AK John Burns, Vice President, Alaska Projects World Net Communications, Inc. 1029 West 3rd Ave. Anchorage, AK 99501 Ms. Laurie Herman, Director External Affairs AT&T Alascom 210 E. Bluff Drive Anchorage, AK 99501 ACTION NARRATIVE TAPE 98-39, SIDE A Number 001 CHAIRMAN HALFORD called the Senate Resources Committee meeting to order at 3:45 p.m. CHAIRMAN HALFORD stated the overview on the fiber optics rights-of- way question was scheduled primarily based on a letter he received from Governor Knowles on May 1. He then invited Commissioner Shively to the table to address the committee. COMMISSIONER JOHN SHIVELY, Department of Natural Resources, stated he would present a brief overview of the situation and then respond to questions from the committee. He noted it was actually the third hearing held on the issue. COMMISSIONER SHIVELY said there are a variety of state agencies that can give rights-of-way, and fiber optics, because it is somewhat new technology and because there is a lot of money involved, has raised some interest on behalf of both the state administration about how we go about giving rights-of-way to private companies. Traditionally, the state has sought to encourage infrastructure development, and a lot of law that's on the books or regulations that are on the books lead towards encouraging development. He said that is one of the paths we can go down here, and the other is maximizing revenue. There are least six state agencies that could provide rights-of-way to fiber optics companies. Two of those, the University of Alaska and the Mental Health Lands Trust, generally do not have large pieces of land, and, therefore, aren't big players here. The Alaska Railroad, which has negotiated some very lucrative arrangements with a couple of companies, is another. There are two parts of DNR: their general public lands and an application for a right-of-way through Chugach State Park along the power line. He said ordinarily they probably wouldn't lease in parks, but because there is a utility right-of-way that existed before the parks, they could do that. The final state agency is the Department of Transportation and Public Facilities. DOT/PF is basically prevented by law from charging for rights-of-way. They can charge a one-time fee for the permit, which is essentially a processing fee, but they cannot charge an annual rental rate. Traditionally, the Department of Natural Resources has done one of two things with utility rights-of-way. One, which they are required to do for nonprofits by law, and the other, which they have sometimes done even for profit making utility companies, is to charge a one-time 10 cents a linear foot fee. Recently, the department has been more accustomed to charging an annual rate based on a value of land or the right in land that they are giving away, and that, by regulation, equates right now to about $100 an acre. That equates to about six cents a foot, although that is for about a 20-foot wide right-of-way. If people wanted a wider right- of-way, it would be more. COMMISSIONER SHIVELY related that the Alaska Railroad has negotiated rights-of-way that basically started around 47 and 48 cents, and then they have some ability to share revenues. DNR has never, at least on public lands, thought that they really negotiate; they have the ability to set this fee. The department has another ability, by regulation, which they have never used before, and that is to make a value of use. And here the value of the right and the land to put in a cable, particularly because a big portion of this is across the bottom of Prince William Sound, can equate to around $100 an acre or six cents a linear foot, but they believe that if that was valued on the use to the customer, in this case the fiber optics people, and based on what they've seen at the railroad, they could get that up to 50 cents a foot. CHAIRMAN HALFORD asked what he meant about a recently changed attitude. COMMISSIONER SHIVELY said in the last three years, as the Alaska Railroad negotiated these more lucrative deals, it caused DNR to relook at what they were doing. CHAIRMAN HALFORD asked the difference to the state in fiber optics and putting up 500 paired phone cables. COMMISSIONER SHIVELY responded that there is no difference to the state. Fiber optics, because so much can go across it, is a much more lucrative use of the land, so you are basically trying to determine what that use could be. COMMISSIONER SHIVELY said DNR is not convinced that the 50 cents would necessarily survive an appraisal. If they had set the 50- cent per foot rate for whichever of the three companies that are in front of them, they would have the right to come in and do an appraisal, and so it could be lower. What they ultimately chose to do was do is what they have traditionally done, which was to take the $100 an acre. He related he received a letter from the four Finance Committee co-chairs in February that indicated that was