Legislature(1997 - 1998)
04/15/1998 01:39 PM JUD
* first hearing in first committee of referral
= bill was previously heard/scheduled
= bill was previously heard/scheduled
SCR 26 - FIBER-OPTIC CABLE RIGHT-OF-WAY POLICY CHAIRMAN TAYLOR explained the committee introduced SCR 26 because significant discussion has taken place among members of the Administration and the Legislature about the varying prices paid for fiber optic cable rights-of-way. An ongoing investigation to look into a right-of-way agreement with the Alaska Railroad is being conducted by Charlie Cole as independent counsel. The price paid for the right-of-way along the Alaska railroad was 50 cents per foot. A similar right-of-way across DNR lands cost six cents per foot, while other state agencies and federal agencies charge other amounts. Chairman Taylor questioned what the state policy is, why agencies charge different amounts to different entities, and why fair market principles are not used to determine what a right-of-way is worth. SENATOR PEARCE noted for the record that her husband is a board member and officer of one of the companies that has at least one right-of-way across state public lands, and his company could be affected in the future by whatever the state does regarding rights- of-way. Number 100 WILSON HUGHES, vice president and general manager of GCI, gave the following testimony. In 28 years of building facilities throughout Alaska, he has never seen a utility or its agent promote a higher rate for state rights-of-ways. GCI is building a new fiber optic network that connects Anchorage, Fairbanks, Juneau and Seattle, scheduled to be completed at the end of 1998. Additionally, a company named Ruralnet plans to build a system connecting the same population centers. SCR 26 states the Alaska Railroad Corporation (ARRC) has obtained a right-of-way lease from fiber optic cable providers based on market value. GCI believes the rate paid for the ARRC right-of-way by the Alaska Fiber Star Group is based on the exclusive use of the highest value portion of the right-of-way, the need not to provide additional conduits for future users, optimum construction conditions, a single contiguous land owner, and a negotiated procurement process. SCR 26 further states that it appears that DNR supports fiber optic cable right-of-way pricing policies that fail to seek lease terms based on market value. After a lengthy negotiation with lots of interested parties, DNR and the Division of Parks have tentatively agreed to lease approximately 18.5 miles of right-of-way to the Chugach State Park at a rate of 50 cents per linear foot to GCI. Additionally, GCI will provide two extra conduits for future users, thus avoiding re- entry for construction purposes, trail improvements, inspection costs paid for by GCI, and a non-exclusive use of the right-of-way. Regarding the submerged portion of the right-of-way, DNR has issued at least two leases during the past six months for fiber optic cables in the submerged lands at the historical rate of $100 per acre. GCI anticipates this same rate will be available to it. SCR 26 declares that the Legislature wishes the state to provide a stable and appropriate regulatory environment to give fiber optic cable projects the best opportunity to compete on a neutral and non-discriminatory basis. GCI agrees wholeheartedly with the Legislature. GCI's current fiber optic project, and others in the state, were developed and financed based on historical standards for right-of-way pricing. The policy and method used for 30 years are GCI's basis for attracting additional capital to invest in Alaska. If the Legislature wishes to change the law, he encouraged it to use an open and well thought out process. Any change to the current approach to right-of-way pricing needs to take into account the state's approach to encouraging development of a much needed infrastructure and the changing competitive telecommunications structure. Current and future fiber optic cable projects will be owned by both local and long distance companies. Current pricing is consistent and competitively neutral. Further discussion and resolution only serves to delay and confuse those who are attempting to build a competitive fiber optics system in Alaska. GCI intends to pay market rate on both the Chugach State Park and the submerged portion of its right-of-way. If the Legislature would like to explore new legislation to change the current method of right-of-way pricing, GCI would appreciate the opportunity to be part of the process. CHAIRMAN TAYLOR asked how the difference between the 50 cents charged by ARRC, and the six cents charged by DNR, can be explained to the public. MR. HUGHES replied the six cents charged by DNR is for tidelands and for the right-of-way underwater, and is actually calculated at $100 per acre. It is difficult to compare the $100 per acre price for the completely submerged property to the property at the end of the tie at the Alaska Railroad, particularly when the ARRC price includes exclusivity off the end of the tie on the optimum construction area. CHAIRMAN TAYLOR asked if different rates are being charged for crossing dry land. MR. HUGHES responded to his knowledge there is a Department of Transportation and Public Facilities' (DOTPF) rate, an ARRC rate, a Mental Health Lands' rate, a University of Alaska (UA) rate, a Division of Parks' rate, a Forest Service rate, a Corps of Engineers' rate, and probably several other rates. CHAIRMAN TAYLOR asked how those rates are established. MR. WILSON answered each one is set through an attempt to comply with different types of legislation and regulations. CHAIRMAN TAYLOR asked if each state department has passed a regulation dealing with fiber optic cable right-of-way rates. MR. HUGHES thought the rates are driven by different regulations that apply to each situation. He explained on the submerged portion, two leases were let within the last six