Legislature(2003 - 2004)
04/11/2003 03:33 PM Senate RES
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* first hearing in first committee of referral
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+ teleconferenced
= bill was previously heard/scheduled
SB 50-ROYALTY GAS CONTRACTS
CHAIR OGAN informed members that a proposed committee substitute
had been prepared, Version I, which is essentially the same as
the House Finance Committee substitute to HB 57.
SENATOR WAGONER moved to adopt Version I as the working document
of the committee.
CHAIR OGAN objected for the purpose of discussion. He then
informed participants that he did not intend to move the
legislation from committee today because Version I makes
substantive changes to the last version of the bill. In
addition, an amendment has been proposed.
MS. MARY JACKSON, staff to Senator Wagoner, sponsor of SB 50,
verified that Version I is the companion legislation to CSHB
57(FIN), which is in the House Rules Committee. She explained
the differences in Version I as follows:
· On page 2, the merged utility and manufacturing language
was separated into two subsections, (1)(A) and (1)(B). New
language was added to line 23 that reads, "for a contract
entered into for a circumstance described in (1)(A) of this
subsection." Section (1)(A) is specific to the utilities
and is existing language in statute. Section 1(B) is new
and contains the requirements for manufacturers of
agricultural chemicals. She told members that separating
the requirements of utilities and manufacturers into two
sections reads more clearly.
· On page 3, line 9, the word "and" was changed to "or"; the
net result being that any one of the exceptions would come
into play, rather than all of them. That change was
recommended by the Administration.
MS. JACKSON said Chair Ogan previously asked whether the
legislation contains a mechanism to allow the commissioner to
negotiate a contract so that the State of Alaska would share in
the profit as well as the risk. She said such a provision would
lead to a better fiscal note and told members the sponsor has
provided a proposed amendment on that subject for the
committee's consideration.
SENATOR STEVENS referred to Section 2(B)(ii) on lines 5, 6 and 7
of page 3 and asked why it contains the words "tangible benefits
to the state" and differs from Section (2)(A)(ii) on page 2.
MS. JACKSON explained that Section (2)(A) applies to the
utilities. Section (2)(B) is new [and applies to value-added
manufacturers]. Those words were added so that if the
commissioner determined that a royalty reduction would lead to
certain benefits related to employment opportunities or some
other unknown tangible benefit, the commissioner could go
forward with a contract.
SENATOR STEVENS said he thought tangible benefits were included
in respect to the manufacturer, not just the utility.
MS. JACKSON said that is correct.
SENATOR STEVENS said the two sections seem to be contradictory
in terms of tangible benefits.
MS. JACKSON referred Senator Stevens to subsection (A) on page
2, regarding the utilities contracts. She pointed out the
language that begins on line 26 is the same as the language on
page 3, line 5, however it is specific to the manufacturer of
agricultural chemicals.
SENATOR STEVENS asked if that language is more aligned with
subsection (A) than it was in the last version.
MS. JACKSON said it is essentially the same; it has just been
separated into two sections.
SENATOR STEVENS said he thought the commissioner could consider
royalty reductions by offsetting other tangible benefits in the
last version. Now, Version I says the royalty reduction receipts
would not be balanced, which is contradictory. He said the word
"not" should not be included.
TAPE 03-27, SIDE B
SENATOR ELTON clarified that the list of items on page 3
contains the reasons the commissioner could deny a contract
based on a written finding, one being that the royalty reduction
would not be balanced by employment opportunities or any other
tangible benefit to the state. He asked why this language is
more specific for the manufacturers, as it further defines
benefits as employment opportunities or other tangible benefits.
CHAIR OGAN commented that if the state lets a utility lock into
a certain price and the state loses some money, Alaskan
consumers will benefit with cheaper electricity. With
manufacturers, the public benefit is not as tangible. In the
original bill, the manufacturers asked to be treated like a
utility. However, Agrium and its employees might have benefitted
but at an expense to the state.
MS. JACKSON said that is a fair analysis. She pointed out that
language on page 2, line 27, of Version I includes a bar that
the utilities must reach. The language on page 3 includes the
bar the manufacturers must meet.
SENATOR ELTON commented that in the case of the manufacturer,
the consumers who benefit could be overseas and not Alaskan
consumers.
SENATOR WAGONER remarked that one benefit is jobs in Kenai.
Right now, Agrium is operating at 75 percent capacity and may be
losing money everyday it operates. If this bill helps Agrium
operate at 100 percent capacity, it will maintain and increase
jobs. He noted if one of Kenai's petrochemical plants shuts
down, the chances of it ever reopening is very low. He pointed
out that Agrium is a big part of the economy on the Kenai
Peninsula.
CHAIR OGAN expressed concern that this legislation singles out
one type of industry and sets a precedent for other industries,
such as the LNG plant at Pt. Mackenzie that ships LNG to
Fairbanks.
