HB 330-DNR: DISCLOSURE OF CONFIDENTIAL INFO  2:04:45 PM CHAIR CLAMAN announced that the next order of business would be HOUSE BILL NO. 330, "An Act authorizing the commissioner of natural resources to disclose confidential information in an investigation or proceeding, including a lease royalty audit, appeal, or request for reconsideration and issue a protective order limiting the persons who have access to the confidential information." CHAIR CLAMAN advised that this is the second hearing of the bill by the House Judiciary Standing Committee wherein the committee had heard a presentation from Ed King, Legislative Liaison to the Commissioner of the Department of Natural Resources (DNR). The committee had asked questions related to confidential processes within Department of Revenue (DOR), and Ken Alper and Jenny Rogers are available to testify, together with a representative from the oil industry, Michael Hurley, ConocoPhillips Alaska. He added that this committee received a 2/16/18 letter of opposition from Lorali Simon, Vice President of External Affairs, Usibelli Coal Mine. 2:05:55 PM KEN ALPER, Director, Tax Division, Department of Revenue, advised that, generally, HB 330 is for the Department of Natural Resources (DNR) as it relates to its treatment of a private company's information in the context of a royalty audit. The manner in which DNR values royalties is based on the highest transaction of a given quantity of oil, he explained, and if one company is partners with a second company and the second company receives a higher price for its oil, the first company is charged a royalty based on what the second company received, "the highest of." Therein lays the problem, he remarked, DNR does not have the ability to tell that first company about the information DNR received from the second company due to taxpayer confidentiality, which this bill would remedy. The Department of Revenue Tax Division holds similar rights within its oil and gas production tax, wherein there are multiple partners, multiple working interest owners, and for various reasons, the Tax Division might use value or price information from one company to impact how it might be calculating tax in an audit on another company. He offered his understanding that his testimony today was simply to convey to the committee that this bill represents a similar authority currently existing within the Department of Revenue. He further offered that DNR requests this legislation for its internal housekeeping and auditing purposes. 2:07:48 PM REPRESENTATIVE REINBOLD asked whether he was aware of any opposition to HB 330. MR. ALPER answered that he was not aware of any opposition. He advised that he did read the letter from Usibelli Coal Mine and, he pointed out, he did not understand the letter in the context of DNR's purpose and intent regarding this bill. He stressed the importance of recognizing that DNR and DOR are not looking to divulge confidential information to the general public, it is simply about sharing one taxpayer's information with another related taxpayer, within a fairly narrow constrained purpose. 2:08:50 PM REPRESENTATIVE REINBOLD noted that if tremendous investments had taken place on certain pieces of property, there could be concerns about the private sector's investments. She said she "is amazed" that Mr. Alper is not aware of any other opposition at all, with the exception of the Usibelli Coal Mine. CHAIR CLAMAN injected that Mr. King is the better person to answer that question because it is a DNR bill; therefore, the objections would go to DNR and not to the Mr. Alper. MR. ALPER answered that Mr. Hurley, ConocoPhillips Alaska, may also be able to provide some insight. From the Department of Revenue's (DOR) perspective, the key piece is that DOR already has this authority and, to his knowledge, it is not a controversial authority. He advised that Jenny Rogers, Department of Revenue (DOR) is available, and has been with DOR's production tax group for over 20-years and she may be able to provide historical reasons why it may have been done in the past. He described it as "a lightly used authority," and that it has not been used more than a handful of times for a specific need. REPRESENTATIVE REINBOLD said that Mr. Alper did not answer the question because she had asked ... CHAIR CLAMAN reiterated that the better person to ask is Mr. King. 2:10:24 PM REPRESENTATIVE LEDOUX asked that if the department already has authority, why is the bill necessary. MR. ALPER replied that this is a Department of Natural Resources (DNR) bill that is seeking a similar authority for royalty audits that the Department of Revenue (DOR) currently holds for its tax audits. 2:11:06 PM REPRESENTATIVE LEDOUX surmised that this authority allows DOR to share one taxpayer's information with another taxpayer. MR. ALPER explained that DOR's authorities are not changed by this bill, DNR's authority is being changed wherein DNR would hold the authority to share confidential information within the narrow context of an audit or an investigation, specifically where one taxpayer's information is being used to change the royalties paid by another taxpayer. For example, the companies may be affiliated in some manner, and the sharing taxpayer received a higher price for its oil than the other taxpayer, and that price is being used to set the royalties owed by the second taxpayer. CHAIR CLAMAN suggested that some of the questions should be directed to Mr. King. 2:12:22 PM REPRESENTATIVE KOPP surmised that the weighted average of the three highest prices in any one field comes into play when a producer contests a royalty owed. Under the audit rules, DNR establishes the going price point that sets the dollar amount owed, which is the average of the three highest field prices. He explained that that is the reason everyone must be able to see what the highest three prices were because that is the process in determining the amount actually owed. MR. ALPER opined that he believed that was correct and deferred to Mr. King. CHAIR CLAMAN noted that when this process occurs, it occurs within the context of a protective order and it is not publicly available, this process is only within the narrow confines of the audit proceeding. 