months. Both were set at $100 per acre. CHAIRMAN TAYLOR asked if the rate on Division of Parks' lands have routinely been 50 cents per linear foot. MR. HUGHES replied to his knowledge, GCI has been the first company to ask to lay a fiber optic cable in park lands. CHAIRMAN TAYLOR asked why GCI did not get a six cent rate. MR. HUGHES said GCI was not a good negotiator. CHAIRMAN TAYLOR asked if the rate was determined by whatever amount DNR could negotiate. MR. HUGHES stated he believes regulation guided DNR to look at market value. Number 235 JOHN SHIVELY, Commissioner of the Department of Natural Resources, gave the following testimony. At least six entities in state government have the opportunity to enter into leases regarding fiber optic cable: the University; the Mental Health Land Trust; ARRC; the Division of Lands; the Division of Parks and Outdoor Recreation; and the Department of Transportation (DOTPF). All of the entities are driven by different enabling legislation and different goals. DOTPF does not charge for the right-of-way itself, it charges a processing fee set by legislation. The processing fee is capped at a one time fee of $2900 for a permit. The Division of Lands has traditionally charged $100 per acre for rights-of-way over public lands and underwater. That amount equates to about six cents per linear foot. The Division is leasing a use of the land, not the entire piece of land. The Division of Parks has never negotiated a utility right-of-way until now, and it is only negotiating this one because there is an existing utility line through the Chugach State Park. Park lands have a higher value since they have been set aside, which is why a different rate was negotiated. ARRC negotiated its arrangements as a quasi-business agency. While SCR 26 suggests that rates be stabilized for all customers situated somewhat equally, Mr. Shively believed that is occuring. If the Legislature wants to stabilize the rate at a higher amount, it will have to pass legislation to change the way DOTPF must charge. Number 300 CHAIRMAN TAYLOR asked if this policy is new and whether any debate took place within DNR about whether the rate should be driven by market value. COMMISSIONER SHIVELY said a lot of debate has taken place within DNR. DNR decided to continue setting the rate in the same way it had in the past, rather than change to a 50 cent rate. DNR believes it uses a market rate in terms of the way it determines the value of the right-of-way. The other option is to determine the value of the use. CHAIRMAN TAYLOR stated the state used a similar formula when it made decisions about oil leases - it attempted to find out the value of each lease. COMMISSIONER SHIVELY responded the initial value of oil and gas leases is set in a much different way because DNR competitively seeks bonus bids on those leases. Setting up right-of-way leases in a competitive manner would be difficult because those leases are requested at different times. In terms of SB 207 and doing an economic analysis to determine whether a royalty reduction was justified, that differs from determining a market rate. He noted he believes either methodology is valid. DNR chose one. CHAIRMAN TAYLOR stated the Legislature is forced to review a very diverse rating structure that appears to have no rational basis. The policy seems to be determined by which agency owns the land and what rate was imposed in the past that particular agency. He expressed concern that it must be very difficult for the customer who is trying to develop a fiber optic cable to calculate what the price of a lease across state land will be. He questioned how he would know whether the ARRC's price of 50 cents per foot is the market price, as some people purport. COMMISSIONER SHIVELY said no one knows whether that is true, but the companies who have applied for rights-of-way can do their own appraisals and challenge the rates. He agreed the rate structure is confusing, but he noted the situation is not unique to Alaska. CHAIRMAN TAYLOR expressed concern that the rate is based on a number picked by whoever is in charge at the time. COMMISSIONER SHIVELY explained the Division of Lands has longstanding regulations that provide for the fee charged, but the Division of Parks has not issued any prior rights-of-way and has no regulations because to govern this new situation. GCI was required to install a conduit in case future users wanted to use the same right-of-way which affected the price it paid. CHAIRMAN TAYLOR asked if the Governor did not want the Legislature to take up this resolution. COMMISSIONER SHIVELY replied the Administration wanted to lay the situation out as best as it could, and to explain the different options. The Administration decided it would work with the Legislature if it decided a uniform policy was necessary, and that it would not finalize any of its decisions until that policy was implemented. CHAIRMAN TAYLOR asked what the Administration recommends on this issue. COMMISSIONER SHIVELY replied the Administration is comfortable with leaving different jurisdictions under existing law and that a consistent state policy would require statutory changes. He added previous legislation has driven DNR to encourage utility development by providing low rates on state land for good reason. He stated the Administration is not willing to change that policy on its own. CHAIRMAN TAYLOR said the Administration already did because the state policy was supposed to let utilities go in at a very low rate. He asked if the varying rates have no effect on non-profit utilities that apply for a permit. COMMISSIONER SHIVELY replied that issue is arising because fiber optic cable may be hung on existing rights-of-way in certain areas. DNR has not finalized its decision on whether that will be allowable without an amendment to the lease. Commissioner Shively emphasized DNR would not even consider leasing the right-of-way in the Chugach State