HOUSE SPECIAL COMMITTEE ON OIL AND GAS March 10, 1998 10:06 a.m. MEMBERS PRESENT Representative Mark Hodgins, Chairman Representative Scott Ogan Representative Norman Rokeberg Representative Joe Ryan Representative Con Bunde Representative Tom Brice Representative J. Allen Kemplen MEMBERS ABSENT All members present COMMITTEE CALENDAR HOUSE BILL NO. 393 "An Act relating to contracts with the state establishing payments in lieu of other taxes by a qualified sponsor or qualified sponsor group for projects to develop stranded gas resources in the state; providing for the inclusion in such contracts of terms making certain adjustments regarding royalty value and the timing and notice of the state's right to take royalty in kind or in value from such projects; relating to the effect of such contracts on municipal taxation; and providing for an effective date." - HEARD AND HELD (* First public hearing) PREVIOUS ACTION BILL: HB 393 SHORT TITLE: DEVELOP STRANDED GAS RESOURCES SPONSOR(S): RULES BY REQUEST OF THE GOVERNOR Jrn-Date Jrn-Page Action 2/11/98 2280 (H) READ THE FIRST TIME - REFERRAL(S) 2/11/98 2281 (H) OIL & GAS, FINANCE 2/11/98 2281 (H) 2 FISCAL NOTES (DNR, REV) 2/11/98 2281 (H) GOVERNOR'S TRANSMITTAL LETTER 2/19/98 (H) O&G AT 11:00 AM CAPITOL 124 2/19/98 (H) MINUTE(O&G) 2/24/98 (H) O&G AT 10:00 AM CAPITOL 124 2/24/98 (H) MINUTE(O&G) 2/26/98 (H) O&G AT 10:00 AM CAPITOL 124 2/26/98 (H) MINUTE(O&G) 3/03/98 (H) O&G AT 10:00 AM CAPITOL 124 3/03/98 (H) MINUTE(O&G) 3/05/98 (H) MINUTE(O&G) 3/09/98 2578 (H) RES REFERRAL ADDED 3/10/98 (H) O&G AT 10:00 AM CAPITOL 124 WITNESS REGISTER HANK HOVE, Mayor of Fairbanks 1253 Chena Hot Springs Road Fairbanks, Alaska 99712 Telephone: (907) 459-1000 POSITION STATEMENT: Testified on HB 393. DAVID COBB, Mayor of Valdez P.O. Box 1858 Valdez, Alaska 99686-1858 Telephone: NOT PROVIDED POSITION STATEMENT: Testified on HB 393. BENJAMIN NAGEAK, Mayor of North Slope Borough P.O. Box 69 Barrow, Alaska 99723 Telephone: (907) 852-0200 POSITION STATEMENT: Testified on HB 393. DAVE HIRE, North Slope Borough Department of Administration ADDRESS and TELEPHONE NOT PROVIDED POSITION STATEMENT: Testified on HB 393. LARRY OSTROVSKY, Assistant Attorney General Oil, Gas & Mining Section Civil Division, Department of Law 1031 West 4th Avenue, Suite 200 Anchorage, Alaska 99501 Telephone: (907) 269-5100 POSITION STATEMENT: Testified on HB 393. ED FLANAGAN, Deputy Commissioner Office of the Commissioner Department of Labor P.O. Box 21149 Juneau, Alaska 99802 Telephone: (907) 465-2700 POSITION STATEMENT: Testified on HB 393. ACTION NARRATIVE TAPE 98-20, SIDE A Number 0001 CHAIRMAN MARK HODGINS called the House Special Committee on Oil and Gas meeting to order at 10:06 a.m. Members present at the call to order were Representatives Hodgins, Ogan, Rokeberg, Brice and Kemplen. Representative Bunde arrived at 10:08 a.m. and Representative Ryan arrived at 10:15 a.m. HB 393 - DEVELOP STRANDED GAS RESOURCES Number 0068 CHAIRMAN HODGINS announced the committee would hear HB 393, "An Act relating to contracts with the state establishing payments in lieu of other taxes by a qualified sponsor or qualified sponsor group for projects to develop stranded gas resources in the state; providing for the inclusion in such contracts of terms making certain adjustments regarding royalty value and the timing and notice of the state's right to take royalty in kind or in value from such projects; relating to the effect of such contracts on municipal taxation; and providing for an effective date." He stated that the pipeline mayors, Mayor Hank Hove of Fairbanks, Mayor Dave Cobb of Valdez and Mayor Benjamin Nageak of North Slope Borough, would be testifying. Number 0319 HANK HOVE, Mayor of Fairbanks, stated that they are prepared to offer their bottom line. He stated that they have operated under the premise that the commissioner of revenue has by statute the power to defer municipal taxes, but not necessarily to (INDISC.-- coughing) pipeline owners from ad valorem taxes. They have discussed this matter and have concluded that although they had previously expressed an interest to take an equity position in the pipeline equal to the amount of taxes deferred for the five years, they have reconsidered. The conclusion is that perhaps there are elements to that concept that may be troubling. He stated that one problem is that their equity share would be exceedingly small and in order to guarantee the constituents interest they would have to have access to the financial records of the operating company. He stated that the department of revenue is troubled by this, as it would require disclosure of confidential financial records. Number 0630 MAYOR HOVE stated that this problem also arises if the state took an equity position, as there