Legislature(2017 - 2018)GRUENBERG 120
02/16/2018 01:00 PM House JUDICIARY
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| Audio | Topic |
|---|---|
| Start | |
| HB330 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| *+ | HB 330 | TELECONFERENCED | |
| + | TELECONFERENCED |
HB 330-DNR: DISCLOSURE OF CONFIDENTIAL INFO
1:04:08 PM
CHAIR CLAMAN announced that the only 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."
1:04:49 PM
ED KING, Legislative Liaison, Commissioner's Office, Department
of Natural Resources, advised that HB 330 is viewed as the
"Protective Orders Bill." The title of this bill is "DNR
disclosure of confidential data," which may raise alarm bells
for some people. Mr. King turned to the PowerPoint presentation
titled, "Protective Orders, HB 330" slides 1-3, and advised that
the intent of HB 330 is not to publish confidential data for the
general public to consume. This protective order bill directs
that the confidential information would be disclosed only to
appellants or participants in an audit in order to provide the
complete administrative record in the adjudication of an appeal,
he explained.
MR. KING advised that the Department of Natural Resources (DNR)
is the land manager of the lands of the state, the Division of
Oil & Gas is housed under DNR and it is responsible for the
management and administration of the oil & gas leases in the
state. Within the Division of Oil & Gas, a section performs
audits to make certain the state receives its due share under
its lease agreements. He pointed out that the lease agreements
contain terms requiring payments to the state, and every month
the leaseholder provides a report to the state calculating the
amount of the royalty or net profit share payments due to the
state. The audit section ascertains whether those payments were
correctly calculated and the state received its appropriate
amount of funds, he said.
1:07:07 PM
MR. KING noted that prior to 2003, the royalty audit section was
housed under the Department of Revenue (DOR), and under House
Bill 246 [passed in the Twenty-Third Alaska State Legislature],
those functions were moved to DNR to perform its own audits.
Subsequent to the 2003 move, 91 audits have been conducted and
have generated additional payments to the state in the amount of
approximately $270 million. Those payments, he explained, are
usually the result of an error on one of the reports, usually on
something associated with either transportation deductions or
the price used in the calculation of the royalty payments.
There are four methods within the state's lease contracts to
calculate the appropriate payments to the state, and the highest
of those four calculations is the amount due to the state. The
first method, he offered, is simply the price the company
received for the oil it sold from the lease; the second is the
volume weighted average of the three highest (indisc.) prices;
and the other two calculations are based on "posted prices,"
which are not actually applicable to Alaska. Generally, he
remarked, the first two computation methods are used and the
highest of those two computations generate the appropriate
payments to the state under its lease terms.
1:08:42 PM
MR. KING turned to slide 4, titled "Why HB 330?" and advised
that this legislation is important to DNR because the companies
provide royalty reports to DNR, and it calculates the average of
those highest three payments to determine the appropriate
payment. He explained that when a company provides its royalty
reports to the state, the company bases those payments on what
it received, and that is not necessarily what the lease terms
will dictate. However, he explained, because those contracts
between the leaseholder and its purchasers are confidential
under current law, DNR cannot provide those confidential
contracts to the company being audited wherein DNR is evaluating
these additional royalty assessments. Currently, seven royalty
audits are pending in the commissioner's office and are worth
approximately $39 million, if all are adjudicated in the state's
favor. In recent years, some of these leaseholders have
objected to the state disclosing that confidential data to other
leaseholders, he advised. Therefore, the Department of Natural
Resources (DNR) has experienced situations where even though it
believes it has the authority to prosecute the lease terms, if
there was a court ruling against DNR's ability to do so, it
would carry criminal charges for the person disclosing that
confidential data. Out of an abundance of caution, he advised,
DNR is asking for explicit authority to disclose that
information to certain parties during an appeal because that
information is necessary to fully adjudicate that appeal.
1:10:49 PM
MR. KING explained that the major issue relates to those seven
currently pending and future audits, and this bill allows DNR to
more quickly adjudicate those additional revenues for the state.