Park except that there is an existing utility line through it. Number 468 CHAIRMAN TAYLOR specified that the only action the Legislature took was to direct the agencies to set a flat rate. The agencies then set different amounts and that history has guided current rates. COMMISSIONER SHIVELY responded DOTPF is required to set a one-time administrative fee. DNR, through regulation, can get value for the land. Non-profit utility companies are charged a one-time fee of 10 cents per linear foot. DNR has charged for-profit agencies the value of the actual right in the land. DNR has the option, under regulation, to charge rates set on the value of the use of the land. ARRC is guided by its own authorizing legislation, as are the Mental Health Trust and the University, which he assumed directed those entities to maximize income. CHAIRMAN TAYLOR asked what would prevent the rates from being increased to $2 or more per foot in a few years since DNR has the power to create new regulations. He asked why the state would not want to create a level playing field so that those people in telecommunications could pick a route and know what the cost would be, based on a flat rate. COMMISSIONER SHIVELY replied that although that sounds good in theory, in practice it would be difficult. He was not sure the Legislature would be interested in setting policy for the Mental Health Trust on fiber optic cable rights-of-way. CHAIRMAN TAYLOR noted the legislative members are the ultimate trustees of the Mental Health Trust and he did not think they would have a problem setting such a policy. COMMISSIONER SHIVELY thought that fiber optic cable owners must deal with a whole variety of landowners in many states. The fact that Alaska has so much public land actually benefits these companies as they do not have as many landowners to deal with. It also dramatically helps the state in attracting companies that want to lay fiber optic cable to develop infrastructure. He did not believe utility companies find anything unique in having to deal with landowners with different policies, even if all of those landowners are state entities. CHAIRMAN TAYLOR referred to a memo written by Jane Anvik in which she stated that the marketplace indicates that rights-of-way for fiber optic facilities are quite valuable in Alaska and elsewhere, and that compensation for fiber optic cable facilities on state lands must be fair and reasonable, assessed on a competitively neutral and non-discriminatory basis, consistent with the Federal Telecommunications Act of 1998. He asked her whether she supported a market driven approach to establishing value on state lands for these rights-of-way. JANE ANVIK, Director of the Division of Lands, DNR, stated the memo that he referred to was one of many draft policies that was considered by the Division of Lands. The Federal Telecommunications Act requires that rights-of-way must be competitively neutral. The market driven issue was examined by reviewing what different organizations are paying in different parts of the state. The Division of Lands laid out all of the options. It began at 10 cents per foot for non-profit utilities and looked at the appraisal of the value in use of lands for a fiber optic cable. CHAIRMAN TAYLOR referred to page 4 of the memo, which stated, "If the Legislature decides not to change that policy during this session, the Division of Lands will grant fiber optic rights-of-way at the $50 per year rate, set out above." He asked Ms. Anvik whether she did that. MS. ANVIK said they did not select that option and decided to continue with the existing policy which is $100 per acre, or six cents per foot. CHAIRMAN TAYLOR stated that is a dramatic difference. He asked what process she went through on behalf of the people of the State of Alaska to assure that the State got the highest and best market value for this lease. MS. ANVIK explained the Division of Lands evaluated information from different landowners in the state, including ARRC, the Mental Health Trust, and DOTPF, and it looked at the experience of other jurisdictions around the United States, such as the Bay Area Transit Authority, in setting the level of compensation for rights- of-way for fiber optic cable. In evaluating the range of experiences, it is vast in the State of Alaska, but it is extremely vast in the world. In Anchorage, the local government traded a route along the bike trail in exchange for illumination of the trail system. Although ARRC negotiated 50 cents, in fact the rate of compensation is five percent of gross and the 50 cents is the minimum. CHAIRMAN TAYLOR stated his frustration lies in the fact that the lands do not belong to those agencies, the land belongs to the public. He repeated a business ought to be able to come to the state and know to expect. He asked whether the Division of Lands actually hired an appraiser to determine what the right-of-way was worth. TAPE 98-34 SIDE B MS. ANVIK reminded Chairman Taylor that at the time the draft memo was written, the Division of Lands was trying to coordinate with the Bureau of Land Management (BLM), which owns the other portion of the right-of-way for MFS. BLM and the Division of Lands were going to jointly prepare appraisal instructions to determine the value of the MFS right-of-way. Since this draft was written, the direction from the Governor has been that the Division of Lands is to use the traditional method as found in its regulations, which is to assess the value of rights-of-way at $100 per acre. Therefore, the appraisal methodology described in the draft memo was not used by the Division of Lands, but was used by BLM for its portion of assessing the value of the right-of-way for the MFS fiber optic cable route along the TransAlaska pipeline. Number 570 COMMISSIONER SHIVELY added he discussed the issue with the Governor's Office, but he basically made the decision. He noted the four Finance co-chairs wrote a letter