is the problem of shareholder/regulator. He gave the example of an environmental problem that would cause a conflict of interest in that circumstance as the decision might represent the business interest but be bad for the state of Alaska. They have come up with a better plan which would be to defer the taxes on the pipeline for the first five years and would have those taxes repaid by the consumer price index and recalculated on January 1 of each year. He stated that it would be repaid on a level basis and after year ten it would just be the ad valorem taxes, which would be applicable to the value of the pipeline that year. He stated that at the end of year 10, the deferred taxes and all currently due taxes would have been paid. He stated this would satisfy the necessity to create an economic circumstance. Number 1055 MAYOR HOVE stated that they have concluded that there might be a significant social impact for communities as a result of the construction. The most likely impact would be the construction of school to accommodate the students that the construction workers would be bringing with them. He stated that as a rule the communities issue up to 30 year bonds for the construction of schools and they are general obligation bonds repaid (INDISC.) the general fund as tax revenues. He stated that in this circumstance they feel, they need to be protected because of the possible situation of, if they build schools to accommodate the influx of residents into the communities and then for some reason the pipeline construction stopped or did not deliver gas. They would ask that for the first five years the state would hold them harmless and guarantee the bonds so they will not be left holding the bag should construction not occur. He stated that until revenue is produced they are asking that the state guarantee any bonds for that five-year-period. He stated that they also feel that any petroleum related property that is presently subject to an ad valorem tax should not be deferred. He stated that any property tax on an ad valorem basis that may be converted from oil or an oil related function and used as part of the gas project, should not have the taxes deferred on them. The (INDISC.) of the taxes should only apply to projects that require construction of the Trans- Alaskan Natural Gas Pipeline and the facilities in existence before should not have their taxes deferred. Number 2055 MAYOR HOVE stated that communities that have an economic proximity to the pipeline should have guaranteed access to sufficient quantities of gas and have prices that are equal to the well head value of gas plus the allocated transportation cost of the pipeline connection for that community. He urged that the legislature specify that a sponsor contract needs to be entered into by the June 30, 2000. TAPE 98-20, SIDE B Number 0012 REPRESENTATIVE JOE RYAN asked if the gas, that he is talking about for transportation is state royalty gas because otherwise, the people that handle the gas in the interim or the people that producing it would probably want to make a profit. He asked how it would be differentiated. Number 0030 MAYOR HOVE replied that they are not prepared to get involved in the "nuts and bolts" matters and can not make those determinations. He stated that they need this because it is time that Alaskans participate and have access to a program and a product that is fairly priced. Cheap energy, whether it comes from state royalty gas or from other gas is of little importance to them. He stated that Fairbanks has an oil pipeline that goes through the community and has two refineries but the community is paying up to 7 cents more per gallon for the product that they refine then what is shipped to Anchorage. The transportation component is not reflected in the price, the Fairbanks price should be less because Anchorage requires it to be transported 350 miles. He stated that they want to create a circumstance where that does not happen again. He stated that there are all sorts of esoteric markets reasons why this is so. He reiterated that they want to create the circumstance where it is in statute that they will have a competitive price for distribution in Fairbanks or for whoever is able to bring a gas to the Trans-Alaskan Natural Gas Pipeline. He stated that Fairbanks buys more B.T.U.s per year than any other metropolitan are in the U.S., yet they pay more than any else per B.T.U. A source of cheap energy is extremely important to them. Number 0144 REPRESENTATIVE RYAN stated that coincidentally the price of gas dropped 10 cents after the economic development meeting. Number 0170 REPRESENTATIVE ALAN KEMPLEN referred to point 4 on the "Proposed Amendments to HB 393 by Pipeline Mayors", in reference to schools and bonding. He stated