He offered that DNR realized that, occasionally, an appeal was
before the commissioner and due to the confidential data
contained within the record, the appeal could not be fully
adjudicated. He described that it is a "very rare
circumstance," and opined that it has only taken place twice in
the last 10-years. These situations, he explained, are when a
third party, outside of a unit agreement, brings an appeal to
the commissioner's attention because it had a financial interest
in the decision. Thereby, causing DNR to go to court to obtain
a protective order allowing that information to be disclosed.
The manner in which HB 330 is written, allows DNR to issue that
protective order in those rare circumstances, as well.
1:11:58 PM
MR. KING turned to slide 5, titled "What are Protective Orders"
noting that the slide discusses a confidentiality agreement the
commissioner can issue, and companies are compelled to enter
into that agreement. He acknowledged that this might sound as
though it is "a very forceful tool," but it is actually a tool
many agencies utilize within the state, such as the Department
of Fish & Game (ADF&G), and the Department of Administration
(DOA). He reiterated that both of these departments have the
ability to issue these protective orders, and the Department of
Revenue (DOR) has the ability to disclose confidential data in
the same manner discussed here when adjudicating appeals on tax
issues. Of course, he said, courts issue protective orders when
situations arise where the lack of the confidential data would
prevent the case from being completed. It is a common tool, he
described, used by courts, arbitrators, and many other agencies,
and DNR is not asking for anything "that is too much beyond
that." It would give DNR the ability to provide confidential
information contained in the record solely to those parties
directly interested as an appellant and, he stated, only under
the protective order limiting the ability to utilize that
information. He reiterated that DNR will not disclose the
confidential information to the general public because DNR is
under a strict and limiting condition. Under the current bill
language, it is discretionary and the commissioner can issue
those protective orders only when deemed necessary to complete
the appeal process, he related.
1:13:49 PM
MR. KING turned to slide 6, titled, "HB 330" sectional analysis,
and explained that Section 1 is the meat of the bill wherein it
grants an additional duty and power to the commissioner. He
referred to HB 330, [AS 38.05.020(b)(15), page 3, lines 25-30
and page 4, lines 1-4] and advised that DNR adds an additional
paragraph authorizing the commissioner to issue these protective
orders if deemed necessary. The paragraph also provides that
the company's confidential data to be released to these other
parties must have an opportunity to be heard, which is identical
language to DOR under AS 43.55.040. He said that AS
38.05.020(b) allows the commissioner to issue that protective
order limiting the person who may have access to the
information, and the purposes for which that information can be
used.
1:14:57 PM
MR. KING advised that Sections 2-3 are conforming language to
include that additional provision within the existing statutes.
1:15:08 PM
REPRESENTATIVE MILLETT surmised that when it comes to what DNR
would be using the protective order for, it would be a lease
audit, an appeal on royalty rights. She said she was unsure
about the requests for reconsideration, noting there were two in
the last 10-years.
MR. KING responded that there have been two rare situations
where a non-royalty issue was brought forward requiring the
disclosure of confidential data. Both of those situations took
place in the Ninilchik unit, they went to court and one case is
currently pending litigation, he offered. The royalty audit
issue is the real issue DNR is attempting to address here so DNR
does not have to continue to report when situation do arise or
come back before the legislature for this additional
authorization at a later date.
1:16:08 PM
REPRESENTATIVE MILLETT surmised that the royalty audit would be
when the state is in dispute with a company regarding what the
company owed the state. In the event a unit had two or three
different producers, which is common in Alaska, that information
would have to be compared in that unit to other royalty. She
asked whether there is any concern through this bill about
disclosure and what each producer is paying for competitive
reasons.
MR. KING answered that, from DNR's perspective, it does not
believe there are any concerns. The Department of Natural
Resources (DNR) does not view this idea as violating anti-trust
laws, allowing collusion, or something along those lines, as
being a relevant point here. These are audits of issues that
happened in the past and are contracts from the past wherein DNR
discloses one contract to another party for the purposes of
determining how much royalty was due three-to-six years ago.
