Legislature(2017 - 2018)BARNES 124
04/24/2017 03:15 PM House LABOR & COMMERCE
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| Audio | Topic |
|---|---|
| Start | |
| HB229 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| *+ | HB 229 | TELECONFERENCED | |
| + | TELECONFERENCED |
HB 229-OIL & GAS BUSINESS BOND
3:18:33 PM
CHAIR KITO announced that the only order of business would be
HOUSE BILL NO. 229, "An Act relating to a bond or cash deposit
required for an oil or gas business; relating to claims against
an oil and gas business; and providing for an effective date."
3:19:01 PM
REPRESENTATIVE PAUL SEATON, Alaska State Legislature, as prime
sponsor, introduced HB 229. He said the bill would suspend
until January 1, 2019, the surety bond or the cash deposit
required for oil and gas businesses operating in Alaska. The
suspension would provide time to the Department of Commerce,
Community, and Economic Development (DCCED) to develop the
regulations needed to do that, he explained. Providing
background, he noted that last year the surety bond was
incorporated into House Bill 247. The necessity for the bond,
he related, is that small companies without deep pockets come to
Alaska and go bankrupt. The bankruptcy code allows the
bankruptcy court, whether that court is in Alaska or Houston,
Texas, to go back 90 days from the time the bankruptcy was filed
and require Alaskan businesses to repay the money they received
for supplying materials or labor to the [oil or gas] company and
this money is then given to security creditors.
REPRESENTATIVE SEATON drew attention to a newspaper article in
the committee packet regarding [Buccaneer Energy Ltd.
("Buccaneer")], a company that came to the Cook Inlet with a
jack-up rig that was financed in large part by the Alaska
Industrial Development and Export Authority (AIDEA). The State
of Alaska filed for bankruptcy, he said, and the bankruptcy
court ordered the businesses that had supplied fuel, water,
moorage, and other services [to Buccaneer] to repay that money
so that the [court] could give the money to secured creditors.
A look was therefore taken, he explained, to determine how to
prevent unsecured creditors, suppliers in Alaska, from being at
risk for security creditors that didn't do their due diligence
on a company and can claw back money from Alaskan suppliers for
90 days prior to when that bankruptcy was filed.
REPRESENTATIVE SEATON said the purpose of the surety bond or
cash [deposit] was to get over this unfair situation. However,
he continued, there have been some glitches in how to provide
that surety bond to oil and gas companies and DCCED is here to
testify in that regard. The bill is simple in that it is just
delaying the imposition of the surety bond or cash deposit so
that the department has time to get its regulations in place.
3:22:36 PM
REPRESENTATIVE KNOPP offered his appreciation to the sponsor for
bringing forth the bill and noted that many of his friends have
been stung. He pointed out that that particular bankruptcy law
is applicable to everything, not just oil and gas. He inquired
whether the bill is specific to oil and gas or would be
applicable to every industry.
REPRESENTATIVE SEATON replied that HB 229 does not have broader
implications and is specific to oil and gas companies that get a
license. The requirement would terminate when the company goes
into commercial production, he continued, because a lease is
something to attach to and so people could sue. There are other
requirements, but at that point in time [the legislature] wasn't
trying to make something that every company would have to have
on the books forever. He reiterated that new people come into
Alaska who don't have experience here and, in several instances,
they have gone bankrupt while [the state] is providing oil and
gas tax credits or other financing like the AIDEA loan. There
is no way to circumvent the bankruptcy court, he noted, so the
purpose of this was to go to unsecured creditors. The thought
was that if something was payable to just unsecured creditors,
the bankruptcy court might not be able to take that unsecured,
creditor-directed payment and give it to secured creditors.
3:24:46 PM
REPRESENTATIVE JOSEPHSON asked whether the regulations could be
written in a way that would allow for [Alaska's] unsecured
creditors to trump secured creditors and be acceptable with the
bankruptcy code.
REPRESENTATIVE SEATON responded that that was the purpose of
directing it through a surety bond that was directed to pay
unsecured creditors. While legislation sometimes gets changed
around, he continued, the order of payment from the surety bond
[is first to] material equipment and supplies delivered in the
state. The company wouldn't own [the surety bond]. Secondary
after that is labor including employee benefits and third is
taxes and such.