that there are a lot more impacts on local municipalities than just kids coming in. He asked how he would address those impacts and would he have the ability to address those other impacts. He asked if the bonding ability is all he needs. Number 0207 DAVID COBB, Mayor of Valdez, responded that right now it is difficult to pin point what those other impacts are going to be. In Valdez there is the history with the past pipeline and with the oil spill. He stated that with 100 families moving into Valdez a new school is needed. He stated that as land is for sale, water and sewers will become an issue. He pointed out that there is a myriad of things that will have to be done to take care of the impact. Bonds are one avenue to be able to do what is needed up- front, with this and some guarantees from the state they have more flexibility of the things that can be done in the communities. Number 0272 BENJAMIN NAGEAK, Mayor of North Slope Borough, stated that they do have some experience with the impacts. He stated that they are short of health aides due to the influx of people. He stated that they are addressing that within their budget and are looking for ways to provide more services to people. He stated that if the pipeline happens, there will be more impacts but they are unknown at this time. Number 0337 REPRESENTATIVE KEMPLEN stated that the pipeline mayors feel that they will be able to meet the increased needs from the existing sources in the communities and that the communities do not need to address any mechanisms to assist with the operating budget. He asked if this was correct. Number 0362 MAYOR HOVE replied that in order to specifically answer his question, it requires an element of judgement on their part without a great deal of data available to them. It is their feeling that the construction of the pipeline will result in people moving into the communities, buying homes, so the tax base will increase on a secondary basis. He stated that it is their judgement, that those events will be sufficient to take care of the operational side. He stated that the biggest problem is the capital requirement to build a school. He stated that if there was legislation that was a means for handling that problem then they think they can handle the rest of the problems. REPRESENTATIVE KEMPLEN stated that he was writing this down. MAYOR HOVE reiterated that he feels that it will be the case, although he did say they are operating without a lot of the facts. He stated that they have been asked to keep this simple and make it fundamental. He stated that this is a fundamental bottom line and they hope that they will never have to appear before legislature again. He asserted that he hoped the legislature would use the desired amendments that they have articulated for the committee. Number 0481 REPRESENTATIVE NORMAN ROKEBERG stated that he has not seen any baseline data on the communities and would appreciate getting that information. He asked what the combined population is of the North Star Borough and the city of Fairbanks. MAYOR HOVE replied 85,000 REPRESENTATIVE ROKEBERG asked what is the combined budget for schools and operations for the borough and the city. Number 0572 MAYOR HOVE replied approximately $195 million. REPRESENTATIVE ROKEBERG asked how much is in debt service payments. Number 0533 MAYOR HOVE replied that the only debt that they have is in relation to schools and is largely taken care of by the state. He stated that they have some debt in relation to a recently closed landfill and the new one. REPRESENTATIVE ROKEBERG asked if there are any rainy day account funds. Number 0565 MAYOR HOVE replied that the city has a permanent fund which consists of the revenues derived from the sale of the telephone utility, electric generating utility and sewer utility which totals $87 million. He stated that it requires a super majority of the vote to be able to remove that money. He stated that the general fund balance in the Fairbanks North Star borough, which is not a cash account as it moves back and forth, is around $8 to $10 million. Number 0602 REPRESENTATIVE ROKEBERG asked Mayor Cobb what the population of Valdez is. MAYOR COBB replied 4,600. REPRESENTATIVE ROKEBERG asked what the annual budget is of the municipal services and the school. MAYOR COBB replied $23 million. Number 0617 REPRESENTATIVE ROKEBERG asked what the debt service is. MAYOR COBB replied that there is 6 million in school debt. REPRESENTATIVE ROKEBERG asked if the $23 million includes the local contribution of University of Alaska community college. MAYOR COBB replied that it does, about 700,000. REPRESENTATIVE ROKEBERG asked if they have a rainy day and a permanent fund account. Number 0640 MAYOR COBB replied that they have both, the total being $60 