an appropriate amount. COMMISSIONER SHIVELY said after the correspondence that transpired between the Governor and the Legislature and the two hearings that took place, they just wanted to make it clear to the Legislature where they were. In March, it was initially spelled out that it was their intent to proceed using what they traditionally use, which was $100 an acre for public lands. In their letter they agreed, as had been suggested in a Sense of the House motion, to put together a group in the interim to look at setting what is called a consistent state policy, and that they would issue the rights-of-way at their existing rate for a period of five years. CHAIRMAN HALFORD noted in a letter from Speaker Phillips to the Governor, she urged equal treatment for all, and he asked how that compared to a previous communication from the Legislature. COMMISSIONER SHIVELY replied that he didn't believe it was possible unless the Legislature wants to set a state policy for all state lands, and it means amending DOT statutes, DNR statutes, railroad statutes, etc. CHAIRMAN HALFORD said his concern is with getting a letter on May 1 effecting a major resource policy to get changed with an adjournment date 12 days away, and yet he doesn't want to be tied to the communication of individual legislators as that being the policy of the Legislature. Number 220 SENATOR WARD asked if any thought has been given to other options to resolve this issue. COMMISSIONER SHIVELY replied there are a variety of ways to solve this, and they believe the appropriate method is to bring the various state interests together in the interim and make a recommendation to the next Legislature. CHAIRMAN HALFORD asked if they feel that they have to issue leases under the existing policy. COMMISSIONER SHIVELY responded that if the existing policy is the $100 an acre fee, he has the option of doing that or the option of doing a use value and subject themselves to an appraisal. They have chosen to do what they have traditionally done. He added that DOT has no option to do anything else than what they've already done. In discussing the issue of the use of fair market value, COMMISSIONER SHIVELY said they have traditionally used the value of the land to determine the fair market value. The value of the use is another way to get to fair market value. They believe that would get a higher rate, although that can't be guaranteed because they have never seen an appraisal done on that. SENATOR TAYLOR asked if when it came to Powerline Pass and Chugach State Park, were they charging for the use of the land or the land value, because there they charged well above 50 cents a foot and then required installation of a conduit large enough that it could handle future users that might want to go up through that same area. He concluded that DNR land right along side of the park gets charged six cents, but if it is in the park, it is 50 cents plus a conduit that is very expensive to put in. COMMISSIONER SHIVELY explained that although they were required to put in an extra conduit, they will get credit off of the 50 cents for putting that in. That agreement has not been finalized, but that is the concept of it. He added that he does believe that the park land is more valuable. SENATOR TAYLOR asked how they came up with the 50-cent rate. COMMISSIONER SHIVELY answered that it was a negotiated rate, and they looked at what they thought the market was, but they did it because it was park land. It was A different situation, and it was not a fee schedule the way that there is a fee schedule in their regulations for general public use lands. They don't have a fee schedule for utilities across park lands because they basically don't do it. The right-of-way was negotiated between the park people and GCI. SENATOR TAYLOR said his concern is that each of these decisions make huge dollar differences for the applicant, and he suggested that maybe that needs some semblance of stability or review of policy other than just a two or three-day window. COMMISSIONER SHIVELY responded that the issue was discussed for several months, not two or three days. CHAIRMAN HALFORD noted that the Governor's May 1 letter indicated it was stated it was the Administration's intent to go ahead with the six-cent rate for a period of five years, and he asked why a five-year rate was picked. COMMISSIONER SHIVELY replied that DNR has traditionally reappraised their rights-of-way at the end of five years. CHAIRMAN HALFORD concluded that if the Legislature were actually going to do something next year, and there was a committee that was going to work on it in the interim, they might choose to issue leases and have a two-year reopener, for example. COMMISSIONER SHIVELY agreed that was in the realm of possibility. Number 465 RON DUNCAN, President of GCI, said there are three principle things that need to be looked at. The first thing is three key issues with respect to rights-of-way: (1) the importance of fiber optic facilities; (2) the fact that not all rights-of-way are the same; and (3) the fact that policy and tax stability are real important to industry investment. MR. DUNCAN said fiber optics is a tremendously important infrastructure for the state, providing the back bone of the modern communications systems. The availability of fiber optics and the consequent low cost is becoming critically important to the economic development of the state's infrastructure. He noted that in merely two years, the Telecommunications Information Council, in their assessment of state telecom policy, suggested that perhaps the state was going to have to subsidize, by as much as $50 million, the installation of the next fiber optic cable into Alaska because the participants in the marketplace didn't appear to able to make the market economics work and the state had a critical need for the fiber optic infrastructure. So in the space of 24 months, the state has come from a state that had a telecommunications policy concern where perhaps it was going to have subsidize fiber optics to a situation where the state is now saying that maybe it should be heavily taxing these things by going to some sort of a value of use phenomena. CHAIRMAN HALFORD inquired if there were any operational fiber optics right now. MR. DUNCAN replied that the line along the railroad is operational, but he didn't know if it was carrying any paying traffic as yet. MR. DUNCAN said the second point on rights-of-way is that not all rights-of-way are the same, with seven different granting agencies within the state, and different rights-of-way also have different characteristics. Those different characteristics create differing values in those rights-of-way to users. They look at construction costs, security, maintainability, and market size. He noted the installation process on a railroad has relatively high efficiency and relatively low unit cost, and there is less chance of a cable being dug up as can happen with highway rights-of-way. Remote rights-of-way are somewhat more secure although access to them can be a very significant problem if an outage occurs. Maintainability is really the issue of what is the response time to repair. Terrestrial rights-of-way have a tremendous advantage over under sea rights-of-way where the maintenance cost is much higher. The market size in Alaska is potentially much smaller than in other parts of the U.S. MR. DUNCAN said in Alaska there is the situation of where exclusivity creates a potential value to the owner of a right-of- way. If there is only one right-of-way available and there are potentially multiple users for that same right-of-way, that right- of-way has a lot more value than a situation where there are an unlimited number of rights-of-way and a very limited number of users. He said you have to be very careful in how you are valuing the fiber optic rights-of-way and what you are saying the market value of that right-of-way is. This issue has been largely raised by World Net who is attempting to persuade people that the 50 cents a foot, if they really paid 50 cents a foot along the railroad, sets a price that should be used defacto for all other rights-of- way. Doing that artificially raises the price of other rights-of- way, which are essentially in infinite supply, and by raising the price it chokes off consumption. He suggested in addressing the World Net issue, you have to address first of all what they are paying, and second of all what is parity. World Net negotiated one-on-one with the railroad without any public policy input from anyone, without any knowledge from competitors that this was going on, and they paid whatever they thought it was worth. Now they're saying the terms and conditions negotiated in private by one company to meet their specific interests now becomes the defacto standard to be imposed on all other companies. The third point on rights-of-way is that policy and tax stability are important. In February 1997, KANAS, the company building the fiber optic cable along the pipeline corridor, was in the same box GCI is in today. They had applied for their permits eight or ten months before then, and the state failed to issue those permits in a timely manner. When it finally came down to the point that they had to have the permits or lose the project, the state came to them with a offer to pay them more than they are entitled to under the regulations or to give the state some free capacity in its fiber optic cable. TAPE 98-39, SIDE B Number 585 MR. DUNCAN said now this issue comes up again when GCI happens to be in the same box that KANAS was in where they have a $130 million project, which they've spent more than half on, there is no way to back out at this point, but they don't have their permits yet. These permits have been in the process for eight months, and now they are in a political trap of where now that they are underway with