Legislature(1993 - 1994)
03/22/1993 09:07 AM Senate FIN
| Audio | Topic |
|---|
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
CS FOR HOUSE BILL NO. 116(FIN)(title am)
An Act amending the manner of determining the royalty
received by the state on gas production, and directing
the commissioner of natural resources to accept, under
certain circumstances, the contract price agreed to
between a lessee of federal land and a gas or electric
utility as the value of the federal government's
royalty share from natural gas production on federal
land from which the state is entitled under applicable
federal law to receive a share of the royalty on gas
production; and providing for an effective date.
Co-chair Pearce directed that CSHB 116 (Fin)(title am) be
brought on for discussion and pointed to the fact that the
Senate version, SB 104, is also in committee. She then
invited the sponsor, Representative Hanley, to join members
at the committee table.
(Senator Rieger arrived at this time.)
As background information, REPRESENTATIVE HANLEY explained
that when oil was discovered in Cook Inlet in the 1960, it
was accompanied by "a fair amount of natural gas." At that
time there were no markets for that gas. Chugach Electric
signed a long-term, twenty-five year contract in 1965 to
purchase the gas at 21 cents a thousand cubic feet. There
were no other contracts at that time, and Chugach made its
decision to build a gas-powered electric generation plant
based on that contract. The contract price for the gas was
not disputed for approximately twenty years. In 1985,
however, the state filed intent stating that it did not feel
the contract price was a fair price for royalties paid to
the state and that the price should be raised. In response,
the legislature introduced legislation that specified that
for sales to utilities (as long as it is an arms-length deal
between the two contractors), the contract price is the
price the state will use for its royalty share. The bill
passed, and that has been prevailing law for state leases
and subsequent sales of natural gas to utilities.
Last year, the mineral management service of the federal
government conducted an audit of its leases in this area.
Contracts had also been signed by Chugach to purchase
natural gas from federal fields. The federal audit
determined that the contract price was a fair price for
"their royalties . . . ." The state has appealed that
decision, claiming the federal government did not receive
enough royalties for its gas. The reason behind the appeal
is that the state receives 90% of the royalties the federal
government collects. While the state is required by state
law to use the contract price on state leases, it has
appealed the federal decision to use the contract price as
well.
Representative Hanley acknowledged that the federal
government has the ability to determine what it feels is a
fair royalty on federal gas leases. In 1988, the federal
agency passed a regulation that made clear that it is
required to use a contract price similar to state law on
federal leases as long the contracts represent "arms-length
deals."
(Senator Jacko arrived at this time.)
In his closing remarks, Representative Hanley reiterated
that, in terms of state participation, the proposed bill
applies the same standards to federal leases as current law
governing state leases.
Senator Kerttula asked if representatives from the Dept. of
Natural Resources had testified regarding what the cost will
be in terms of state royalties. Representative Hanley
observed that cost is determined by the difference between
the contract price and the true value. The Dept. of Natural
Resources provided a zero fiscal note for the bill. The
Representative pointed to backup information on the note
indicating a total of "$12 million." Approximately half of
that amount is interest while the remaining half is actual
royalties based on value.
Further comments followed by Representative Hanley
concerning department use of $1.50 per thousand cubic feet,
the Chugach lawsuit following 1985 state intent to raise the
royalty, and the subsequent settlement of the lawsuit at 76
cents per thousand cubic feet. He reiterated that the
federal government has ruled the contract price fair for
federal royalties. It is unclear whether the state will win
its appeal. If it does not. There will be no money owed to
the state.
Discussion followed between Senator Sharp and Representative
Hanley regarding 1965 contract provisions for future value
of the gas.
Representative Hanley noted the retrospective nature of the
state charge (1984-87) and problems associated with attempts
to apply a surcharge to those who used power during a past
time period.
JON TILLINGHAST, representing Chugach Electric, next came
before committee. He explained that when leases were
originally executed, federal regulations applying at the
time were clear that the contract prices would be the basis
for valuing royalties. The federal government subsequently
issued notice to lessees indicating that it would accept the
contract price "but in extraordinary circumstance we'll
deviate from that contract price." That is the basis of the
current dispute.
Speaking to fiscal implications of the bill, Mr. Tillinghast
said that in 1988, the federal government changed its
regulations to accept the contract price in every
circumstance. Prospectively, the proposed bill should have
no fiscal impact since it merely conforms to current federal
law. Fiscal consequences are thus confined to state claims
for the audit period 1984-87. Mr. Tillinghast noted that
the federal minerals management service has already ruled
against DNR at the staff level. DNR has appealed.
Senator Rieger directed attention to page 4, lines 2 and 3,
and requested an explanation of provisions relating to "an
affiliated interest." Mr. Tillinghast said that the
language was inserted at Representative Brown's behest. She
was concerned that the utility not be related to the lessee
or any purchaser of gas or electricity. It is intended to
prevent situations whereby a large industrial buyer might
establish a dummy utility to take advantage of the law. It
seeks to ensure an arms-length distance between the utility
and those who buy gas or electricity from the utility.