Therefore, he pointed out, the release of that confidential data
is different than getting two people in a room to collude and
try to drive prices toward a certain market level. This
legislation is different than what an anti-trust type argument
would require, and DNR does not believe there are any reasons
why, for competitive reasons, the ability to disclose would
somehow injure one of the parties. In the event there are
issues, he advised that the party has the opportunity to bring
those issues to the attention of the commissioner prior to that
protective order being issued and the confidential data
disclosed. He pointed out that if DNR did have to go to court,
this protective order idea is how the court would resolve the
issue, and when the court issues a protective order, no
colluding or anti-trust issues are brought forward in those
cases.
1:18:16 PM
REPRESENTATIVE MILLETT related that she understands how a court
would deem a protective order, except the discussion here is
about a commissioner who could change every four-years or more
often. She surmised that DNR's problem is that it just does not
want to go to court every time it wants a protective order to
disclose data. She asked whether DNR is anticipating higher
audit disputes in the future, and what is the genesis of the
bill.
MR. KING replied that DNR currently has seven audits pending
that are related to this issue, and that DNR does believe it has
the authority to disclose the confidential data that is the part
of the audits. However, he said, due to a statute maintaining
that the disclosure of confidential data carries a criminal
penalty, DNR is hesitant to enforce that clause in the lease
simply because it may provide some type of criminal charge for
DNR's employees. One way to resolve this issue would be for
explicit authority from the legislature to release confidential
data, another option is to prosecute the lease terms and "do it"
without the explicit authority, or DNR could continue going to
the court requesting a protective order, he explained. It is
DNR's belief that HB 330 is the most expeditious manner in which
to resolve the immediate issues, and in the future, he said.
1:20:03 PM
REPRESENTATIVE KOPP asked whether this legislation solely
discusses producers.
MR. KING responded that the confidential data would almost
exclusively come from a leaseholder, it would be a producer of
oil and gas, and the language is general enough that it could
include other leases DNR holds. This could cover some
circumstance in the future, for example, a mining lease with
confidential data, and an appeal from a third party. He related
that that type of situation does not exist currently, but it
could theoretically, and that he guesses he would say yes, that
it is the producers' data, generally speaking.
1:20:55 PM
REPRESENTATIVE KOPP surmised that each producer is currently
obligated to share their price information with the Division of
Oil & Gas via the lease provisions.
MR. KING answered in the affirmative.
1:21:15 PM
REPRESENTATIVE KOPP surmised that the discussion here is what
value is used to compute the royalty due under the lease. He
further surmised that the reason DNR needs to share confidential
information with the producer who "disagreed with the audit," is
because that determination is made on the average price of other
producers and those other producers may not want that
information disclosed due to the competitive advantage of the
information. He asked whether that is the only way, set out in
the law, for DNR to establish what the value is that is owed
under the audit.
MR. KING answered that Representative Kopp was correct.
1:22:15 PM
CHAIR CLAMAN clarified that it is DNR's routine practice to
audit "pretty much every royalty payment." In order to audit a
company effectively, DNR must have access to information from
the producer being audited and may also need information from
another producer not being audited. Information from that
producer's data is partially how DNR determines whether the
royalty payments were correct for the producer being audited, he
commented.
MR. KING clarified that the division already has the
confidential data from all of the leaseholders and it is not
compelling a company to provide additional data.
1:23:13 PM
CHAIR CLAMAN offered a scenario in which Company A is being
audited and Company B's information is important to performing
the audit correctly. Company A needs Company B's information,
which it otherwise would not have, to complete the audit process
correctly, he asked.
MR. KING answered that Chair Claman was correct.
1:23:37 PM
CHAIR CLAMAN noted that before a protective order would be
entered, he surmised that these are protective orders that must
be agreed to by the producers, and it not where DNR can
unilaterally impose the protective order.
MR. KING explained that under current law and processes, DNR
does go to the producers requesting a confidentiality agreement
in order to share the data. The issue is when the producers
refuse to sign the confidentiality agreement that the problem
arises, and this bill would allow DNR to enter into that
protective order and disclose that information without the
permission of the producer.
CHAIR CLAMAN asked whether it is the producer that is not a
party to the audit.
MR. KING replied that it is the owner of the confidential data.
1:24:26 PM
CHAIR CLAMAN surmised that this is confidential data of the
party that is not being audited. Under this law, he commented,
the company not being audited would be able to register its
objections with DNR and the department would decide as it deemed
fit.