million. REPRESENTATIVE ROKEBERG asked Mayor Nageak the same questions. Number 0649 MAYOR NAGEAK stated that the population is 8,000. The borough's contribution to the seven village schools is $28 million out of the operating budget for $169 million. He stated that they provide for all the services: airports, clinics, fire department etc. He stated that the budget would provide training for local hire to work on the pipeline. REPRESENTATIVE ROKEBERG stated that his information stated that the total borough's budget is around $350 million including everything. DAVE HIRE, North Slope Borough, Department of Administration, stated that the debt service would be added on top of the operating budget. REPRESENTATIVE ROKEBERG stated his information states that the debt service is about $110 million a year. Number 0782 MR. HIRE stated that the operating budget is approximately $169 million and on top of that is the debt service repayment, which he does not have the figure. He stated that the majority of their debt is retired over the next ten and a half years as they do not bond past an eleven year schedule. REPRESENTATIVE ROKEBERG asked what the "mill" rate is in the boroughs. MR. HIRE replied that it is 18.5 mills. Number 0845 REPRESENTATIVE ROKEBERG asked if there are any economic incentive programs for development. Number 0867 MAYOR COBB replied that Valdez is working with a Montana grain company to try and get Valdez's grain elevators utilized. He stated that they are always trying to find new economic development within the community. He stated that the major problem is the high electrical rates. He stated that when the rates are 19 cents a kilowatt no one wants to come into the community. Number 0967 REPRESENTATIVE ROKEBERG asked Mayor Cobb to tell the committee the history of their bond issues for infrastructure during the oil pipeline. Number 0991 MAYOR COBB replied that they had bonded the dock infrastructure through revenue sharing bonds that were paid buy the oil companies and are still being paid off. He stated that it is not a debt to the city as they are industrial revenue bonds. Number 1035 REPRESENTATIVE ROKEBERG asked if there was any tax relief granted to "Alyeska pipe" by the municipality. Number 1043 MAYOR COBB replied that it was a 1 percent return. Number 1080 REPRESENTATIVE ROKEBERG asked Mayor Hove if there was an inherent benefit to the communities, if this gas was make available for local generation. He stated that it is unusual that they are asking for a further benefit. Number 1122 MAYOR HOVE replied that he presumed his question arises from the statement made regarding well head value plus allocable transportation costs. He stated that if he thought it out, Representative Rokeberg, would find that the return to the pipeline owner and to the state, assuming it is royalty gas would be the same if it had been liquefied and loaded into a tanker. He stated that he would find that it would net out to the same amount. He stated that they want to pay their fair share, they are not looking for subsidized gas they are looking for gas that is priced the same to them as it is to wherever it is going. Number 1185 REPRESENTATIVE ROKEBERG asked if wouldn't the municipalities be able to grant a franchise and/or have control over the distributor and marketer of the gas, within their boundaries. Number 1211 MAYOR HOVE replied no. He stated that they presently have a privately owned gas distribution firm and that is hauling Liquefied Natural Gas (LNG) by tanker truck up to the city and putting it into the line. He stated that to the extent that they continue to expand that distribution system, they will probably be the natural gas distributors, that they will be using. Number 1242 REPRESENTATIVE ROKEBERG stated that in this era of deregulation, as natural gas transmission and distribution within the municipality of Anchorage is totally deregulated. He stated that it is ironic Mayor Hove would want to stipulate (UNDISC.) price. Number 1286 MAYOR NAGEAK stated that he has to barge in fuel to all of the communities. He stated that the borough subsidizes it because of the high cost of transportation. He stated that they are trying to find alternative energy ways due to the high cost of gasoline. Number 1388 REPRESENTATIVE CON BUNDE stated that he was at the energy summit and they are talking about $8 a barrel. He stated that proximity of the gas pipeline and future uses are a soft word for him and asked for the Mayor's definition. Number 1462 MAYOR HOVE stated that he uses the word proximity advisably. He stated that the Beluga Fields, are most likely, not going to be able to supply the demand for gas in Southcentral. He stated that it is conceivable that a smaller pipeline could transport gas to South Central