3:26:16 PM
REPRESENTATIVE JOSEPHSON recalled that there are ways of using
the Uniform Commercial Code (UCC). Two chapters in particular
are Article 2 on sales and Article 9 on secured transactions
where someone could try to perfect a security interest. He said
he doesn't know if that is even necessary if this gets done
right. He inquired whether the sponsor is saying that the
impetus for [HB 229] is that the department just needs more time
to promulgate regulations.
REPRESENTATIVE SEATON answered yes, that is what the department
has told him. Work was being done through Legislative Legal and
Research Services to figure out how to do this and the surety
bond or cash bond payable to certain businesses was the only way
that came up as a possibility. He said he doesn't think this
has been tested in court and so it is not known 100 percent that
it will work, but if it is not payable to secured creditors,
then the thought is that there is more likelihood that the
unsecured creditors wouldn't have to repay those amounts. There
would be some hurdles that would have to be jumped over for the
bankruptcy lawyers instead of just issuing a letter that says a
business owes a certain amount of money that it was paid for
fuel or water that that business had supplied to the [oil and
gas company] and that the [oil and gas company] had used, but
now that business must pay back the money because there is
somebody else wanting the money.
3:27:57 PM
REPRESENTATIVE BIRCH asked whether the oil and gas industry is
the only industry required to provide a surety bond or cash
deposit. He further asked whether this would be done uniformly
across other businesses, such as fish processors or aviation
businesses.
REPRESENTATIVE SEATON replied that this was targeting a specific
problem. Buccaneer was the first instance where it became
evident that there wasn't a way for suppliers to know that the
company was getting ready to file bankruptcy. Due diligence for
a fuel supplier, he said, is not the same kind of due diligence
that secured creditors should be applying. This was
specifically targeted at small companies coming to Alaska
without deep pockets and relying on state credits to finance
their business and then when something went wrong, they went out
of business and small suppliers in Alaska were left on the hook.
Therefore, this isn't generally applicable across all businesses
in Alaska. It was specifically targeted at oil and gas and it
is required before the company gets an oil and gas license and
so would be attached to that business.
3:30:10 PM
REPRESENTATIVE BIRCH inquired whether the sponsor sees any merit
in applying a uniform approach to other enterprises that might
be similarly situated that are outside the oil and gas business.
REPRESENTATIVE SEATON responded that whether or not there would
be merit, it is very complex to target something that is broad
across the entire business spectrum of Alaska. This was an
attempt to solve a problem that required a state license to
perform, he explained, and there was some due diligence by the
state that wasn't adequate because the state gave them a license
to start drilling. This was targeted at a certain aspect of
what was proceeding and seen in several cases in Alaska and not
in general businesses. He said he thinks that someone else
expanding something to general businesses would have a lot of
impact if it were talking about every business in the state.
REPRESENTATIVE BIRCH said he thinks there are various mechanisms
that can be applied. As an example, he shared a story about an
airplane that was attached for money in the amount of $60,000
that was owed. However, he stated, he is not familiar with this
particular [mechanism].
3:31:55 PM
REPRESENTATIVE SULLIVAN-LEONARD recalled that when Buccaneer had
problems with the jack-up rig, it stored the rig in the Homer
port. She asked whether Buccaneer paid the City of Homer.
REPRESENTATIVE SEATON confirmed that Buccaneer had a business
relationship with the Port of Homer and said he thinks there was
about $20,000 in port fees due. But, he continued, more than
anything, the proposal would target small businesses that
supplied materials and so [the Port of Homer] would be the third
tier. He reiterated that the surety bond would be applied first
to material equipment and supplies delivered in the state.
Second, any remaining money would be applied to labor including
employee benefits. Third, it would be applied to taxes and
other amounts due a city or borough in that order and then
repair of public facilities, and finally taxes and other amounts
due to the state. This was targeting small business suppliers
that had provided supplies within 90 days of the [oil and gas]
company filing bankruptcy and being ordered by the bankruptcy
court to pay back the money received for those supplies that
were used up by the company. It was trying to protect small
businesses because small businesses don't have any way to do due
diligence on these companies, he added.
