Legislature(2005 - 2006)SENATE FINANCE 532

02/08/2006 03:30 PM RESOURCES

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03:54:27 PM Start
03:56:07 PM Overview - Alaska Minerals Industry: Alaska Minerals Commission Report & Recommendations; Division of Mining, Land and Water Presentation
04:26:09 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
Joint w/(H) Resources
Alaska Minerals Industry:
Alaska Minerals Commission Report &
Division of Mining, Land and Water
                    ALASKA STATE LEGISLATURE                                                                                  
                         JOINT MEETING                                                                                        
              SENATE RESOURCES STANDING COMMITTEE                                                                             
               HOUSE RESOURCES STANDING COMMITTEE                                                                             
                        February 8, 2006                                                                                        
                           3:54 p.m.                                                                                            
MEMBERS PRESENT                                                                                                               
SENATE RESOURCES                                                                                                                
 Senator Thomas Wagoner, Chair                                                                                                  
 Senator Ralph Seekins, Vice Chair                                                                                              
 Senator Fred Dyson                                                                                                             
 Senator Kim Elton                                                                                                              
 Senator Albert Kookesh                                                                                                         
HOUSE RESOURCES                                                                                                                 
 Representative Jay Ramras, Co-Chair                                                                                            
 Representative Jim Elkins                                                                                                      
 Representative Kurt Olson                                                                                                      
MEMBERS ABSENT                                                                                                                
SENATE RESOURCES                                                                                                                
 Senator Ben Stevens                                                                                                            
 Senator Bert Stedman                                                                                                           
HOUSE RESOURCES                                                                                                                 
 Representative Ralph Samuels, Co-Chair                                                                                         
 Representative Carl Gatto                                                                                                      
 Representative Gabrielle LeDoux                                                                                                
 Representative Paul Seaton                                                                                                     
 Representative Harry Crawford                                                                                                  
 Representative Mary Kapsner                                                                                                    
COMMITTEE CALENDAR                                                                                                            
OVERVIEW - ALASKA MINERALS INDUSTRY:  ALASKA MINERALS COMMISSION                                                                
REPORT & RECOMMENDATIONS; DIVISION OF MINING, LAND AND WATER                                                                    
PREVIOUS COMMITTEE ACTION                                                                                                     
No previous action to record                                                                                                    
WITNESS REGISTER                                                                                                              
IRENE ANDERSON, Chair                                                                                                           
Alaska Minerals Commission;                                                                                                     
Bering Straits Native Corporation                                                                                               
Nome, Alaska                                                                                                                    
POSITION  STATEMENT:   Introduced the  members of  the Commission                                                               
and began the discussion.                                                                                                       
KARL HANNEMAN                                                                                                                   
Alaska Mineral Commission;                                                                                                      
Manager, Public and Environmental Affairs, Teck Pogo, Inc.                                                                      
Fairbanks, Alaska                                                                                                               
POSITION STATEMENT:   Discussed what the  Commission considers to                                                               
be the most important recommendations.                                                                                          
CHARLOTTE MACCAY                                                                                                                
Alaska Minerals Commission;                                                                                                     
Bristol Environmental & Engineering Services Corporation                                                                        
Anchorage, Alaska                                                                                                               
POSITION STATEMENT:  Answered questions.                                                                                        
ACTION NARRATIVE                                                                                                              
CHAIR THOMAS WAGONER  called the joint meeting of  the Senate and                                                             
House  Resources  Standing Committees  to  order  at 3:54:27  PM.                                                             
Representatives  Ramras  and  Senator Wagoner  and  Kookesh  were                                                               
present  at  the  call  to order.'    Representative  Elkins  and                                                               