Alaska. He stated that to the maximum extent possible Alaskans should benefit from Alaskan gas first, as long as it is not on the subsidized basis. That is why they chose the word proximity. Number 1594 MAYOR HOVE stated that in regards to future use it is hard to define. He stated that they are trying to make provisions for future use, meaning the gas will be available to them when they require it. Number 1643 MAYOR COBB stated that in Valdez they look at it as an energy source and it would be more then the community would ever use. He stated that with 200 mega watts of surplus electricity sent up to Southcentral Alaska, they could see electricity being produced in the 2 to 4 cent range. He stated that electricity and the need for an "inertia" becomes very viable to send the electricity back to the rest of Alaska. REPRESENTATIVE BUNDE stated that they can't do anything that cannot be undone by a future legislature. He stated that in regards to the bottom line, he asked how would they be able to commit future municipal administrations to what would be their bottom line. Number 1784 MAYOR HOVE stated that they operate under the same rules. He stated he could not obligate a successor. When considering things of this sort, they are usually not easily modified. He stated that there will be point where these events will not be able to be reversed. Number 1920 MAYOR COBB stated that he perceives this to be the bottom line, however, anything is negotiable and they could discuss this with any party involved. Number 1979 CHAIRMAN HODGINS referred to the bond issues and asked if the communities have a special assessment district for roads and sewer lines etc. MAYOR HOVE responded yes. Number 2008 REPRESENTATIVE ROKEBERG stated that's what troubles him, is that there is not provision for any front-loaded monies to respond to the actual impact. He stated that there are not impact funds. Number 2118 CHAIRMAN HODGINS asked what type of dollars are they speculating on and what would the bonding needs be over the five years. Number 2137 MAYOR HOVE replied that it is difficult to answer until more information is known about the scope of project, such as how many people are coming. He stated that in response to impact funding, it could be said that this is their contribution to the project. TAPE 98-21, SIDE A Number 0031 MAYOR HOVE stated that it either comes from the state of Alaska or it comes from the sponsor group of the gas pipeline. He stated that acknowledging that the project is economically marginal seems to be troubling. He stated that if they were to place a price on the impact funding in total, they might tip the project upside down. He stated the sum would be significant and would exceed the amount of the deferred taxes for the first five years. Number 0284 REPRESENTATIVE ROKEBERG stated that he is troubled by the statement that sum of impact would exceed the amount of deferred taxes. He stated that it might not be the case that the impacts are going to be extraordinary. Number 0327 MAYOR HOVE replied that the only way that they have to look at the pipeline is to take the $12 billion figure, back out the cost of 14 LNG tankers and reveal only the Alaska component of the construction of the pipeline, including what might incur on the North Slope and Valdez. He stated that what would occur in those communities is greatly in excess of what will occur in Fairbanks. He stated that in the first year there will be zero tax deferred because the taxes will not be due until the following year. He stated that the construction phase will last until year 3. The full taxable value of the pipeline will not occur until year 5 or 6. He stated that considering the time table the amount of taxes that would be deferred will not be as much as the impacts that are likely to occur in the communities. He stated that the impacts are both negative and positive. He stated that Anchorage will have many positive impacts, the construction of industry's building, which are under the local real estate tax laws. Number 0712 MAYOR COBB stated that they have a team put together that will be evaluating this as more information is available and will be looking at every aspect. He stated that until what the project consists of is known, it is very difficult to determine what the impacts are going to be. Number 0838 MAYOR NAGEAK responded (INDISC. -- STATIC on TAPE). Number 1009 REPRESENTATIVE TOM BRICE stated that his biggest concern is that the municipalities need to rely on the state to make sure they are not going to be left out. Number 1207 REPRESENTATIVE KEMPLEN referred to statements about inadequate information and stated that it would be appropriate to insert a subsection into the legislation that asks the sponsor group to address the issue