3:34:20 PM
REPRESENTATIVE SULLIVAN-LEONARD inquired whether [the bankruptcy
court] was going after the City of Homer to get back the fees
that had been paid, like what [the bankruptcy court] is doing
with the small businesses here.
REPRESENTATIVE SEATON replied that the City of Homer had to pay
back the port fees that had been collected, which were about
$8,000 or $20,000.
3:34:59 PM
REPRESENTATIVE WOOL inquired whether in the sponsor's opinion
$250,000 is enough, given that several of the Buccaneer debts
were $70,000.
REPRESENTATIVE SEATON responded, "No, ? it depends on how far
down the scale you are trying to go. If you are going to the
first one material equipment and supplies delivered in the
state that is mostly the small businesses." There could be
some on the second criterion, he noted, which is labor including
employee benefits. He said the intent was not to get in between
the relationship between a prime contractor and an oil company
but to [address] "the small, unsecured people" who are actually
delivering a product that is used up and now they not only don't
have the product but they have to pay back the amount of money
"that product was used for." So, he continued, it was trying to
cover a specific range of small businesses that don't have the
ability in their normal operations to do the due diligence to
determine whether an oil company has too thin a financial backup
and would go bankrupt.
3:36:56 PM
REPRESENTATIVE KNOPP said he agrees with Representative Wool
that given all the claims, $2 million to $3 million is more
appropriate. He asked why $250,000 was chosen for the bond. He
recalled the sponsor stating that the bond would be in effect
until the company came into production. However, he noted,
Buccaneer was in production with the Kenai Loop gas fields that
were producing a fair amount of gas in good contracts. He asked
what the sponsor thinks is the point at which a company can get
rid of that bond.
REPRESENTATIVE SEATON answered it is a question of whether to
"leave it on forever." He said it was his call early on to say
that once someone goes into commercial production there's
probably something that can be attached, something of value, so
there could be lawsuits the other way as well. The problem, he
continued, is that small operators can't hire a lawyer to go
after somebody for $20,000. He pointed out that Representative
Birch's example of $60,000 owed in fuel, and for which a plane
was attached, was not a situation of bankruptcy. Had it been
bankruptcy, the plane could not have been attached.
Representative Seaton stated it comes down to finding a point
where operations have been going on long enough and the company
is now having actual production or commercial production. So,
he reiterated, it was a call. He further noted that having it
go for forever was objected to. Should ConocoPhillips, BP, or
folks coming into production in Cook Inlet have to carry a
surety bond on the books forever? The intent here, he said, was
to get to small [oil and gas] companies that were coming in with
thin financial resources.
3:39:41 PM
REPRESENTATIVE BIRCH inquired whether the sponsor has a sense
for the cost of a surety bond. For example, he asked, what
would be the incremental cost or additional cost of providing
that level of assurance.
REPRESENTATIVE SEATON replied that if he remembers correctly
from when this was done, a construction bond, which is a kind of
surety bond, was about 2.3 percent per year. But, he continued,
he doesn't know what it is now and hopefully that is something
the department knows from having moved forward.
3:40:45 PM
FRED PARADY, Deputy Commissioner, Office of the Commissioner,
Department of Commerce, Community, and Economic Development
(DCCED), began his testimony by thanking Representative Seaton
for bringing this legislation forward last session. He related
that Representative Seaton has spent the last six months working
with the department as it tries to implement these provisions
that are going to be delayed by HB 229 should it pass. Speaking
candidly, he stated that the department did not foresee the
complexities that are involved in implementing these bonding
requirements as outlined in Alaska Statute (AS) 43.70.25. Since
the passage of House Bill 247 last year, the department has been
working to find the least burdensome way to put these
requirements into action and that is AS 43.70.025, which is the
bond itself, and AS 43.70.028, which is the pecking order for
release of those funds. Those statutes provide important
protections for small businesses that contract with oil and gas
companies, he said, and DCCED is fully committed to implementing
them.
MR. PARADY outlined some of the obstacles that DCCED has
encountered. He said the first stumbling block the department
came across is seemingly innocuous, but it is the process of
identifying which businesses to which the bond applies. All
business licenses are associated with one or more North American
Industry Classification System codes (NAICS), he explained.