MR. MARK MYERS, Director of the Division of Oil and Gas, DNR,
told members that in regard to the previous discussion about
Sections (2)(A) and (2)(B), Senator Elton was correct when he
pointed out that the royalty reduction is granted unless one of
those four conditions exists, in which case the commissioner can
deny it.
SENATOR STEVENS asked if the commissioner will have to prove
that the royalty reduction would not be balanced and not have a
positive impact on the economy.
SENATOR ELTON said he did not understand Mr. Myers' explanation
because if the commissioner can deny the royalty reduction based
on the first factor listed, the commissioner would not consider
the second factor, that the royalty reduction would not be
balanced by employment opportunities or other tangible benefits.
MR. MYERS said that is correct as the four variables are
independent. The commissioner can deny the reduction if any one
of the four variables exists.
CHAIR OGAN asked Mr. Myers if he anticipates that this
legislation will set a precedent for other industries.
MR. MYERS said the petrochemical industry could argue, as Agrium
has, that it adds a lot of value to the state based on gas-to-
liquids (GTL) projects, for example.
CHAIR OGAN asked if, under the Stranded Gas Act, the
commissioner of revenue was given the ability to negotiate
royalty payments for the petrochemical and GTL industries.
MR. MYERS answered the commissioner cannot change the rate but
valuation methodologies can be negotiated. The producers
proposed similar treatment to the previous administration in
terms of their gas leases.
CHAIR OGAN felt justification could be made that this incentive
should be given to other industries.
MR. MYERS agreed and said DNR understands Agrium's concern that
it needs a good supply of gas to get up to 100 percent capacity.
CHAIR OGAN asked if more gas is available but not at the price
Agrium needs to be profitable.
MR. MYERS said supply and demand is balanced at this time but,
at current rates of consumption without additional exploration
success, Cook Inlet will begin to squeeze out those who are
willing to pay less for the gas. Typically, the utility market
pays a higher value, followed by LNG, followed by the
agricultural manufacturer. That will put Agrium in a tight spot
when deliverability is less. He noted that a good deal of
exploration is going on in Cook Inlet at this time.
SENATOR STEVENS expressed concern about the differences between
Section (2)(A) and Section (2)(B) [the four factors the
commissioner can use to deny a reduction], and pointed out that
Section (2)(A) contains the word "and" while Section (2)(B)
contains the word "or". Therefore, all variables must exist in
Section (2)(A) while only one variable must exist in Section
(2)(B) for the commissioner to deny a royalty reduction.
MR. MYERS indicated the original bill contained the word "and"
and he does not know why this version was changed to "or". He
said Version I in its current form sets a different standard for
agricultural manufacturers than it does for the utilities. All
four conditions must exist for the commissioner to deny an
application from a utility.
SENATOR STEVENS said he believes the statement on page 2, lines
21-22, should be changed because he reads it to mean that (A)
and (B) fall under that statement.
MS. JACKSON said the issue is that the standards for the new
manufacturer are more restrictive. For a utility, the
commissioner must enter into a contract unless all four
conditions are met. For a manufacturer, the commissioner shall
enter into a contract unless any one condition is met. She
repeated the provision is more restrictive for the manufacturer
than it is for the utility.
SENATOR STEVENS said he understands the intent but he does not
read those sections that way because both (A) and (B) are
subsections of Section (1)(aa)(2).
SENATOR ELTON said the bill makes it easier for the commissioner
to deny a contract with a manufacturer than with a utility.
MR. MYERS told committee members the Administration has taken no
position on the bill but said he supports the proposed
amendment.
CHAIR OGAN removed his objection to adopting the work draft,
therefore the motion to adopt Version I as the working document
before the committee carried.
SENATOR WAGONER moved to adopt Amendment 1, which reads as
follows:
Page 3, after line 11, insert "(C) in granting an
application under this section, the commissioner may
use or accept an amount in excess of the price for the
gas established in the contract but less than would
otherwise be due under the lease when it is in the
best interest of the state."
CHAIR OGAN objected for the purpose of discussion. He told
members he intended to adjourn the meeting without adopting the
amendment to give members a few days to consider it.
CHAIR OGAN said Amendment 1 is a profit sharing amendment that
will allow the state to share in any upside.
SENATOR WAGONER told members Amendment 1 was written in
consultation with Division of Oil and Gas staff, who said it is
necessary to allow the commissioner to negotiate profit sharing.
SENATOR ELTON pointed out that Amendment 1 will cause a change
in the fiscal note.
SENATOR WAGONER agreed Amendment 1 will make the fiscal note
much more powerful.
CHAIR OGAN told members the committee would take up SB 50 and
the proposed amendment on Monday and adjourned the meeting at
4:45 p.m.
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