of community impacts, since they will know the phasing and details of the project. He stated that they should be the ones to present the solution to the impacts to local communities. CHAIRMAN HODGINS stated that we need to remember that we need to keep this project profitable. REPRESENTATIVE KEMPLEN stated that lets encourage creativity. Number 1552 REPRESENTATIVE RYAN stated that the bill does not preclude a municipality from enacting a sales (INDISC. -- TAPE STATIC). TAPE 98-21, SIDE B Number 0040 CHAIRMAN HODGINS thanked the pipeline mayors and stated that the committee will consider their thoughts. LARRY OSTROVSKY, Assistant Attorney General, Oil, Gas & Mining Section, Civil Division, Department of Law, stated that any discussion of Alaska hire is related to Article 4 of the U.S. Constitution which provides that the citizens of each state shall be entitled to all privileges and immunities of citizens in the serval states. He stated that the Alaska Supreme Court has construed the purpose of this provision being to prevent states from enacting measures which discriminate against nonresidents for reasons of economic protectionism. He stated that a past court case had shown that some deference is due to the state of Alaska when it functions in a propriety capacity because that statute involves public construction of the project. He stated that the court also decided that classification among people affects a fundamental right and it must for a permissible purpose be narrowly tailored to achieve that purpose. He stated that it affected a vast majority of construction projects in the state. He stated that the Alaska Supreme Court held that the purpose to exclude nonresidents, so that more jobs would be available to Alaskans, was an impermissible purpose. The reason being because the privileges and immunities clause applies to all states. Number 0202 MR. OSTROVSKY stated that the other constitutional provision that is relevant, is that the Alaskan Constitution provides that "all persons are equal and entitled to equal rights, opportunities and protection under the law." He stated that this was a provision construed in a local hire case which involved a statute involving the preference for individuals residing in areas determined by the Commissioner of Labor to be a zone under employment. He stated that the court found that "the (INDISC.) treatment of unemployed workers in one region in order to confer an economic benefit on similarly situated workers in another region is not an legitimate legislative goal." The court found that a nonresident worker in a less distressed zone might be unfairly disadvantaged. He stated that the bill tries to not cross the line in order to not enter into unconstitutionality. Number 0282 CHAIRMAN HODGINS asked can we or can't we have local hire. Number 0347 MR. OSTROVSKY replied that local hire could be encouraged but it would be very easy to cross the line into unconstitutionality. Number 0359 CHAIRMAN HODGINS asked if the Department of Law has done a legal analysis of the bill. Number 0368 MR. OSTROVSKY replied that they have not done a formal legal analysis of the bill. CHAIRMAN HODGINS asked if the local hire issues in the bill work. MR. OSTROVSKY replied that the department believes that they work. Number 0375 REPRESENTATIVE KEMPLEN stated that Alaska has licencing requirements and courses need to be taken regarding Arctic and sub- Arctic conditions. He asked if there were problems with those type of requirements. Number 0406 MR. OSTROVSKY replied that he is assuming he means occupational licensing. Number 0414 REPRESENTATIVE KEMPLEN asked if it would be constitutional if the legislation were to include language that required participants in the construction of the gas pipeline, to attend an accredited Alaskan institution in order to acquire knowledge that is relevant to Arctic and sub-Arctic environmental conditions. Number 0457 MR. OSTROVSKY stated that he has not considered that approach. He stated that he thought that if there is a legitimate purpose for that requirement and not one that is for the sole purpose of weeding out nonresidents, it would be legitimate. For example a dentist or a doctor needs accreditation. He reiterated that if it is transparent that it is to eliminate nonresidents it would not be legitimate. Number 0485 REPRESENTATIVE KEMPLEN stated that there is no other state that has winters as long as Alaska's which necessitates additional knowledge and training requirements. He stated that it would take time for someone to acquire that training. Number 0517 REPRESENTATIVE RYAN stated that contractually there are a lot of things that can be done that can't be done statutorily. MR. OSTROVSKY stated that it is correct to distinguish what an individual can do and