the project, they ought to raise the price of the permits. He said that's not policy stability. It is a tax stability issue too, because the value of use is essentially an excise tax or a royalty and it is an opportunity to stick industry for a little more money, and maybe even more still now that they are in a box where they have already spent $60 million starting this project. He said that is not the kind of stability that is going to induce the economic investment that the state said two years ago it was willing to subsidize to the tune of $50 million. MR. DUNCAN said with respect to the existing cable, they are in box. GCI has spent almost $80 million on the cable to Seattle and, while it is a certain this may result in endless litigation, that cable is going to be constructed at this point because there is no way to back away from that project. He questioned if that is reasonable and sends good signals to the industry. He said when GCI clearly was encouraged to plan this project under existing structures, they expected to pay $97,000 a year for their right-of- way, and it is now being suggested that right-of-way should cost perhaps as much as $800,000 a year. Had GCI known that in advance, they would have designed a very different route. If they'd known that the state was thinking of charging 50 cents a foot, they would have dropped Valdez and Juneau from the construction program because $30 million extra in cost to run the cable into those two locations, combined with an $800,000 increase in operating costs, would have simply wiped those markets off the economic feasibility scale. MR. DUNCAN said this situation makes a big difference for what happens next. Within five to six years, GCI will be building a second cable, not because the first will be out of capacity, but because there won't be an adequate capacity to back up the first cable. Even though they won't make any more money by building a second cable, GCI will need to construct and the state will need to have a second cable so that if one of the two is cut the communications can run around in the other direction. This second route would run from Anchorage to Seattle and include all of Southeast Alaska in a looped system. Under the existing regulations, that system would cost GCI $121,000 in rights-of-way, however, under the proposed 50 cents a foot rate, that system would cost more than $1,000,000 dollars a year in rights-of-way, which would clearly sink the project. MR. DUNCAN said if the state wants single thread into Juneau, and it's going to get Juneau only because it didn't change the rates in time, then it ought to go ahead and bill with this market value of use price. If the state wants a solid, redundant telecommunications infrastructure, it should go with the policy that the Governor is proposing, which is a policy of keeping the rates low to induce investment. In his closing comments, MR. DUNCAN said what is going on is phone wars, and phone wars are always all about competition. World Net wants less competition, and they want to stop GCI from building this year. World Net is saying they are going to build a cable to Seattle, but he doesn't believe they have the customers or the financing for that cable yet. He said what is going on is an effort to stop the issuance of the permits or condition them in a way that GCI doesn't make this year's construction season thus buying World Net what it really wants, which is another year to decide to build to Seattle. Number 463 CHAIRMAN HALFORD asked if it would do any harm if the Governor were to go forward and issue these permits with a relatively short-term reopener. MR. DUNCAN replied that it doesn't do the state any harm in the sense that it is going to get the current cable because GCI is in a corner that it can't get out of. However, it isn't consistent with the message that the Legislature has on other fronts attempted to send to industry that it's going to invite investment by offering stable tax and investment policies. He said it is unfair to GCI who planned the project based on rate and is now being asked to take an open-ended exposure for as much as a ten times increase in that rate. He did say that GCI would go along with a reopener if that reopener was nondiscriminatory across all utilities. SENATOR TAYLOR expressed his displeasure with Mr. Duncan blaming the Legislature for trapping GCI in a box. He said there wasn't one person in the room who did that, and he should be placing the blame on the Governor's office on the third floor. He said he personally wants to see something that is flat, equal and open for every single person out there that wants to build a cable. MR. DUNCAN apologized for using the word "you" when he should have stated "the state," however, he did add that there are people in the Legislature who have made efforts to hold them up on their project. He agreed that there have been disagreements within the bureaucracy as to the appropriate