Legislature(1993 - 1994)
02/26/1993 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
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
otherwise.
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,
1988.
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
legislation.
Number 411
SENATOR MILLER thanked everyone for their testimony and
adjourned the meeting at 4:10 p.m.
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