what a governmental entity can do. He stated that is why the courts have said that there will be greater deference when the state is acting like a private citizen in a proprietary capacity. Number 0604 REPRESENTATIVE RYAN stated that there are lots of local preference laws and asked if it would be possible to give a local hire preference. He stated that the state of Alaska is nothing more than its residents and the resource is owned by the people. He stated that if he needed a carpenter he would be able to choose the carpenter that he wanted. He asked how this project is any different. Number 0683 MR. OSTROVSKY replied that admittedly it is not a very bright line because the court has acknowledged, that the greater deference is to the state acting in a propriety capacity. He stated that it could be argued that this project is distinguishable from the others as this is just one project. He stated that it would be difficult to say with any certainty whether it has crossed the line or not. Number 0752 REPRESENTATIVE RYAN asked if it was conceivable to have a contractual arrangement for provisions protecting Alaskans for hire than to do so statutorily. Number 0776 MR. OSTROVSKY stated that it is probably better if it is not a function of legislature. He stated that this process would go through a level of negotiation when the sponsors and the commissioners form the contract. He stated that there could be stronger contractual terms and the less they are the product of legislation the better the legal argument is. Number 0848 REPRESENTATIVE BRICE asked if there were any other states that had local hire provisions. Number 0860 MR. OSTROVSKY replied yes, there have been a lot of cases. They were different situations. He referred to South Dakota and stated that the state owned a cement plant and gave a preference to residents to purchase cement. He stated that it was upheld because the state was acting in its propriety capacity. He stated that Boston had a local preference for public construction project and it was challenged under the commerce clause of the U.S. Constitution which prohibits restraints on commerce. It survived the challenge as the state was acting as proprietor but it might not have survived the challenge under the privileges and immunities clause. Number 0945 REPRESENTATIVE BRICE stated that it was his understanding that there were some areas in the Pacific Northwest that have been able to seek relief from Congress in establishing local hire provisions for the timber industry. MR. OSTROVSKY stated that he would look into it. Number 0998 CHAIRMAN HODGINS stated that on page 15, Section 3, defines an Alaska resident to be someone who received a permanent fund dividend check or has obtained two items from a list which includes drivers license and voter registration. He stated that this means that anyone can become a resident in close to an hour. Number 1042 MR. OSTROVSKY stated that he would change the language to read "voter registration card and". He would delete drivers license and motor vehicle registration. He stated that with these changes the other requirements require a years residency. Number 1102 CHAIRMAN HODGINS asked if that would stand the test. Number 1109 MR. OSTROVSKY replied that it is as it is an accountability method, for purposes of this project. Number 1144 CHAIRMAN HODGINS asked if it would be possible to come up with a level of participation and local hire to give incentives to certain companies. Number 1158 MR. OSTROVSKY replied that is an interesting question but incentive is the flip side of disincentive. He stated that he would imagine it could provide an incentive for a royalty reduction. However, favoring one over another would be coercing resident hire at the expense of nonresident hire. Number 1213 CHAIRMAN HODGINS asked if he could present the committee with some language, understanding what the committee would like to do. Number 1235 MR. OSTROVSKY stated that it is important to distinguish between employers and employees. He stated that an incentive program may not act as a bar to an employer coming in because all employers would be able to bid and if they met certain local hire requirements they would then get an incentive. He stated that the bill was drafted thinking that it was as far as the department could constitutionally go. He stated that the changes he suggested would change the requirement to essentially a year. Number 1371 REPRESENTATIVE ROKEBERG asked if the Department of Law has recently defended that definition of what a resident is. Number 1424 MR. OSTROVSKY replied that he is not aware of a recent case and in a sense the definition of resident is not the constitutional problem here. It is how it is implemented. He stated that the state can call a resident