Legislature(1999 - 2000)
05/05/1999 01:23 PM RES
* first hearing in first committee of referral
= bill was previously heard/scheduled
= 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 resource. 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  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 source. 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 year. 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 mechanisms. 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.