suggesting the appropriate method was to keep the traditional rate. CHAIRMAN TAYLOR indicated Ms. Anvik wrote the draft memo on February 25. He asked if BLM initiated the discussion about hiring an appraiser to determine the value of the land. MS. ANVIK explained that BLM is required to get a fair market value appraisal before it issues a right-of-way. At the time the Division of Lands was originally exploring the MFS right-of-way, it was trying to figure out a way to facilitate the development of this facility in Alaska by having all of the government entities along the route cooperate with one another. The regulations in place in 1996 indicated that the State of Alaska would issue a right-of-way to MFS for $100 per acre. The Division of Lands was trying to streamline the process so that it and BLM would use the same numbers, and MFS would have had to pay for the appraisal. Number 544 CHAIRMAN TAYLOR noted BLM would not call up President Clinton to find out what amount he would use. That only occurs on the state's side of the fence. MSF would still have to pay for BLM's appraisal and pay whatever price the appraisal determined. He asked Ms. Anvik if when she wrote the memo in February of 1998, she knew what the decision was about setting up an appraisal system. MS. ANVIK explained the co-chairs of the House and Senate Finance Committees wrote a letter to DNR in February asking it to retain the structure as it existed in regulation. Her letter was in response to that request. CHAIRMAN TAYLOR asked when MFS was granted its permit. MS. ANVIK replied MFS does not have its permit yet. It has an early entry authorization which gives it the opportunity to install the fiber optic cable before the snow falls. The final decisions with respect to the rights-of-way for MFS, GCI, and Northstar have not been made, and every company is aware that DNR is grappling with the method it should use to determine the compensation. Unless the Legislature directs DNR to do differently, the Administration will continue to use the existing regulations and charge $100 per acre. CHAIRMAN TAYLOR noted that rate will not apply to state park land, DOTPF land, University land, or Mental Health land. He asked Ms. Anvik if she was attempting to develop a policy to create uniform treatment. MS. ANVIK said she was not, she was trying to develop a policy to determine what the appropriate rate of compensation for general state purpose lands managed by the Division of Lands. The Division of Lands staff worked with staff from the Division of Parks, the University, the Mental Health Lands Trust, private entities, and ARRC in order to ascertain what policies were currently engaged in by different land managers, especially in regard to activities changed by the Federal Telecommunications Act of 1996. That Act changed the playing field for this industry. The Division of Lands was trying to ascertain how to be in "sync" with the intent of the federal legislation. Number 502 CHAIRMAN TAYLOR asked if that Act is guiding BLM in doing its appraisal. COMMISSIONER SHIVELY responded the Federal Telecommunications Act does not offer guidance as to whether an appraisal is to be done or how much is to be charged. It does say that state and local governments should be consistent and cannot create obstacles. DNR interpreted the requirement to be consistent as requiring consistency within each entity of state government. That issue may be litigated at some point in time. If the court determined that all state agencies should use the same rate, Alaska's state agencies would be forced to charge the DOTPF rate. CHAIRMAN TAYLOR assumed legislation would be proposed at that point to establish a policy for all state lands. COMMISSIONER SHIVELY noted that might not be possible because of existing leases. CHAIRMAN TAYLOR asked Ms. Anvik if she is working on any appraisal system at this time. Number 480 MS. ANVIK replied the Division of Lands has many options under existing law and regulations to choose from on how to pursue this question. By statute, the Director of the Division of Lands has the ability to determine what the value is and/or set a value in unique circumstances, and the applicant who disagrees with that value has the opportunity to seek an appraisal to disprove that the value set is incorrect. She asserted the division uses many methods, and the appraisal method will continue to be used in some cases. She repeated that unless the Legislature directs the Division of Lands differently by April 24, it will issue rights-of ways across general state lands at the rate of $100 per acre. After that action occurs, in her opinion, the state will no longer have the opportunity to change the rate. The Division of Lands has purposely not issued any permits, in order to make sure that when the rights-of-way are finally issued, all future applicants will be treated equally when crossing state land. CHAIRMAN TAYLOR said the fact that many options exist in these unique situations for the Commissioner of DNR, the Executive Director of the Mental Health Trust, the Board of Regents of the University, and the ARRC Board must be frightening for those out in the marketplace. Consequently, once a policy is established, the Telecommunications Act will not allow the state to consider these situations unique because permits have been granted, therefore everyone will be locked into existing rates. COMMISSIONER SHIVELY agreed, as long as the Telecommunications Act does not change. CHAIRMAN TAYLOR asked why the state would want to put the current system in stone. The current system could do terrible damage to the telecommunications industry by making it far too expensive to run cables to parts of the state. COMMISSIONER SHIVELY responded the Administration is setting what it thinks is the best policy given the information available at this time. It has been looking at how to increase the rate. CHAIRMAN TAYLOR stated he is not interested in