amount to charge, but he pointed out that at this point, this is a case where the Governor is trying to do the right thing by keeping the rates low to induce investments. Number 380 LOWELL HUMPHREY, General Manager, KANAS Telecom, Inc., explained that three years ago, KANAS, which is made up of three Native Corporations and MFS Network Technologies, made decisions on the financing of their projects, and pursued the Alyeska long-term project. In order to win that job, they had to bid a 15-year hard dollar price, which they did at that time based on the state's historical approach to rights-of-way cost and all the associated risks with the project. There were delays by DOT/PF from the beginning of the project, and it was suggested by them to allow the use of some of KANAS's fibers so that the state could put in their own network in direct competition to them. It was finally agreed that DOT/PF would stick with what their regulations said, and KANAS got their permits for DOT lands. Close to half of their right-of-way is DOT, and they have 840 miles of fiber in the ground today, and they will be starting traffic on that the first of September. The total DNR right-of-way mileage is approximately 260 miles. KANAS believed that the state would follow its historical approach on appraisal so they proceeded with the project accepting the fact that the appraisal would happen at the conclusion of the project. They are now at the point of beginning the appraisal process since their route is now in the ground and ready to go forward. He said it would be a pretty devastating financial hit to KANAS to go from the historical, just on the DNR lands where they expected historically that it would be under $20,000 for the DNR rights-of- way, and now at the 50 cents, they are looking at closer to $800,000 for rights-of-way. MR. HUMPHREY related that KANAS has been looking at some other projects to expand and serve the other communities where they have their existing system in place, but if they have to spend for real expensive rights-of-way to get to these other smaller communities, they are going to be very reluctant to spend it and they probably would not be able to bank the job. MR. HUMPHREY said at $100 an acre, it would cost KANAS approximately $60,000 a year, which is an acceptable increase to them, but an $800,000 increase is not. He said KANAS has said in writing that everyone should be charged consistently. Concluding, MR. HUMPHREY said the current statement by the Administration that they would use the $100 an acre for five years is something KANAS believes they can live with. Number 265 CHAIRMAN HALFORD asked if he would object the five years being two or three years. MR. HUMPHREY responded that if it includes all state agencies, all the utilities, all the people who desire rights-of way, and everybody is even-handed, then he would be all for it. Number 254 SENATOR TAYLOR said Mr. Humphrey had made reference to going through an appraisal process, and he asked what he assumed the words "appraisal process" meant. MR. HUMPHREY replied it wasn't like they had never done an appraisal, it was traditionally the way an appraisal was done and what the value of the land was. KANAS looked at the land and anticipated that some of the land might come in at more than $100 an acre, but they thought a lot of it would come in under $100 an acre. Their expectation was that their rights-of-way cost, just for the DNR lands, would be around $20,000. SENATOR TAYLOR suggested that KANAS may well be better off to have this Legislature grant them an interim permit for two years, to get a committee to look at what this is really worth, do some kind of an appraisal and come up some kind of number. He said he thinks they would be better off in that fashion and couldn't be held hostage by the Administration in coming up with whatever they want to come up with. Number 166 JOHN BURNS, Vice President for Alaska Projects, World Net Communications, Inc., testifying via teleconference from Anchorage, said through their investment in Alaska Fiber Star, World Net participated in the construction of a high capacity fiber optic cable from Anchorage to Fairbanks last summer. An affiliated company is currently constructing a high capacity fiber optic project between Alaska and Oregon. Altogether, they have committed over $150 million for Alaska telecommunications projects. MR. BURNS said he wanted to address some misconceptions. First of all, the Administration has said that six cents a linear foot is a historic price, but it has been testified that there has never been a fiber optic project along a substantial corridor that has ever been priced at six cents a linear foot. MFS KANAS project documents dating back to 1996 show that the notion of an appraisal was first raised in the entry permit process and was committed to for the balance of the project. In terms of historical perspective, there other projects such as Alascom's