When Director Fagerstrom, the state's lead business license
person, dug into the details of it she found there are some 23
different codes that could be considered, having petrochemical
in the title. The department narrowed it down to applying to
four. An example of the kind of problem that is encountered, he
related, is that NAICS code 211111 is crude petroleum and
natural gas extraction. It was a surprise to find this code
attached as a secondary code to the business license of Usibelli
Coal. While no one anticipates this applying to Usibelli Coal,
he continued, this is what is encountered when looking at those
classification systems and sorting out where it applies and when
it doesn't.
MR. PARADY said it is important the department get right the
application of the proper code and to which businesses it
applies because other surety bonds in DCCED's Division of
Corporations, Business and Professional Licensing are attached
to a professional license rather than to a business license. He
stated that the department doesn't currently have a process for
attaching bonding requirements to business licenses without
unnecessarily delaying business licenses for those who are not
doing work that is subject to the bonding requirements for the
specific NAICS code.
3:43:57 PM
MR. PARADY pointed out that the regulatory framework for these
statutes must include a simple way to identify which businesses
are required to post bond, and then a mechanism is needed to
release the bond when a company begins producing oil or gas in
commercially viable quantities. That takes coordination between
DCCED, the Department of Revenue, and the Department of Natural
Resources, which DCCED has been actively working on. It is a
matter of trying to not impose an undue burden and of trying to
make that process clear. There are many questions to be sorted
out. For example, in releasing a surety bond based upon
commercial production, what if a company has commercial
production in the North Slope but the bond is applicable to an
activity in Cook Inlet? There are also questions about
subsidiaries and hierarchy and which level of the company to
attach the requirement to.
MR. PARADY said DCCED has put forth a good faith effort to
develop these regulations. The department put out a scoping
notice to solicit public comment and industry input and received
two comments, of which one was a response from ConocoPhillips.
He stated that the department believes a constructive solution
can be found. However, he continued, implementing the statute
without a sound regulatory framework is impractical for all
parties involved and therefore DCCED approached Representative
Seaton to seek the delay that is before the committee in HB 229.
3:45:28 PM
REPRESENTATIVE BIRCH remarked that it seems to him there is an
inching towards a "nanny state" of babysitting businesses that
don't have the wherewithal to research who their customers are
and basically getting stiffed by a customer. Regarding small
business, he asked whether there is a size of business that is
big enough that it doesn't stand an opportunity to collect on a
bill through the claims court, whereas a business doing less
than $1 million a year in revenues does have an opportunity. He
further asked whether there is a mechanism for distinguishing
between a supply that is a big company and one that is a small
business.
MR. PARADY deferred to Representative Seaton, the original
sponsor, for an answer. He noted, however, that AS 43.70.028
lists the pecking order of who gets paid and the first is
material equipment and supplies delivered in the state, the
second is labor including employee benefits, and then it goes to
taxes and repair public facilities. There is an effort in that
identification to target the smaller [businesses], he continued,
but to his knowledge there is not a definition of small business
that is applicable.
3:47:03 PM
REPRESENTATIVE BIRCH offered his understanding, then, that there
is no distinguishing between a large national supplier versus a
local supplier in Homer as far as recovering against the bond or
the party that has gone bankrupt.
MR. PARADY again deferred to Representative Seaton but said that
to his best understanding the hierarchy that is there was an
effort to address that. However, he cautioned, as was alluded
to by Representative Josephson, care must be taken when
considering bankruptcy laws and what is applicable in that an
Alaska-only distinction cannot be easily drawn, and care must be
taken in how creditors are dealt with in that regard. Of
course, he continued, this is intended to address unsecured
creditors as opposed to secured creditors.
3:47:58 PM
REPRESENTATIVE BIRCH asked whether this applies to any other
businesses or any other enterprises in Alaska or in any other
state that Mr. Parady is familiar with where the State of Alaska
intercedes to require a backstop on a contract. He said he is
not familiar with the state intervening to protect suppliers in
this manner.
MR. PARADY replied he is not familiar with the research that was
done to bring this concept forward and is not aware of a similar
provision in another oil and gas state. But, he noted, this is
statute that is applicable within the state of Alaska. The
challenge is in finding out how to make it work, and DCCED needs
more time to do so.