increasing or decreasing the rate, he is trying to find out how the numbers were picked. He expressed frustration that he has not heard one explanation about the large discrepancy in the rates. COMMISSIONER SHIVELY disagreed that no explanation has been given. ARRC determined the value of the use, as did the Division of Parks. The Division of Lands looked at the value of the right. He repeated many landowners are involved in the negotiations in other states, and that the rates vary. Number 425 CHAIRMAN TAYLOR stated that is why the state has exercised its right to eminent domain. He asked what part of the public process was used in this decision. COMMISSIONER SHIVELY pointed out notice was given, and public hearings were held about the Chugach State Park. He added once the value is determined and a final arrangement is made with GCI, then it is subject to appeal to the Commissioner for reconsideration. The $100 per acre rate was set by regulation and all regulations are open to public process. MS. ANVIK added that a public notice was issued on the NorthStar route, the MSF route, and the GCI route, although the main issue in that notice was the route, not the rates. CHAIRMAN TAYLOR asked if the hearing was held shortly after the public notice was issued and whether the decision was made quickly. COMMISSIONER SHIVELY answered the process is not finished yet. CHAIRMAN TAYLOR said as far as the Governor was concerned, the process was finished until he received a letter from the House and Senate Finance co-chairs, at which time he dumped it back into the Legislature's lap. COMMISSIONER SHIVELY clarified the intent of the Governor's letter was to say if the Legislature wanted to work on this, the issue should be resolved by April 24th for the benefit of the companies involved. CHAIRMAN TAYLOR said he wants to know why they are going to pay it. Number 380 STEVE GIANI, Director of Marketing for Kanis Telcom, testified via teleconference from Anchorage. MFS is Kanis' contractor. First, Kanis supports the letter sent by the Governor to the Legislature. Kanis understands the Governor to support historical pricing. Kanis' issues are not with the University of Alaska, or any federal landholders. Kanis believes that if the state starts setting market rates, very little infrastructure will be built, especially if rates start at 50 cents per foot. The 50 cents per foot rate along the ARRC corridor was for an exclusive right. Kanis could have asked for the same thing, but it opted for the six cents per foot rate. He disagreed with Chairman Taylor's assumption that the various rates are difficult for the fiber optic companies to deal with. It was not a problem until the 50 cents per foot rate came up, and Kanis started comparing exclusivity with common use rights- of-way. Kanis understands it has the right to do an evaluation of the right-of-way if it disagrees with the cost of the right-of-way. Kanis has chosen not to do so as it assumes it will continue to pay six cents per foot. CHAIRMAN TAYLOR asked Mr. Giani what price Kanis will pay BLM for its land. MR. GIANI said he could not answer that at this time. CHAIRMAN TAYLOR asked how that price is being established. MR. GIANI said he was unsure, but Kanis did not take issue with it. CHAIRMAN TAYLOR asked if it is being done on an appraisal basis, based on fair market value. MR. GIANI said he could not answer that question. CHAIRMAN TAYLOR said he was referring to information contained in Ms. Anvik's memo. MR. GIANI said he understood that memo was in draft form. CHAIRMAN TAYLOR stated although the memo was a draft, BLM is probably going to get an appraisal. He asked Mr. Giani how Kanis is negotiating its rate with the University. MR. GIANI said he could not answer that question either. He offered to get that information for Chairman Taylor. He clarified that the right-of-way will travel across a very small piece of both University land and state park land, so Kanis probably would not have contested the rate if it thought it was reasonable. CHAIRMAN TAYLOR stated his only concern is that even though those portions of the right-of-way are very small, the rates will become locked in once they are issued. Some company may want a right-of- way across 500,000 acres of University land in the future, and the rate will be too costly. He asked Mr. Giani to get him the requested information. PHYLLIS JOHNSON, Vice President and General Counsel of ARRC, discussed the railroad's experience with right-of-way rate establishment. The first fiber optics line that was laid in the railroad right-of-way was contracted right before transfer in 1985. That right-of-way was from Whittier to Portage, and possibly to Anchorage, with ATU. That right-of-way was the first of its kind negotiated by the federal railroad. The federal railroad got a certain number of pairs of copper line it could use, so it negotiated an in-kind trade. After the state took ownership of the railroad, Alascom, under the ownership of PTI, negotiated a route down to Seward in 1988. Considering the complications surrounding the APUC proceedings, ARRC decided the right-of-way was worth more. ARRC spoke to other railroads with similar corridors and decided to charge a flat rate of $600 per mile. In the mid 1990's, ARRC signed a contract with Alascom which it terminated after one year. Nunat (ph) then signed a contract which became the first modern day fiber optics permit. ARRC hired an outside appraisal firm to evaluate the fair market value of a right-of-way along its corridor. The fact that use of the corridor would alleviate the need to gain rights-of-way on adjoining pieces of land increased the value. The rate of 50 cents per foot is at the high end. CHAIRMAN TAYLOR asked if ARRC traded the right-of-way permit for a share of the use of the cable in its first lease; and the next lease was let at a cost of $600 per mile, or about 11 cents per foot. MS. JOHNSON said that was correct, however