Legislature(1999 - 2000)

05/05/1999 01:23 PM RES

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
CSSB 134(RLS) - WELL REGULATORY COST CHARGE/CONS. TAX                                                                           
CO-CHAIR OGAN announced that the first item of business would be CS                                                             
for Senate Bill No. 134(RLS), "An Act authorizing the Alaska Oil                                                                
and Gas Conservation Commission to determine the amount of and to                                                               
collect a charge for operating wells subject to the commission's                                                                
jurisdiction, and to allocate expenses of investigation and                                                                     
hearing; authorizing the commission to employ additional                                                                        
professional staff; repealing the oil and gas conservation tax; and                                                             
providing for an effective date."                                                                                               
Number 0105                                                                                                                     
PATRICK CARTER, Legislative Assistant to Senator Drue Pearce,                                                                   
Alaska State Legislature, came forward on behalf of the sponsor.                                                                
He explained that SB 134 repeals the existing oil and gas                                                                       
conservation tax, and it institutes a more stable funding source,                                                               
to ensure that the Alaska Oil and Gas Conservation Commission                                                                   
(AOGCC) is capable of carrying out its objective of protecting the                                                              
public interest.  The primary goal of the AOGCC is to ensure that                                                               
no hydrocarbons are wasted, he noted, and that operations are                                                                   
conducted in a manner that provides maximum recovery of the                                                                     
MR. CARTER advised members that the original intent of the                                                                      
legislature was to have the oil and gas industry pay for regulatory                                                             
cost oversight through the oil and gas conservation tax; that tax                                                               
is directly proportional to production, with a                                                                                  
four-mills-per-barrel fee rate.  Although production is declining,                                                              
the workload of the AOGCC is not, and the system is no longer                                                                   
sufficient to cover the costs associated with its operation.                                                                    
Therefore, SB 134 creates a program-receipt-type system in which                                                                
the regulatory cost charge is directly associated with the total                                                                
volume of liquids produced or injected, to more accurately reflect                                                              
factors directly associated with AOGCC's workload.  Furthermore, SB
134 provides for recovery of costs associated with an investigation                                                             
or hearing, which would be allocated to the parties involved if                                                                 
there were a unitization dispute on the North Slope, for example.                                                               
MR. CARTER reported that the AOGCC had experienced budget                                                                       
difficulties in the past; even when tax proceeds exceeded annual                                                                
appropriations, those weren't always appropriated to the AOGCC.                                                                 
Certain members of the oil and gas industry have raised concerns                                                                
that this type of program receipt system wouldn't receive the same                                                              
level of scrutiny during budgetary oversight by the legislature.                                                                
However, he said, Senator Pearce believes that the oil and gas                                                                  
industry is quite capable of bringing to the legislature's                                                                      
attention any excessive budget requests by the AOGCC.                                                                           
MR. CARTER pointed out that SB [134] also strengthens the AOGCC by                                                              
adding four staff.  Currently, the level of institutional knowledge                                                             
at the commission is one person deep, including one petroleum                                                                   
engineer, one reservoir engineer and one petroleum geologist.                                                                   
"Right now, also, they feel that the inspection program is lacking                                                              
one inspector," he advised the committee.  "We've added one                                                                     
additional person to each one of those positions."  Mr. Carter                                                                  
concluded by saying SB 134 will create a more stable funding                                                                    
source, enabling the AOGCC to provide the monitoring services                                                                   
necessary to protect Alaskan interests into the future.                                                                         
Number 0426                                                                                                                     
CO-CHAIR OGAN referred to page 2, line 18, which says, "The                                                                     
commission shall annually determine regulatory cost charges under                                                               
this section."  He noted that it goes on to describe that the                                                                   
amount being collected approximates the appropriations made for the                                                             
commission's operating costs.  He suggested that some would argue                                                               
this gives carte blanche authority to the AOGCC, what he calls the                                                              
"Chilkoot Charlie syndrome," cheating the other guy and passing the                                                             
savings on.  He referred to Mr. Carter's opening remarks,                                                                       
suggesting the oil companies would have the ability to hold the                                                                 
legislature's feet to the fire because they have lobbyists                                                                      
representing them, and they scrutinize the budget closely.  He then                                                             
asked Mr. Carter to talk about the safeguards.                                                                                  
Number 0582                                                                                                                     