Senators Elton and Dyson arrived as the meeting was in progress.                                                                
^OVERVIEW   -  ALASKA   MINERALS  INDUSTRY:     ALASKA   MINERALS                                                               
COMMISSION  REPORT &  RECOMMENDATIONS; DIVISION  OF MINING,  LAND                                                               
AND WATER PRESENTATION                                                                                                          
CHAIR WAGONER announced that the  only order of business would be                                                               
an overview of the Alaska minerals industry.                                                                                    
IRENE  ANDERSON,   Chair,  Alaska  Minerals   Commission;  Bering                                                               
Straits  Native Corporation,  reminded  the  committees that  the                                                               
commission was formed in 1986 by  the legislature to which it has                                                               
provided its findings and recommendations.   In fact, a number of                                                               
the  findings and  recommendations  have been  acted  upon.   The                                                               
commissioners introduced themselves from the audience.                                                                          
3:56:07 PM                                                                                                                    
KARL   HANNEMAN,   Alaska  Mineral   Commission   ("Commission");                                                               
Manager,  Public  and  Environmental Affairs,  Teck  Pogo,  Inc.,                                                               
began by informing  the committees that there  are four operating                                                               
mines:  Usibelli  Coal Mine, Inc., Red Dog Mine,  Fort Knox Mine,                                                               
and Greens  Creek Mine.  The  Pogo Mine is nearing  completion of                                                               
construction.  He further informed  the committees that there are                                                               
a number  of advance  projects, such as  Rock Creek,  Nixon Fork,                                                               
Donlin Creek,  and Pebble  Copper.  Mr.  Hanneman then  turned to                                                               
the  Commission's recommendations  with  regard  to the  taxation                                                               
regime as it  applies to mining.  There is  a mining license tax,                                                               
which was  first enacted in  1913 and  required 7 percent  of net                                                               
profits [tax]  for major operations  payable from  all operations                                                               
in the state  regardless of land status.  The  industry also pays                                                               
mining  rents  and royalties,  which  was  a  major part  of  the                                                               
Statehood  Act.     In  1981,   the  attorney   general's  office                                                               
questioned the state  policy and asked the  legislature to review                                                               
the  income  to   the  state  from  mineral   development.    The                                                               
aforementioned lead the  legislature to pass a  modified law that                                                               
went through  several years of  litigation.  Ultimately,  in 1987                                                               
the Alaska Supreme Court ruled  that rents or royalties needed to                                                               
be  charged  to mining  operations.    In 1989,  the  legislature                                                               
passed legislation  to satisfy the aforementioned  and thus there                                                               
is now a  process by which rent  is charged per acre  per year as                                                               
well as 3  percent on the net profits.   Mr. Hanneman highlighted                                                               
that all of  the aforementioned occurred prior to  any major hard                                                               
rock  mining in  the state.   Therefore,  [the Commission]  views                                                               
this as  a good model for  how tax policy should  be imposed such                                                               
that it's imposed  prior to major industry expansion  so that the                                                               
industry understands the terms of its investment.                                                                               
MR. HANNEMAN  explained that the  taxes in Alaska  aren't applied                                                               
to the  exploration or development expenditure  components of the                                                               
industry but  rather taxation  [is applied] to  the value  of the                                                               
mineral  production.     In  the  mid  1980s   there  was  stable                                                               
production  from  the  Usibelli   Coal  Mine  and  a  significant                                                               
increase in 1989 when the Red  Dog and Greens Creek Mines came on                                                               
line.   The  [production]  remained relatively  stable until  the                                                               
entrance of  Fort Knox in 1996-1997.   In 2004-2005 there  was an                                                               
increase in the value of  mineral production primarily because of                                                               
world  markets improving  product prices.   In  fact, during  the                                                               
early years  of production from  Red Dog and Greens  Creek Mines,                                                               
which  are  primarily  zinc  mines, the  zinc  price  during  the                                                               
feasibility and  construction was  at $.60-$.70 range.   However,                                                               
over  the  years  the  price decreased  and  thus  pressured  the                                                               
projects, the profitability  of the projects, and  the ability to                                                               
pay the  net profits  tax.  Recently,  prices have  rebounded and                                                               
the  projects  are  significantly  more  profitable.    The  same                                                               