the second lease also provided for some usage by ARRC. CHAIRMAN TAYLOR asked if the cost was a one time rate. MS. JOHNSON said it is an annual cost. She clarified that permit was pre-existing and was entered into around 1989. ARRC's newest permit has a dollar amount tied to fair market value as its base amount plus five percent of adjusted gross. CHAIRMAN TAYLOR asked if ARRC will get 50 cents per foot plus a percentage of the gross each year. MS. JOHNSON replied it would. CHAIRMAN TAYLOR asked if ARRC can estimate what the projected growth will be. MS. JOHNSON noted the contract contains a maximum, which she guessed was $3 million per year. She indicated ARRC is projecting several million dollars per year, and that the amount will increase over the life of the contract. Number 151 CHAIRMAN TAYLOR asked if the minimum threshhold is the 50 cents per foot. MS. JOHNSON thought the 50 cents is probably an average. She noted it is stated as a flat dollar amount in the permit. CHAIRMAN TAYLOR asked what the flat dollar amount is in the permit. MS. JOHNSON replied ARRC has three separate permits in place. One permit covers the area from Eielson to Anchorage and it contains a flat dollar amount of around $1 million. CHAIRMAN TAYLOR said if the flat rate is approximately $1 million for the first year and possibly a few years thereafter, the company has protection built in that it will cap out at a certain point, which may be as high as $3 million. MS. JOHNSON said that was correct, and that the permit contains provisions for reappraisal as well. She stated if pricing is established based on appraisal and reappraisal, treating everyone similarly situated in that manner would allow room for some growth consistent with the federal statute. MS. ANVIK added if ARRC treats all future competitors the same, meaning all rights-of-way will be appraised and reappraised, then it is complying with the requirements of the Telecommunications Act. CHAIRMAN TAYLOR asked Ms. Johnson what she thinks about the state's policy of establishing an historic value for given parcels of land, and how it will be treated under the Telecommunications Act should the state wish to change its method. MS. JOHNSON replied she does not know much about the federal act, and that ARRC administers different kinds of land because it has a corridor. Number 104 MR. KIM JACOBS, Director of Worldnet Communications, Inc., which owns 65 percent of Alaska fiber optic stock, testified via teleconference from San Francisco. He stated Worldnet wishes to construct a fiber optic cable between Anchorage and Fairbanks between the corridor of the Alaska railroad. Mr. Jacobs added he is the Director of WCI Cable, which has constructed an interstate fiber optic cable system that runs between Anchorage and Whittier along the ARRC corridor. WCI is in the process of constructing an undersea fiber optic cable between Whittier and the "Lower 48". He read the following testimony into the record. WCI, which is Worldnet Communications, Inc., and WCI Cable, are recent entrants in the Alaskan telecommunications industry. We have already spent, and/or committed to spend, in excess of $150 million to the industry in connection with the State of Alaska. I am testifying here today because I am very concerned about the State of Alaska's proposed policy to grant certain fiber optic rights-of-way across the state lands at a price of six cents per linear foot per year. This pricing policy, if adopted, would put Alaska FiberStar and WCI Cable at a significant competitive disadvantage to other companies providing fiber optic capacity in Alaska. It would also appear to change our understanding of how Alaskan policy generally operates, which is one of a level playing field. I'm sorry Mr. Chairman, you've stolen a bit of my thunder in some of the expressions you've used but I will be probably stealing a bit of that thunder back if I could. Alaska Fiber Star's fiber optic cable between Anchorage and Fairbanks was constructed pursuant to a permit which requires a minimum price of 49 cents per linear foot per year with the railroad, and WCI's interstate fiber optic cable between Anchorage and Whittier was constructed pursuant to a permit which requires a minimum price of 47 cents per year per linear foot. Both contracts were negotiated on the basis of market price. GCI and Kanis are constructing fiber optic cables and have an agreement to swap [indisc.] which will allow both companies to provide capacity between Anchorage and Fairbanks in competition with Alaska Fiber Star, as far as we're aware. If the State of Alaska grants rights-of-way to GCI and MSF Kanis, at the price of six cents per linear foot per year, the Alaska Fiber Star and WCI Cable will be paying a significantly higher price for rights-of way between the same locations. Alaska Fiber Star's and WCI Cable's cost of providing capacity would therefore be significantly higher than GCI's and MSF Kanis' cost of providing capacity, which would result in Alaska Fiber Star and WCI Cable being at a significant competitive disadvantage. We're aware that sometimes, as you stated in [indisc.] Kanis also agreed to pay an appraised price for the rights-of-way along the route of the TransAlaska Pipeline system. Now after Alaska Fiber Star's already constructed the fiber optic cable between Anchorage and Fairbanks, and after WCI Cable has already constructed the terrestrial segment of the interstate fiber optic cable from Anchorage to Whittier, the State of Alaska apparently is considering a change of the policy for pricing rights-of-way and granting GCI's and MSF Kanis' permits at six cents per linear foot per year. As stated, Alaska Fiber Star and WCI Cable have made, and continue to make, a very significant investment in the telecommunications infrastructure of Alaska. This infrastructure investment has been noticed at the national and international level. Consequently, any discriminatory policy that is adopted will open [indisc.] both nationally and internationally. Also, it would be highly contrary to the direction that the telecommunications industry has travelled, and continues to travel internationally, as is evidenced by the WTO agreement on telecommunications that was recently agreed to by the [indisc.] nation. Instead of virtually subsidizing certain companies in preference to other companies, the State of Alaska should maintain its policy of having a healthy and equally competitive environment in the telecommunications industry. The only way to maintain a healthy, competitive environment in our opinion, is to ...