2:13:50 PM REPRESENTATIVE EASTMAN asked whether questions about protective orders would more appropriate for "this speaker or the next one." CHAIR CLAMAN advised that questions about the context of a protective order should be directed to the Department of Law, and a representative is available. MR. ALPER offered that there is a similar protective order structure within DNR's authorities under AS 43.55.040 as to what is contemplated here in this change in DNR statutes. HB 330-DNR: DISCLOSURE OF CONFIDENTIAL INFO  2:19:09 PM CHAIR CLAMAN returned the committee to HB 330, and asked Michael Hurley, ConocoPhillips Alaska, to come forward and testify. 2:19:49 PM MICHAEL HURLEY, Director of Government Relations, ConocoPhillips Alaska, Inc., advised he was available to testify. CHAIR CLAMAN noted that Mr. Hurley will answers questions as to how ConocoPhillips Alaska participates in the protective order process and its perspective on the protective orders. He stressed that Mr. Hurley is not here to offer an official position of ConocoPhillips Alaska, as to this bill. 2:20:18 PM REPRESENTATIVE EASTMAN asked whether ConocoPhillips Alaska did not have a position on this bill because it had analyzed all of the information and decided to not take a position, or because the company is still analyzing the bill and has not had enough time to calculate a position. MR. HURLEY responded that the bill has some good aspects to it with some mildly concerning aspects for the company, and it decided to "let it take its course." 2:21:03 PM REPRESENTATIVE LEDOUX requested an explanation of the good aspects to the bill, and the aspects that gives the company pause. MR. HURLEY responded that this authority, given to the Department of Natural Resources (DNR) to provide these protective orders themselves, is helpful because ConocoPhillips Alaska's goal is to try and pay its royalties when they become due. He related that the authority is important to ConocoPhillips Alaska because, although the legislature made changes last year in terms of the interest rate charged in taxes, DNR still has an 11 percent interest rate that accrues on unpaid royalties. Therefore, he explained, if DNR goes six- years before auditing the royalty, or ten-years before "some of that stuff is resolved," there is a consequential situation of 11 percent interest over ten-years. That situation could triple the amount owed, yet the company's goal is to try and pay its royalties as close to the correct amount as possible as soon as they are due. This legislation is another tool for the department to share confidential information with other producers to determine that average price, thereby allowing ConocoPhillips Alaska to pay its royalties as accurately as possible when they are due. 2:23:13 PM MR. HURLEY offered concern with the section of the bill regarding the protective orders because "other things could be included in that kind of proprietary bucket of things," such as the geological and geophysical information. He explained that the geological and geophysical information, within a competitive industry business such as ConocoPhillips Alaska, is "very confidential" for the companies. Mr. Hurley pointed out that, as Mr. King had previously testified, DNR uses that authority solely in obscure situations, and he is not aware of any of those situations (audio difficulties). On the whole, he opined, the legislation is positive due to the benefits it brings forward with the existing protective orders and, "it should be okay." 2:24:54 PM REPRESENTATIVE LEDOUX noted that the purpose of the bill, as has been explained, is for royalty audits. She referred to HB 330, [AS 38.05.020(b)(15), page 3, lines 25-30] and noted that it appears to be broader than simply royalty audits and suggested limiting the language to simply read "royalty." She asked whether that narrowed language would allay some of the concerns he had voiced. MR. HURLEY answered in the affirmative. 2:25:51 PM [CHAIR CLAMAN and Representative Reinbold discussed the appropriateness of certain questions.} 2:27:09 PM REPRESENTATIVE REINBOLD asked whether Mr. Hurley was aware of any pushback, other than Usibelli Coal Mine, on this bill. MR. HURLEY answered, "No." 2:27:25 PM REPRESENTATIVE EASTMAN asked whether the protective order process could be misused where confidential information was somehow leaked to the public. He further asked whether that was a concern to Mr. Hurley and whether instances in that manner had taken place in the past. MR. HURLEY responded that he is unaware of any instances of that nature. Especially, he offered, with the type of data being discussed in computing the royalty amounts wherein the average of the three highest prices determine the amount owed for royalty. He related that he does not have any particular concern about the other pieces of it, and as Representative LeDoux suggested, if it were limited solely to royalties, he would be happier but "it's okay." 2:28:51 PM REPRESENTATIVE KOPP surmised that currently, if there is an appeal based on a tax audit and ConocoPhillips Alaska disagrees, the information is necessary to be disclosed in order to come to the correct valuation in the law. He asked whether that means (audio difficulties) now. MR. HURLEY answered yes, and he explained that currently, there have been situations where ConocoPhillips Alaska received some of the information through a court protective order. This bill allows a simpler process of going through the commissioner's office rather than going to court with an actual dispute before "you get there." He reiterated that the company's goal is to make sure it can pay its royalties in a timely manner at the correct amount and not incur those interest charges. He pointed out that having the protective order process go through the commissioner's office, ConocoPhillips Alaska is hoping that process will allow DNR to make those averages calculations on a timelier basis so the company can pay the correct amount as it becomes due. 2:31:10 PM PETER CALTAGIRONE, Assistant Attorney General, Natural Resources Section, Department of Law (DOL), was available for questions. 