MR. CARTER explained that under the current system, the budget                                                                  
would still have to go through the Office of Management and Budget                                                              
(OMB), then through the budgetary considerations by the                                                                         
legislature.  He stated, "A good 'for instance' on why Senator                                                                  
Pearce doesn't share their concerns ... that it won't receive                                                                   
budget oversight is the APUC [Alaska Public Utilities Commission],                                                              
as most people are well-aware, has an enormous backlog of cases.                                                                
They came before the legislature recently and requested twelve                                                                  
additional personnel.  The legislature did not approve that; they                                                               
approved four personnel, even with the current backlog that they                                                                
have.  Senator Pearce doesn't share their concerns ... that it                                                                  
won't have legislative oversight, or the legislative oversight will                                                             
be somehow weakened by moving it to a program receipt system, as                                                                
opposed to a general fund receipt system."                                                                                      
Number 0680                                                                                                                     
CO-CHAIR OGAN asked whether the APUC has this type of funding                                                                   
MR. CARTER replied, "Regulatory cost charge.  And the oil and gas                                                               
industry pays that regulatory cost charge based on tariffs for the                                                              
pipeline right now, and they don't currently have that problem.                                                                 
But we've never heard a concern expressed about the APUC type of                                                                
funding system."                                                                                                                
CO-CHAIR OGAN noted that on page 3, lines 11-13, it says, "The                                                                  
legislature may appropriate to the commission for its operating                                                                 
costs under this chapter for the next fiscal year an amount that is                                                             
at least equal to the lapsed amount."  On line 15, it further says                                                              
that "the commission shall reduce the total regulatory [cost]                                                                   
charge collected" after they do that.  Emphasizing the word                                                                     
"shall," and noting that leftover receipts could be rolled forward,                                                             
he asked for confirmation that the legislature can do that already.                                                             
MR. CARTER explained that under the current system, with the                                                                    
conservation tax, it is actually general fund monies; it is up to                                                               
the legislature whether or not to appropriate those monies in their                                                             
entirety.  Under the system proposed in SB 134, in contrast, if                                                                 
there were $300,000 left over at the end of the year, that money                                                                
would be rolled into the next year's budget.  Under the formula,                                                                
they take the total volume of liquids produced or injected, as well                                                             
as the cost associated with the AOGCC's monitoring of those fluids.                                                             
For instance, if the total fluids under last year's operations were                                                             
3.3 billion, and Badami made up 1.2 million of that, then 1.2                                                                   
million would be divided [into] 3.3 billion; that fraction would be                                                             
multiplied by the approved budget, and that would be Badami's share                                                             
of that budget.  If it were rolled into the next year, each person                                                              
would receive a percentage of that deducted from the regulatory                                                                 
cost charge associated with the current year.  To remove any                                                                    
guesswork about current-year production levels for this year's                                                                  
budget, Mr. Carter explained, Senator Pearce had felt it would be                                                               
easier to use the volumes produced last year.                                                                                   
Number 0892                                                                                                                     
REPRESENTATIVE BARNES commented that the system in place for the                                                                
APUC has worked very well.  Noting the AOGCC's $200,000 budget                                                                  
shortfall this year, as yet unaddressed by the legislature, she                                                                 
expressed belief that this is a good bill; she doesn't see it as a                                                              
tax on the oil and gas industry, she said, as it is a service                                                                   
provided to them.  Reminding members of the proposed oil company                                                                
merger, she stressed the importance of having the AOGCC continue.                                                               
Number 0998                                                                                                                     
CO-CHAIR OGAN concurred that the AOGCC is important because of the                                                              
merger, and he characterized the commission as the policemen of the                                                             
field, with quasi-judicial powers.  He then asked Mr. Carter if                                                                 
Section 3 is simply the program receipt authorization.                                                                          
MR. CARTER affirmed that.                                                                                                       
CO-CHAIR OGAN noted that AS 43.57 is the section on the oil and gas                                                             
conservation tax.  He stated his understanding that Section 4                                                                   
eliminates those two taxes, and that the rest of the bill replaces                                                              
it with program receipts.                                                                                                       
MR. CARTER affirmed that, also.                                                                                                 
Number 1101                                                                                                                     