permit with the railroad in 1994 which was established by appraisal. Alascom chose to get out of that permit the following year. Subsequently, Alaska Fiber Star's permit, WCI's permit, GCI's permit with the railroad, all have utilized the railroad's appraisal process. MR. BURNS said a second misconception is the Administration saying that an administrative act is needed to pursue anything other than the six cents a foot proposal. He said this is not true, because as was discussed earlier by the Commissioner, he does have the means to use an appraisal with purely a decision between the Commissioner and the Governor. The third misconception is that Alaska Fiber Star is using an exclusive right-of-way. The right-of-way language applied to the Alaska Fiber Star project is specific. Within 25 feet other utilities can be placed within 25 feet. The only exception is fiber optics. The Alaska Railroad has a 200 foot right-of-way, therefore, theoretically, as many as eight corridors could be available. The fourth misconception is that the pricing of six cents a foot needs to be made a decision now because pricing is holding up the development of projects is also untrue. He said projects have been finished and are underway and all these decisions were made months and months ago. MR. BURNS said when World Net Communications came to Alaska and decided to invest in the Alaska Fiber Star project, it believed that Alaska provided opportunities to provide competitive telecommunication services under a set of rules that applied to all competitors, and, in fact, that is what the Telecommunications Act of 1996 requires. Fairness is the key to competition, but it appears that his spring, beginning in March, fairness will not be offered in Alaska. The fact is that the AFS permit from the railroad was established by an independent third-party appraisal and will pay the railroad approximately $1.8 million a year in 35 years as a minimum, and there is the opportunity for the railroad to earn much more. On the other hand, the MFS KANAS permit issued by the Department of Natural Resources is only waiting for its appraisal. They agreed to have that value set by appraisal. The question of fairness is why in March, 1998 the Administration intervened, setting aside valuation by appraisal and unilaterally stated that all permits, including MFS KANAS permit, would be at six cents a foot. MR. BURNS said he wanted to correct another misconception stated earlier by Mr. Duncan. He stated WCI would never recommend a single figure and has not advocated a policy of 50 cents a foot. WCI advocates a policy of appraisal, which, he said, is the only true fair way to get a value for the state that is also fair to the company that requests the right-of-way. Concluding his testimony, MR. BURNS said before we finish with the question of fairness, there is the issue of what is fair between companies such as AFS and the state. When AFS wanted to utilize public access to make their commercial project viable, they agreed to pay a market-based fee because it was fair to the railroad and the state, because any corridor between two commercially significant locations is a valuable asset, and if happens to be owned by the state, then the state should receive the appropriate compensation. CHAIRMAN HALFORD asked if the Alaska Railroad rates on Fiber Star, on GCI, and on the old Alascom permit were all set by appraisal. MR. BURNS responded that for AFS, GCI and World Net Communications the rates were all set by appraisal. The old Alascom one was before the railroad had instituted its appraisal process. CHAIRMAN HALFORD asked what that Alascom rate was. MR. BURNS answered that there is a permit rate plus provision to the railroad of a spare fiber and copper wire. CHAIRMAN HALFORD asked if that Alascom permit had expired. LAURIE HERMAN, representing the AT&T Alascom, related that the Alaska Railroad permit he was speaking to was between Anchorage and Fairbanks. Alascom originally applied for a permit on the railroad right-of-way between Anchorage and Fairbanks, and shortly after the acquisition of Alascom by AT&T, they exercised their option not to pursue that lease. There is an existing lease between Anchorage and Seward where the North Pacific cable spur comes from Seward to Anchorage. That is in existence today and is the lease that was negotiated prior to there being an appraisal policy at the Alaska Railroad. CHAIRMAN HALFORD asked if the appraisal is based on the value of land or an appraisal based on value of use. MR. BURNS replied that it is an appraisal based upon the value of land that is simpled into a corridor. The notion is that value to someone desiring the corridor is based upon the two points or multiple points they chose to connect. CHAIRMAN HALFORD stated the Senate was about to go back into session, and that discussion on fiber optic rights-of-way would continue the following day. He adjourned the meeting at 5:15 p.m.