[end of tape]. TAPE 98-35 SIDE A MR. JACOBS continued. ... along the corridor of the Alaska Railroad differently from rights-of-way along the Seward Highway or along the Transatlantic Pipeline. All of this land, including the land of the Alaska Railroad, is state land, and should be valued using the same approach. In addition, Alaska Fiber Star and WCI Cable, do not have, contrary to what has been stated, exclusive rights-of-way along the corridor of the Alaska Railroad. The Alaska Railroad corridor is 150 feet wide and with its rights-of-way - there are six parallel rights-of-way - which are 25 feet wide within that right-of-way, five of these six rights-of-way are, as far as we are aware, still available to be leased. Based on our acceptance, and that of others - including GCI, to a market-driven pricing policy, the low price of six cents per linear foot is certainly not necessary to encourage development of telecommunications infrastructure between the larger population centers in Alaska and between Alaska and the Lower 48. We did it based on market price. [Indisc.] below pricing achieved, is to lower the return to the ultimate shareholders of state land, being the residents of Alaska. It provides an unnecessary subsidy to certain companies for infrastructure development, and discourages investment into the state by new entrants, be they national or international. The State of Alaska may want to consider a price which gives an economic incentive to encourage development of telecommunications infrastructure in more rural areas of Alaska. Therefore a market based approach to pricing fiber optic rights-of-way is the best way to ensure that the appropriate price is charged for each fiber optic cable project. However, when the State of Alaska disposes of its rights-of-way at six cents per linear foot, or at a market price, in certain respects is not the issue. The issue is that the State should treat telecommunications participants equally and fairly, and should not charge different prices for rights-of-way between the same location. It is sort of like adopting the policy to grant rights-of-way for fiber optic cable at a price of six cents per linear foot per year, then this policy should be applied to rights-of-way across all state lands, including Railroad lands and all telecommunications participants should be charged the same price to rights-of-way between the same locations. In summary, our companies were attracted to the State of Alaska for two main reasons. The first was an excellent business opportunity in the telecommunications infrastructure industry. The second was that we were investing significant capital in what we believe is a state which has international outlook, has a policy of consistency, and a commitment to an even handed approach to its new entrants. Based on these premises, we made our commitment in hard cash resources, and local employment, with the result [indisc.]. We ask the State to maintain its commitment so that the true competition and market forces can work to the benefit of the State and its residents, both old and new. Finally Mr. Chairman, I'm aware of the proposed SCR 26 proposed by Senator Robin Taylor. This resolution would receive our full support in that it adheres to the issue which we have great concern, and addresses those issues, being equality for all participants, consistency of policy, and the ability of market forces to dictate pricing. The resolution, if implemented, would enable Alaskan residents to receive fair value for the state's resources, and provide the players in the industry comfort that further investment is, and will continue to be, encouraged and supported by the State. Thank you Mr. Chairman for the opportunity to address the Judiciary Committee today, and I apologize for it being a little bit lengthy but I thank you for the time. Number 078 ERIC YOULD, Executive Director of the Alaska Rural Electric Cooperative Association (ARECA), gave the following testimony via teleconference from Anchorage. ARECA represents 95 percent of the utility companies in the State of Alaska. ARECA's main concern with SCR 26 is its possible precedent-setting implications for other utilities. The previous speaker spoke about equity within his own industry, and as an industry that regularly utilizes transmission corridors, ARECA is quite concerned with how market pricing may be imposed on the utility industry as well. Any revenue resources to the State will ultimately be passed back to the customers. He read the last two lines of a resolution passed at ARECA's last board meeting which are: A use of these right-of-ways is for the general well- being of the people of the State of Alaska. They should not be used as a revenue source in excess of reasonable administrative costs for permitting. MR. YOULD stated his industry does not object whatsoever to paying the reasonable cost of the expense of an agency to administer land, nor to ensure that the land is properly maintained in an environmentally sensitive way. However, any revenue collected by the State, over and above what is set by the agencies, is viewed as a tax. ARECA is concerned that if the fiber optics cable industry is taxed, the electric, gas, and water and sewer industries will be next. ARECA does not want to see market rates charged for