CO-CHAIR OGAN called upon Bob Christenson, chairman of the AOGCC,                                                               
who informed members via teleconference from Anchorage that he was                                                              
available to answer questions.                                                                                                  
Number 1160                                                                                                                     
JUDY BRADY, Executive Director, Alaska Oil and Gas Association                                                                  
(AOGA), testified via teleconference from Anchorage, noting that                                                                
AOGA is a trade association whose 18 members account for the                                                                    
majority of oil and gas exploration, production, transportation,                                                                
refining and marketing activities in Alaska.  She said AOGA had                                                                 
testified before the Senate Finance Committee regarding concerns                                                                
about SB 134, and she indicated she would express continuing points                                                             
of concern.  Ms. Brady stated:                                                                                                  
     AOGA supports adequate funding for the AOGCC, and for as long                                                              
     as AOGCC has been in place, the oil and gas industry has paid,                                                             
     through a tax, ... for its performance.  And, as was pointed                                                               
     out, for years that tax was more than the legislature                                                                      
     appropriated to the AOGCC.  And so, we have always supported                                                               
     adequate funding for the AOGCC.  It is an important                                                                        
     organization for us.  We were concerned when the Senate ...                                                                
     did not appropriate money for it this year.  We were concerned                                                             
     when the Governor's office didn't appropriate the money that                                                               
     they needed.  But we're also concerned that SB 134 creates a                                                               
     virtually unlimited funding taxing mechanism.                                                                              
     The commission is a regulatory agency which oversees the                                                                   
     underground operations of the oil industry on private and                                                                  
     public lands and waters in Alaska.  It is the agency which                                                                 
     regulates drilling and production of oil and gas, to ensure                                                                
     that physical waste does not occur, to ensure maximum ultimate                                                             
     recovery of oil and gas resources, and to protect the                                                                      
     correlative rights of all oil and gas interest owners.  It is                                                              
     also the agency authorized by the EPA [Environmental                                                                       
     Protection Agency] to manage the state's underground injection                                                             
     control program, which is a very important program to the AOGA                                                             
     members, and for which AOGCC receives, I believe, $100,000 a                                                               
     It's critical to the oil and gas industry in Alaska that the                                                               
     AOGCC maintain a continuous ability to issue permits and                                                                   
     decisions that are required for ongoing oil field                                                                          
     explorations.  We realize the AOGCC needs adequate funding,                                                                
     and would remain interested in discussing options that will                                                                
     assure the AOGCC's budget is appropriate for the work they are                                                             
     required to do.  Some options ... might include a budget cap,                                                              
     a budget review committee comprised of members of the AOGCC,                                                               
     the legislature, the industry and the public, or some other                                                                
     And I believe if 133 passes, then ... there is an oversight by                                                             
     Legislative Budget and Audit in this next summer about the                                                                 
     functions of the AOGCC, along with the functions of the APUC,                                                              
     that the question of what the agency does or does not spend                                                                
     its time on ... will become clear to everybody.                                                                            
     We're concerned that the funding mechanism embodied in [SB]                                                                
     134 charges an assessment on oil, gas and water which is                                                                   
     injected, as well as oil and gas produced.  AOGA would propose                                                             
     that a fee be assessed on revenue-generating production of oil                                                             
     and gas, and that the funding mechanism be less complicated                                                                
     and, therefore, less subject to controversy.  Assessing a fee                                                              
     based on the volume of production also would be more equitable                                                             
     to the industry, as it would not overburden low-volume fields.                                                             
     We are very interested in working on an acceptable proposal in                                                             
     the next few days, which would provide funding certainty for                                                               
     the AOGCC and would also provide a level of equity and                                                                     
     certainty for the industry.  We reiterate our continuing                                                                   
     support for a fully functional, adequately funded, independent                                                             
     AOGCC.  We remain committed to working with the legislature                                                                
     and the Administration to develop an appropriate and                                                                       
     accountable way to fund the AOGCC.                                                                                         
Number 1414                                                                                                                     
CO-CHAIR OGAN declared that the committee's purview is to make sure                                                             