occurred for Fort Knox Mine.   The aforementioned is reflected in                                                               
the  payments  that   ultimately  come  to  the   state  and  the                                                               
municipalities  from  the  mining  industry.    He  provided  the                                                               
committee  with a  chart illustrating  the payments  to municipal                                                               
governments through payments in lieu  of taxes (PILT) or property                                                               
taxes, the rents and royalties  component, and the mining license                                                               
and income tax.  The mining  license and income tax, he noted, is                                                               
highly variable based  on the profitability of  the operations in                                                               
2004 and 2005.                                                                                                                  
4:03:20 PM                                                                                                                    
MR.  HANNEMAN  then  turned  the  committees'  attention  to  the                                                               
Commission's  six primary  recommendations.   With regard  to the                                                               
National Pollutant  Discharge Elimination System  (NPDES), Alaska                                                               
is  one  of  the  few  states that  doesn't  have  primacy.    He                                                               
explained   that  primacy   is   when   Alaska's  Department   of                                                               
Environmental  Conservation has  the primary  role for  reviewing                                                               
and issuing NPDES permits, which  are the primary water discharge                                                               
permits  of  mining  operations.   Currently,  the  Environmental                                                               
Protection  Agency (EPA)  Region  10 issues  and processes  those                                                               
permits in Alaska.   Mr. Hanneman opined that  with primacy there                                                               
could  be  much  improved  efficiency  coordination  amongst  the                                                               
technical members of the group.   The legislature recognized that                                                               
last  year and  requested  that the  Department of  Environmental                                                               
Conservation (DEC) file an application  for primacy by July 2006.                                                               
Therefore,  the  Commission  recommends  following  up  with  the                                                               
aforementioned  and   supporting  DEC  as  it   pursues  primacy.                                                               
Furthermore,  the  Commission  recommends  that  the  legislature                                                               
ensure appropriate funding for the aforementioned.                                                                              
MR.  HANNEMAN moved  on to  the Commission's  recommendation with                                                               
regard to permit efficiency.   He highlighted that the Department                                                               
of Natural Resources  (DNR) has a large permitting  team that has                                                               
greatly improved state coordination.   Furthermore, DEC has added                                                               
staff and reduced its application  backlog.  Still, there must be                                                               
improvement  with  [state]  coordination with  federal  agencies.                                                               
Additional  processes to  the current  permitting process  aren't                                                               
necessary,   he   stated.      He  mentioned   that   there   are                                                               
organizational  challenges  that are  a  result  of some  of  the                                                               
reorganization in DNR.  As a  result, there is some strain on the                                                               
availability  of  human  resources in  the  permitting  agencies.                                                               
Therefore, the  Commission recommends  the continued use  of high                                                               
quality third-party staff.  The  outstanding vacancies need to be                                                               
filled  and  senior-level  vacancies   need  to  be  filled  with                                                               
experienced  and  qualified  people.     Furthermore,  the  state                                                               
recruiting  mechanisms  need  to  be  able  to  react  to  market                                                               
conditions in order  to attract qualified people.   Moreover, the                                                               
state needs  to assume its  federal responsibilities in  order to                                                               
improve  accountability.   Mr. Hanneman  emphasized the  need for                                                               
the state to  request from the agencies a  periodic status report                                                               
on permitting.                                                                                                                  
4:08:08 PM                                                                                                                    
MR. HANNEMAN turned  to mixing zones and  explained that existing                                                               
regulations  prohibit mixing  zones  in  anadromous and  resident                                                               
fish spawning areas.   The current mixing  zone regulations don't                                                               
provide flexibility in looking ahead  such that mining operations                                                               
are permitted to  minimize impacts.  The DEC  had proposed mixing                                                               
zone language  that allowed  there to  be a  mitigation approach,                                                               
evaluation  of  the potential  impacts,  and  allowed science  to                                                               
guide  some  flexibility  in the  regulations.    The  Commission                                                               
supported  the promulgation  of  regulations  that included  such                                                               