MR. KING said that Chair Claman was correct.
1:24:48 PM
CHAIR CLAMAN added that this legislation would give DNR
authority to [release the confidential data], and he asked
whether, before the protective order took effect, the company
not being audited would have the option of appealing that
decision to the court.
MR. KING deferred to Peter Caltagirone, Department of Law (DOL).
1:25:28 PM
PETER CALTAGIRONE, Assistant Attorney General, Natural Resources
Section, explained that when the information being discussed
here is to be disclosed, the unaudited producer receives notice
that its information will be disclosed pursuant to the terms of
a protective order. He explained that there is a period of time
between when it received notice and the information was
disclosed, and within which time it could register its
objections to the division.
CHAIR CLAMAN asked that after the company registered its
objection with the division, and the division decided to proceed
with the protective order allowing the use of the unaudited
company's confidential information, whether the company had the
option of appealing that decision.
MR. CALTAGIRONE responded that the unaudited company would have
to petition the court.
CHAIR CLAMAN agreed, and he asked whether the company would have
the option, if unhappy with the division's decision, to petition
the court for a review of that administrative decision by DNR.
MR. CALTAGIRONE said that Chair Claman was correct.
1:27:14 PM
REPRESENTATIVE MILLETT said, "That's what they do now," and
noted confusion because that is the current process.
CHAIR CLAMAN said that he thought DNR was not issuing protective
orders currently and it had to go to the court each time, and
this bill gives it the authority to issue a protective order.
MR. KING opined that Representative Millett was referring to the
fact that if DNR followed the chain of events "that were just
laid out, then we might not be any better off than we are
today." He then deferred to Mr. Caltagirone.
MR. CALTAGIRONE asked Chair Claman to repeat the question.
CHAIR CLAMAN asked what happens today when an unaudited company
refuses to agree to allow confidential information shared with
the company being audited.
MR. CALTAGIRONE responded that today, the unaudited company
receives a notice letter that its information will be disclosed.
In the event the unaudited company so chose, it could contact
the Division of Oil & Gas, state its objections, and if those
objections could not be resolved, the unaudited company would
seek an injunction from the court preventing its information
from being disclosed.
1:29:18 PM
CHAIR CLAMAN surmised that the department does not have to go to
the court to obtain the protective order, and that the
department is essentially going forward. It is simply a
question as to whether the company wants to file suit to stop
the department from going forward, he commented.
MR. CALTAGIRONE clarified that the Division of Oil & Gas is not
simply going forward, the division issues a letter to the
audited company advising that the information at issue from the
other producers will be disclosed, but only if the audited
company executes a confidentiality agreement. Essentially, he
explained, the confidentiality agreement lays out the same terms
and protections as a protective order. The division advises the
unaudited company that its information will only be disclosed
"if they sign a confidentiality agreement." In short, he said,
the confidentiality agreement limits who can see the
information, the purpose the information can be used for, and it
limits the state's liability if the audited company somehow
missuses the information that is disclosed.
1:30:31 PM
REPRESENTATIVE STUTES asked for clarification because she
thought Mr. King had said that the contracts with the producers
currently have that clause in it, but there is a statute that
precludes that clause, and the concern was the effect of the
statute even though the division has the ability, based on the
contracts, to disclose. She said she was under the impression
that HB 330 would address the concern with the clause in the
statute, even though, currently the contracts the division
enters into allow it to disclose information.
MR. KING said he believes Representative Stutes is correct, the
contracts do have the clause and enforcing the contract requires
that this disclosure be allowed. He explained that when a
company paid the division a royalty payment based on a $50
barrel of oil, and another leaseholder paid the division a
royalty payment based on a $60 barrel of oil, the division would
then send a bill for the difference to the company that received
$50 per barrel. He offered a scenario of the $50 a barrel
company going to the division and asking how it would know that
what the division billed it was accurate, the division would
respond that the bill is based on the contract from this other
company, and the billed company would ask to see that contract,
but the division cannot show it to them because it is
confidential data. It is the division's belief that it has
authority, under enforcement of that contract, to disclose.