anything they want to, it is just the exclusionary measures that brings debate. Number 1466 REPRESENTATIVE ROKEBERG asked if a one year residential requirement is constitutional and defendable. MR. OSTROVSKY stated that it is defendable as long as it is in this bill as long as it does not act as a bar... CHAIRMAN HODGINS asked as long as it is never applied. MR. OSTROVSKY replied as long as it does not act as a bar to someone seeking employment. He stated that accountability is at the heart of this. He stated that the industry will have to disclose their hired Alaskan residents and as private contractors, they can do a lot things that the state cannot make them do. The bill would provide the information for everyone to consider this in a contemporaneous way. Number 1560 REPRESENTATIVE ROKEBERG asked if the qualification for the permanent fund dividend has ever been tested in the courts. MR. OSTROVSKY stated that he is sure it has. REPRESENTATIVE ROKEBERG referred to Representative Ryan's idea that it could be held in contract and asked if it is better to not have the definition of Alaska residency in the bill. Number 1642 MR. OSTROVSKY replied that there is nothing wrong with defining an Alaskan but the individual contracts are better suited to further mandate Alaskan hire. Number 1743 REPRESENTATIVE BRICE asked what is the longest term of an Alaskan resident. Number 1781 MR. OSTROVSKY replied that as far as he knows it is a year. Number 1805 REPRESENTATIVE BRICE stated that he keeps bringing up the distinction between a bar to employment verses accountability and asked if he could go into depth. Number 1820 MR. OSTROVSKY replied that because of the constitutional constraints, accountability gives the incentive for producers to have local hire because they come to the legislature for many things. He stated that it would seem to be a powerful tool. Number 1916 REPRESENTATIVE RYAN suggested the longevity bonus and the pioneer home as criteria. Number 1998 REPRESENTATIVE ROKEBERG in regards to pioneer homes it has been lowered to one year. TAPE 98-22, SIDE A Number 0031 ED FLANAGAN, Deputy Commissioner, Office of the Commissioner, Department of Labor, stated that the big key is that the industry voluntarily agrees to adopt the language to hire residents. He stated that within that context there could be the definition of a resident. He stated that there has been a matrix of indicators that can be used. He stated that it is in the eye of the beholder looking at the data to decide what a resident is. He stated that British Petroleum gives a very detailed report every three years on their workers. Number 0138 REPRESENTATIVE KEMPLEN asked page 15 the bill refers to "qualified." He asked if the Department of Labor has given any sort of hard thinking to future demand of qualified Alaskans for this project and whether there is in the current labor pool sufficient numbers of qualified Alaskans to meet the projected demand for the project. Number 0170 MR. FLANAGAN replied that not for this project but on a more tangible basis there is a projected large amount of work for 1999 and 2000 on the North Slope. He stated that the Oil and Gas working group has done a skills and projected labor needs assessment with the industry for that period. They have tried to identify the training needs for that demand. He stated that if they address that need and meet it, it would roll-over and take care of this project. Number 0226 REPRESENTATIVE KEMPLEN stated that there was a suggestion to solidify the connection between the industries need for trained labor and the provision of that trained labor was the notion "of payment in lieu of taxes". The suggestion was that there could be a credit against that "payment in lieu of taxes". For example, an oil company could train their labor force and get a benefit which would be a credit against that "payment in lieu of taxes". He asked if he was saying that the energy industry in Alaska is already solid and that connection has already been established. He asked if this notion of a credit is not to be needed. Number 0280 MR. FLANAGAN responded that he would not say that. He thought that the efforts to date have probably identified the needs. This incentive, he did not believe has been discussed but would merit consideration. Number 0306 REPRESENTATIVE BRICE referred to page 13, line 30 and the requirements for local hire and stated that one of the provisos is competitive priced labor. He asked that it is competitively priced compared to what. Number 0325 MR. FLANAGAN replied that he could not place that in context for him. CHAIRMAN HODGINS stated that the bill would be held over. ADJOURNMENT Number 0355 CHAIRMAN HODGINS adjourned the House Special Committee on Oil and Gas meeting at 12:00 p.m.