3:48:46 PM
REPRESENTATIVE KNOPP addressed the complexities of implementing
the surety bond and said it is a small business protection
measure to try to protect the small businessperson from a bad
deal. He said he questions the actual need for the surety bond
now that House Bill 247 has been repealed. There is no longer
that incentive to reinvigorate Cook Inlet, he continued, so most
focus will be on the North Slope. He opined that if it was a $2
million to $3 million bond, he would be all over it, but time
is being spent trying to figure this out for too little benefit.
The department has put effort into this over the past year and
more will be required going forward for a $250,000 bond. He
noted that the bond would be divisible by multiple claims, some
in the range of $70,000, and questioned whether the effort that
will be put into solving the complexities will be worth the
gain. He asked whether there is still a need for it after the
repeal of House Bill 247. He also asked who is going to have to
post the bond and whether it is somebody who is financially
dependent on borrowing money from the state or looking forward
to the generous credits offered by the state. He further asked
who is going to determine when the bond needs to be posted and
what the requirements are going to be for that.
3:51:06 PM
MR. PARADY responded that the aforementioned are broad questions
about equity and fairness in small business and he would like to
narrow them. He offered his belief that Representative Knopp is
referring not to the repeal of House Bill 247, but to the repeal
of oil and gas tax credits in general. He said House Bill 247
is current statute that DCCED is tasked with implementing. He
said the path the department is trying to find going forward is
how to implement it effectively, and DCCED is seeking a delay so
it can do so.
MR. PARADY said that regarding the larger questions asked by
Representative Knopp, he would punt those back to the wisdom of
the legislature because the legislature gave the department this
statute. As the legislature works its way forward with it, he
continued, tweaks might be needed. He stated he can't speak to
the size of the bond, but he can speak to the reality of what
brought Representative Seaton's measure forward because he sits
on the board of AIDEA. There was a situation where the place of
secured creditors was firmly established in the pecking order,
but unsecured small Alaska businessmen were left holding the
bag. The amount that was set upon at $250,000 was a judgment
call, he continued. While he is not aware as to the cost of the
bond, he recalled that Representative Seaton referenced 2.3
percent when asked about this by Representative Birch. He
related that in earlier parts of his career he did mine
reclamation bonding that ran 2.5 percent. At that level, he
calculated, a $250,000 bond could cost on the order of $6,500-
$7,000 and so it isn't insignificant. If the bond were to be
increased to $2 or $3 million, the business cost would be
increased accordingly. Therefore, he said in closing, he would
leave the aforementioned questions to the future and seek the
delay that DCCED is requesting so it can try to do a decent job
with this.
3:53:12 PM
REPRESENTATIVE KNOPP agreed he misspoke and that it was repeal
of some of the credits and not repeal of House Bill 247. He
said the question that haunts him is solving the complexities
versus the gain and whether it would be better to rethink this
or whether the thought is that it can be reasonably done for
what little guarantee is going to be offered.
MR. PARADY answered that the little guarantee of $60,000,
$100,000, or $250,000 that is being offered to small businesses
is a substantive contribution to their future liability, and he
said he thinks there is value in it. But, he continued, a path
forward through the details of who it applies to, what NAICS
code, how it's released, what constitutes commercial production,
and what level of subsidiary is required to carry it needs to be
found. If DCCED fails to find a path it will be back before the
committee with additional information and back in front of
Representative Seaton trying to match the department's
regulatory framework to the direction that's being given in this
bill.
3:54:37 PM
CHAIR KITO opened public testimony on HB 229. There being no
one wishing to testify, Chair Kito announced that HB 229 was
held over.
| Document Name | Date/Time | Subjects |
|---|---|---|
| HB229 Sectional Analysis ver D 4.14.17.pdf |
HL&C 4/24/2017 3:15:00 PM |
HB 229 |
| HB229 Sponsor Statement ver D 4.14.17.pdf |
HL&C 4/24/2017 3:15:00 PM |
HB 229 |
| HB229 Supporting Document- Article ADN 4.14.17.pdf |
HL&C 4/24/2017 3:15:00 PM |
HB 229 |
| HB229 ver D 4.14.17.pdf |
HL&C 4/24/2017 3:15:00 PM |
HB 229 |
| HB229 Fiscal Note DCCED-DCBPL 4.21.17.pdf |
HL&C 4/24/2017 3:15:00 PM |
HB 229 |