flexibility and mitigation.                                                                                                     
REPRESENTATIVE  ELKINS asked  if  [the  Commission] is  satisfied                                                               
with  the   governor's  proposed  regulations  or   the  proposed                                                               
MR. HANNEMAN clarified  that the Commission does  not support the                                                               
legislation,  which  he  characterized   as  a  significant  step                                                               
backward  in  terms of  flexibility  and  recognizing science  to                                                               
evaluate impacts.  The governor's  proposed regulations also fall                                                               
short in  terms of  incorporating science  and flexibility   into                                                               
the permitting process.                                                                                                         
4:10:54 PM                                                                                                                    
MR. HANNEMAN  addressed tax considerations.   He then highlighted                                                               
a  map, which  illustrates that  mineral development  can provide                                                               
private sector employment in all areas  of the state.  However, a                                                               
substantial  portion   of  this   development  lays   within  the                                                               
unincorporated areas of  the state.  The  Commission is concerned                                                               
that the  formation of boroughs  creates uncertainty  with regard                                                               
to  the   tax  regime  in   these  areas  of   potential  mineral                                                               
development.   Mr. Hanneman  opined that  the mining  industry is                                                               
willing to pay  its share of broad-based taxes,  such as property                                                               
taxes.    The  Commission  believes, he  related,  that  industry                                                               
specific taxes such as a severance  tax is the wrong approach and                                                               
can  serve as  a  significant disincentive  to  development.   In                                                               
fact,  it  could   be  used  as  a  tool  to   halt  or  preclude                                                               
development.  The aforementioned  would make investment decisions                                                               
very difficult.   Therefore, the  Commission recommends  that the                                                               
state establish a  tax policy that provides  stability and equity                                                               
in  areas  [of  potential  mineral  development].    Perhaps  the                                                               
aforementioned may include the payment  in lieu of taxes concept.                                                               
"We need  to improve the  tax certainty  in those areas  to allow                                                               
those projects to proceed," he said.                                                                                            
4:13:09 PM                                                                                                                    
MR. HANNEMAN  turned attention  to the  issue of  geophysical and                                                               
geological mapping.  Although the  state has done much to improve                                                               
the mapping,  the state remains  one of the poorest  mapped areas                                                               
in the world, he related.   Furthermore, the state doesn't have a                                                               
good database to show mining  companies that may be interested in                                                               
investing  to Alaska.   Since  1993 expenditures  on the  mapping                                                               
program has  averaged $400,000  annually, but  only 6  percent of                                                               
the state land entitlement has  been accomplished.  He noted that                                                               
the  governor  has  a   fiscal  note  for  geological/geophysical                                                               
mapping  this  year  that includes  the  $350,000  increment  for                                                               
surficial  mapping along  the potential  pipeline corridor.   The                                                               
Commission  recommends   increasing  the  rate  of   funding  for                                                               
geological/geophysical mapping as well  as providing an increment                                                               
of $150,000 over  the governor's request to  complete the bedrock                                                               
4:15:05 PM                                                                                                                    
MR. HANNEMAN opined  that power supplies is an area  in which the                                                               
state could  provide significant leadership, which  could lead to                                                               
support of the  mineral industry over time.   Major mines require                                                               
substantial  power supplies  and  remote mines  have to  generate                                                               
their own  power.  Working on  the grid could help  projects such                                                               
as  Pebble and  Donlin Creek  Mines, but  the cost  of base  load                                                               
generation is of significant concern  for all power users.  Coal-                                                               
fired generation  offers the ability to  create stable, long-term                                                               
power.   The  Commission,  he related,  recommends improving  the                                                               
base  load coal  generation on  the  grid system.   Mr.  Hanneman                                                               
concluded by  stating that  he has  discussed the  most important                                                               
issues that  the Commission wanted  to highlight, but  the report                                                               
includes  many  more recommendations.    In  response to  Senator                                                               