Mr. Tillinghast noted that the term "affiliated interest" as
defined in the public utility code is so broad that it would
include "almost everybody." He next cited examples of broad
application.
In response to concerns raised by Senator Rieger that major
utilities might trigger "affiliated interest" provisions
under the APUC code, Mr. Tillinghast answered:
Well, I think they're going to have to structure
their affairs to make sure that they're not. For
example, they have to make sure that they don't
have any directors or officers in common with any
of the producers that they buy gas from. If they
do, then they are an affiliated interest, and they
lose the protections of this bill.
They must also ensure that they do not have any service or
management contracts with the producers. The fact that they
simply buy gas from them is not a service or management
contract. Mr. Tillinghast concurred in the legitimate
nature of Senator Rieger's concern and reiterated that
utilities would have to ensure that they do not become
affiliated.
End, SFC-93, #41, Side 2
Begin, SFC-93, #43, Side 1
Further discussion followed between Mr. Tillinghast and
Senator Sharp regarding situations which might give rise to
affiliated status.
Senator Kerttula asked if the proposed bill would impact
Chugach Electric drilling and production if the utility
chose to undertake that effort. Mr. Tillinghast voiced his
understanding that neither the law nor the proposed bill
would apply to the utility since both deal only with arms-
length contracts between two entities. If the producer and
the utility are one and the same, the law does not apply.
In response to a further question from Senator Kerttula
asking if there were similarities between the proposed bill
and legislation Mr. Tillinghast might seek on behalf of
MAPCO. Mr. Tillinghast explained that peculiarities
associated with HB 116 result from the fact that:
1. No precedent is being set. The issue was settled
in
1986. Legislative history of 1986 law indicates
that lack of application to federal leases was
simply an oversight. HB 116 does not break
new ground as does proposed TESORO
legislation.
2. There is no debate over how much of the benefits
will
be passed on to Alaskan consumers. Increased
royalties will be passed directly to Chugach and
in turn to consumers on a dollar per dollar basis.
Discussion followed between Mr. Tillinghast and Senator
Rieger regarding the sale of power by one utility to
another. Mr. Tillinghast assured that there should be no
problem as long as the utilities do not have interlocking
directors or service management contracts.
Co-chair Pearce asked what was added to the bill to effect a
title change on the floor of the House of Representatives.
Representative Hanley explained that new language relates to
changes requested by Representative Brown. Title language
was tightened to ensure that the legislation did not become
a vehicle to change "a lot of different oil and gas
contracts."
Referring to page 3, Sec. 4, Co-chair Pearce asked where the
section would fit within existing statutes. Mr. Tillinghast
explained that it would be placed in temporary and special
acts.
Senator Jacko asked what would happen should the legislation
not pass. He noted other proposals that would raise the
cost of power for Alaskans covered by power cost
equalization. He then asked who the proposed bill would
impact. Representative Hanley again noted uncertainty
associated with the fact that federal leases are involved.
He again pointed to the fact that the federal government has
determined that the contract price is the price upon which
royalties are based, and no additional royalties are due.
There is thus no 90% additional flow-through to the state.
If additional royalties were charged by the federal
government, and the state received 90%, consumers in the
railbelt would be charged.
Representative Hanley advised that when power cost
equalization was established, the average price of
Fairbanks, Anchorage, and Juneau power costs was used to
establish the base rate of 8.5 cents. He acknowledged that
a hypothetical argument could be made that retroactive
royalty charges would raise rates in the railbelt and
subsequently lead to a higher average for power cost
equalization as well. That would be a political decision.
Discussion followed between Senator Kerttula and Mr.
Tillinghast regarding North Slope gas and application of the
bill to gas-fired utilities should they be established. Mr.
Tillinghast advised that discussion in House Finance led to
a determination that the bill should apply to both existing
and new fields.
Co-chair Pearce called for additional testimony on the bill.
None was forthcoming. She then queried members regarding
disposition. Senator Kerttula inquired concerning testimony
from the administration. The Co-chair said that
representatives of the Dept. of Natural Resources were aware
of the present hearing. The department has issued no
adverse comments. She further advised that the bill was
placed in a subcommittee in House Finance, and the
subcommittee and Representative Hanley worked closely with
department staff in incorporating amendments.
Senator Kelly MOVED that CSHB 116 (Fin)(title am) pass from
committee with individual recommendations. No objection
having been raised, CSHB 116 (Fin)(title am) was REPORTED
OUT of committee with a zero fiscal note from the Dept. of
Natural Resources. Co-chairs Frank and Pearce and Senators
Kelly, Rieger, and Sharp signed the committee report with a
"do pass" recommendation. Senators Jacko and Kerttula
signed "no recommendation."
| Document Name | Date/Time | Subjects |
|---|