Except, he reiterated, a confidentiality clause in statute
carries a criminal penalty and if for some reason a court
decided against the division, then the division's employees may
be subjected to a criminal penalty. He offered that the
Department of Revenue (DPR) has a statute that read, "for these
circumstances you have explicit authority from the legislature"
to get around that statute. The Department of Natural Resources
(DNR) does not have that provision in its statutes, and that is
what it is trying to clean up today.
1:33:52 PM
CHAIR CLAMAN opened public testimony on HB 330. After
ascertaining no one wished to testify, closed public testimony
on HB 330.
1:34:36 PM
REPRESENTATIVE KOPP commented that he would have preferred to
have heard from someone in the industry and the producers, but
"apparently, they did not feel that was necessary." He related
that he is glad to see that the [Division of Oil & Gas] has this
fiduciary duty to make certain the appropriate revenue is
collected in every lease agreement. He pointed to the
sensitivity in this issue, commenting that if the only vehicle
available to come to an appropriate evaluation of the state
royalty owed requires a competitive disclosure, and if the
company's competitor knows the price point, the competitor can
pretty much build the first company's whole portfolio. Frankly,
he said, "we all benefit" from a competitive environment and he
understands why this is a sensitive issue. When the court is
involved, he pointed out, it is a neutral decider of facts
whereas perhaps the individual could be considered favorable one
time and unfavorable another time. He said he guessed there is
some weighing of the balance in how to de-politicize these
orders, and also how to protect the private market information
of these companies so they are not compromised.
1:36:32 PM
CHAIR CLAMAN noted that there is an oil company representative
in the audience who, obviously, prefers not to testify. He
commented that the perspective of the industry on this
legislation is important and his office will contact
representatives as to whether they have an objection to the bill
and address the confidential information issue. Previously, he
said, he had conversation with folks, including industry folks,
who commented that the price information, although confidential,
is not especially sensitive because it is pretty well known.
Although, when getting into things such as geologic data and
proprietary information, it starts becoming more important as to
what is known and not known, he said.
1:38:10 PM
REPRESENTATIVE MILLETT suggested asking someone from DOR Tax
Division to speak to the committee about how it adjudicates
decisions on appeal.
1:38:43 PM
CHAIR CLAMAN related that DOR would be asked to attend the next
hearing. He said that one of the points of this bill is for DNR
to be on the same footing as other departments when pursuing
these types of audits. The Department of Natural Resources
(DNR) is not attempting to be put in a position that is more
advantageous than other departments in the state, he pointed
out.
1:39:01 PM
REPRESENTATIVE KREISS-TOMKINS said he would appreciate hearing
the industry's perspective on this bill and echoed
Representative Millett's comments. Particularly, he said, if
DNR is trying to create a parallel in the statutes between DNR
and DOR, it would be helpful to learn how this works at DOR and
to possibly extrapolate any potential pitfalls.
[HB 330 was held over.]
| Document Name | Date/Time | Subjects |
|---|---|---|
| HB330 ver A 2.16.18.pdf |
HJUD 2/16/2018 1:00:00 PM HJUD 2/21/2018 1:00:00 PM HJUD 2/23/2018 1:30:00 PM HJUD 2/26/2018 1:00:00 PM HRES 3/9/2018 1:00:00 PM HRES 3/12/2018 1:00:00 PM HRES 3/14/2018 1:00:00 PM |
HB 330 |
| HB330 Transmittal Letter 2.16.18.pdf |
HJUD 2/16/2018 1:00:00 PM HJUD 2/21/2018 1:00:00 PM HRES 3/9/2018 1:00:00 PM HRES 3/12/2018 1:00:00 PM HRES 3/14/2018 1:00:00 PM |
HB 330 |
| HB330 Presentation 2.16.18.pdf |
HJUD 2/16/2018 1:00:00 PM HRES 3/12/2018 1:00:00 PM HRES 3/14/2018 1:00:00 PM |
HB 330 |
| HB330 Fiscal Note DNR-DOG 2.16.18.pdf |
HJUD 2/16/2018 1:00:00 PM HJUD 2/21/2018 1:00:00 PM HRES 3/9/2018 1:00:00 PM HRES 3/12/2018 1:00:00 PM HRES 3/14/2018 1:00:00 PM |
HB 330 |