Elton, Mr. Hanneman specified that  AMEREF is the Alaska Minerals                                                               
and  Energy  Resource  Education  Fund, which  is  a  partnership                                                               
between  the state  and  the industry  to  offer Alaska  specific                                                               
resource-based education in Alaska's schools.                                                                                   
4:18:19 PM                                                                                                                    
SENATOR  ELTON recalled  the recommendation  that the  department                                                               
provide  a   status  report  of   permits,  which  seems   to  be                                                               
bureaucratic  make-work.   He opined  that he  would rather  have                                                               
department  staff  working  on  a  permit  than  a  report  about                                                               
MR.  HANNEMAN said  that Senator  Elton's concern  is valid.   He                                                               
noted that the issue was discussed at length by the Commission.                                                                 
CHARLOTTE   MACCAY,    Alaska   Minerals    Commission;   Bristol                                                               
Environmental & Engineering  Services Corporation, explained that                                                               
the  report  is  intended  to be  a  succinct  summary  regarding                                                               
whether permits are being awarded,  the number of applicants, and                                                               
the stage  at which the  permits are.   Ms. MacCay  mentioned the                                                               
potential of retaliation  from the permit writer  if an applicant                                                               
brings  forth complaints.    Therefore, there  is  the desire  to                                                               
review   the  progress   of  permits   and  review   and  discuss                                                               
controversial actions  of permit writers.   The aforementioned is                                                               
desired so that permit writers  aren't establishing policy, which                                                               
is for the commissioners to establish.                                                                                          
SENATOR DYSON  recalled Mr. Hanneman's earlier  comment regarding                                                               
the need for there to be  no industry specific taxes.  He related                                                               
his understanding that most of  the companies investing in mining                                                               
in Alaska are  Canadian firms.  He asked if  there is an industry                                                               
specific tax in Canada.                                                                                                         
4:21:30 PM                                                                                                                    
MR. HANNEMAN said that he does not know.                                                                                        
SENATOR DYSON related  that he is delighted about  all the mining                                                               
activities in  the state.   However,  he inquired  as to  how the                                                               
state can  recoup the funds expended  on infrastructure necessary                                                               
to  mining, such  as mapping.   He  opined that  it should  be at                                                               
least revenue neutral for the state.                                                                                            
MR. HANNEMAN  clarified that there  are industry  specific taxes,                                                               
including  the 7  percent  net  profits tax,  the  3 percent  net                                                               
profits tax  on state  land, and  the corporate  income tax.   He                                                               
explained that the Commission's  recommendation is in the context                                                               
of local  municipal governments being  able to apply  an industry                                                               
specific tax  that unduly  burdens the  project or  is used  as a                                                               
lever  to preclude  the  project.   In  further explanation,  Mr.                                                               
Hanneman  specified that  the recommendation  is specific  to the                                                               
unorganized areas  of Alaska  that don't  have a  local municipal                                                               
tax regime, which creates uncertainty.                                                                                          
4:23:37 PM                                                                                                                    
CHAIR WAGONER asked if the  Commission has reviewed SB 203, which                                                               
creates one-stop shopping for permitting.                                                                                       
MR.  HANNEMAN answered  that it  is  under review  by the  Alaska                                                               
Miners  Association.    He  pointed   out  that  the  large  mine                                                               
permitting team has done much  to coordinate and work together as                                                               
a team in that direction.   He noted that the Commission's report                                                               
includes a recommendation for one-stop  shopping for small remote                                                               
exploration camps.   The mine  permitting process,  he commented,                                                               
is technical and detailed and  thus the legislation would need to                                                               
be reviewed.                                                                                                                    
4:25:52 PM                                                                                                                    
There being no further business  before the committees, the joint                                                               
meeting  of the  House and  Senate Resources  Standing Committees                                                               
was adjourned at 4:26:09 PM.                                                                                                  

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