2:31:19 PM REPRESENTATIVE EASTMAN asked the severity of the penalties if a protective order, in this context, is violated. MR. CALTAGIRONE asked, "The penalties to whom?" REPRESENTATIVE EASTMAN responded that to whomever violated the structure of a protective order. MR. CALTAGIRONE asked whether Representative Eastman was asking about a producer misusing otherwise confidential information that was contrary to the terms set forth in the protective order, and what happens next. REPRESENTATIVE EASTMAN answered yes, and he asked what happens when the confidential information is misused or is disclosed to an unauthorized party." MR. CALTAGIRONE advised that a protective order should be set up in the same manner as the confidentiality agreements are currently set up. This, he offered, would provide specific rules for handling the information as to who, within the receiving party can handle the information, what purpose the information can be used for, and is extremely limiting in both of those respects. There is also language that protects the state from liability if that information is misused by the receiving party. In theory, he said, for the company whose information is being disclosed, the remedy is that it would have to pursue against the receiving party if the receiving party misused that information somehow. CHAIR CLAMAN explained that all royalty and other proceedings are confidential proceedings, at least until such time as someone starts appealing it up through the court system. The administrative proceedings within DNR are all confidential for all parties, he reiterated. 2:33:59 PM REPRESENTATIVE EASTMAN noted a concern raised by at least one company, that through this bill, the confidential information under a protective order could become available to an adversarial party. He asked Mr. Caltagirone whether that concern was unfounded. MR. CALTAGIRONE surmised that Representative Eastman's question was whether there was a possibility that that could happen. He responded that it certainly could happen, except that DNR, in issuing its protective order, lays out specific and narrowing circumstances under which the information could be used. In the event DNR had reason to believe the terms of its protective order had been violated, it could go to the superior court and seek the appropriate sanctions (audio difficulties). 2:35:05 PM REPRESENTATIVE EASTMAN surmised that the discussion is about civil sanctions and a lawsuit setting, except, he said that he envisioned a situation where an anti-mining group might have access to this information, misuse it in some manner, declare bankruptcy relatively quickly and have no funds. Therefore, that party would not have much in the way of a penalty in the type of civil suit setting being discussed. He asked to what extent that anti-coal mining group receiving the information in the first place could happen through HB 330, and whether Mr. Caltagirone had considered that possibility. CHAIR CLAMAN asked whether Mr. Caltagirone had read the 2/14/18 letter from Usibelli Coal Mine that Representative Eastman is referencing. MR. CALTAGIRONE advised that he has seen that letter and asked Representative Eastman to repeat his compound question. 2:36:37 PM REPRESENTATIVE EASTMAN asked whether there is a mechanism under HB 330 for that anti-mining group to obtain access to this information and a lawsuit would be the remedy. He asked whether there was a manner in which "they could get access to the information," and if not, his question is moot. MR. CALTAGIRONE answered that he is not fully versed in mining law as it is not his area of practice. However, he said, he did speak with a mining attorney prior to this hearing and his understanding is that in Representative Eastman's scenario, this is information the group may be able to obtain anyway, outside of HB 330. Although, he said that he may be incorrect, and he would like the opportunity to file a written response after researching the question because he did not want to speak out of school. 2:38:43 PM REPRESENTATIVE LEDOUX asked Mr. Caltagirone that if the committee limited the new section [AS 38.05.020(b)(15)] to "royalty," whether that would take care of the situation presented by Ms. Simon, Usibelli Coal Mine. MR. CALTAGIRONE opined that amendments were recently submitted regarding page 3, line 25, clarifying that this bill is related to oil and gas, which would alleviate any concerns presented by Osibelli Coal Mine. 2:40:27 PM ED KING, Special Assistant, Commissioners Office, Department of Natural Resources, advised that after receiving the 2/16/18 letter from Usibelli Coal Mine, DNR contemplated an amendment to rectify its concerns and he offered to share that amendment with the committee. CHAIR CLAMAN advised Mr. King that there are deadlines for amendments so the committee members would have an opportunity to review the amendments in advance. He pointed out that Mr. King is coming to the committee now, in the midst of the hearing, with a potential amendment that the committee may want to review. He advised Mr. King that offering amendments in this manner is not consistent with the manner in which the committee operates, and because every member of the committee would like to review the amendment, it would not be taken up today. 2:41:59 PM REPRESENTATIVE LEDOUX asked whether members would have a chance to offer amendments. CHAIR CLAMAN answered, "Absolutely." [HB 330 was held over.]