that bills are in the best interests of resource development in the                                                             
state.  He suggested that funding questions and sources might be                                                                
better handled by the House Finance Committee.                                                                                  
REPRESENTATIVE BARNES commented that the legislature is under                                                                   
tremendous pressure to get their fiscal house in order, and she                                                                 
looks upon this bill as one way to do that.  She expressed                                                                      
dissatisfaction with hearing that this bill needs to be rewritten                                                               
at this late date.  She pointed out that there would be oversight                                                               
because the legislature oversees all state agencies.  Furthermore,                                                              
she said, she believes that the legislature would be the first to                                                               
step in, if there were exorbitant fees or no justification for what                                                             
was being charged.                                                                                                              
Number 1516                                                                                                                     
MS. BRADY reported that AOGA is trying to discuss with the bill                                                                 
sponsor another approach to the funding mechanism.  If they are                                                                 
able to work out a compromise on that, it will be presented to the                                                              
House Finance Committee.                                                                                                        
CO-CHAIR OGAN restated his belief that the House Finance Committee                                                              
is the appropriate venue for the funding sources.                                                                               
Number 1585                                                                                                                     
MARK WORCESTER, Counsel, ARCO Alaska, Incorporated (ARCO),                                                                      
testified via teleconference from Anchorage, stating that generally                                                             
ARCO supports, and obviously is a supporter of, AOGA, and they                                                                  
endorse the statement that Judy Brady gave.  Emphasizing a few                                                                  
points, he told members:                                                                                                        
     We, as AOGA, support full and adequate funding for the AOGCC,                                                              
     ... and it seems to be a consensus on the committee, as well,                                                              
     that this is an important agency, and it should have adequate                                                              
     funding.  We share the concerns articulated by AOGA about the                                                              
     funding sources, and how the appropriation process works.  We                                                              
     believe that there are a number of ways that could potentially                                                             
     address our concerns.                                                                                                      
     One would be ... if we used a tax on production, putting a ...                                                             
     per-mill limit, with a cap. ... Another way would be some sort                                                             
     of oversight committee, comprised of a variety of input                                                                    
     sources - from the Administration, legislature, industry,                                                                  
     public, or whatever is deemed appropriate - to review the                                                                  
     budget before it's submitted.  And we're prepared to consider                                                              
     any other options, and to work cooperatively and                                                                           
     constructively to get something that serves everyone's                                                                     
     interests and meets all the concerns.                                                                                      
     And, finally, ARCO supports these comments that were made just                                                             
     in recent discussions that this is an appropriate issue for                                                                
     the Finance Committee.  And we are quite committed to working                                                              
     with the sponsor, interested members of the legislature, the                                                               
     commission, and the Finance Committee to find an appropriate                                                               
     resolution to everyone's concerns.                                                                                         
Number 1697                                                                                                                     
CO-CHAIR OGAN asked if anyone else wished to testify, then closed                                                               
public testimony.                                                                                                               
REPRESENTATIVE BARNES indicated her belief that whatever work a                                                                 
committee feels is necessary, including work on financial issues,                                                               
should be addressed before moving a bill forward.  Having said                                                                  
that, she stated that she believes SB 134 is technically correct                                                                
and fiscally relevant.                                                                                                          
Number 1779                                                                                                                     
REPRESENTATIVE BARNES made a motion to move CSSB 134(RLS) from the                                                              
committee with individual recommendations and accompanying fiscal                                                               
notes; she asked unanimous consent.                                                                                             
CO-CHAIR OGAN clarified that his own statements about the funding                                                               
didn't reflect a belief that the bill is flawed.  However, people                                                               
had testified to the contrary, and he believes it is appropriate                                                                
that the House Finance Committee look at it.  Co-Chair Ogan asked                                                               
if there was any objection to moving the bill.  There being no                                                                  
objection, he announced that CSSB 134(RLS) was moved from the House                                                             
Resources Standing Committee.                                                                                                   

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