access across state lands. ARECA would like to see the last clause of SCR 26 to ask Governor Knowles to consider state right-of-way costs based on agency costs to administer and preserve the integrity of the land consistent with a normal, public right-of-way, rather than on market price. CHAIRMAN TAYLOR asked Mr. Yould to comment on the rate charged by ARRC. MR. YOULD said, in his personal opinion, he does not think it was appropriate for ARRC to set its rates as high as it did, however ARRC is an authority with a specific responsibility to make a profit so it can be viewed differently than the Division of Lands. CHAIRMAN TAYLOR asked Mr. Yould how he felt about the rate of 50 cents per foot in a state park. MR. YOULD said he would personally oppose that rate as the state can get revenue from its extractive resources. Number 191 CHAIRMAN TAYLOR said he agreed. He asked how ARECA charged for leasing its cable poles out for cable television. MR. YOULD said in one instance DNR wanted to charge ARECA to allow an entity to hang a fiber optics cable on the existing transmission towers for which ARECA already owned the right-of-way from DNR. CHAIRMAN TAYLOR asked what ARECA planned to charge the fiber optic cable company. MR. YOULD said he did not know the answer to that question. CHAIRMAN TAYLOR noted the Ketchikan, Wrangell and Petersburg utility companies charged a rate per pole based on the market value of the product to be sold. MR. YOULD said ultimately, given the fact that those utilities are subject to APUC regulation, the profit would have to be put back into the rate base which would lower electrical rates. Number 218 SANDRA GHORMLEY, representing Homer Electric, read the following statement on behalf of Mr. Norm Story, general manager, via teleconference. Mr. Chairman and committee members, first we respectfully request that you do not pass this resolution. If passed, it could have far reaching consequences, and there are eight issues I would like to bring forth for your consideration that will clarify and justify our position. Again, this resolution is in conflict with the present state and municipal right-of-way requirement, and I refer here to AS 42.05.251. By Public Utilities Commission ruling, within municipal boundaries, a municipality is limited to only charging a reasonable administrative fee for the use of public rights-of-way. [Indisc.] at a minimum sets a precedent for the State to follow. The State should not be able to level unreasonable and unnecessary charges. For example, this is presently a consistent interpretation with the treatment of utilities within state rights-of-way that are under DOT's jurisdiction. Secondly, modern infrastructure development within our state should be encouraged, not discouraged, as this resolution will do. Charging fair market value for fiber optic right-of-way would have a killing affect on development using fiber optics. Not only would utilities be more reluctant to install fiber optics because of the dollar cost involved, but also they would realize, as HEA has learned, that when the entity granting the right-of- way is concerned about receiving fair market value, there is an additional cost associated with determining just what that fair market value is, and whether the charge is appropriate. Making applications for permits and dealing with the increased time lag involved in obtaining a permit is also an added financial burden. By singling out fiber optic cable for special treatment with respect to right-of-way charges, the state could create a conflict between fiber optic and copper lines. The price signal, which would then be sent to the firm installing telecommunication lines, would be that copper is preferred over fiber. I do not think this is the message that was intended to be sent because it would completely be opposite to the current policy of the state. Or, a conflict also would be set up between the treatment of electrical utility facilities and telecommunications facilities using fiber. No logical distinction exists for preferring one type of wire over another. Point five, this policy would be setting a precedent for charging all utilities fair market value for all work done in state right-of-ways, resulting in increased utility costs which ultimately affect all Alaskan consumers. And six, fiber services are intended to directly serve the people of Alaska as are all other utility facilities. By increasing the cost of utilizing state rights-of-ways, the state is, in effect, levying a hidden tax on the people of Alaska, and only on the people of Alaska. Seven, the policy would create a conflict where none now exists. Fair market value is not easy to define. Utility companies faced with large dollar charges, or easement costs, would no doubt have to hire their own appraisers to check out the fair market value costs established by the state's appraisers. In the event of conflict, the state's charges would either be challenged in court or through an appeal process, resulting in increased costs to state operations, as well as utility operations, in the form of experts and attorneys, not to mention the additional staff and management time which is a real, but perhaps not as obvious, cost to the consumer for such a policy. And finally the last point - and probably the most important - encumbering and discouraging the development of a fiber infrastructure means that many of Alaska's remote areas may not have the same access to health and education systems as those who are fortunate to live in the higher density areas. And isn't this resolution actually a step backwards, away from Lt. Governor Fran Ulmer's vision for the children of Alaska, as stated in the Alaska 2000 plan, in that all children of Alaska shall have equal access to a quality education via an interconnected state of the art telecommunications system. This is only feasible with a fiber optic infrastructure and an unencumbered use of state rights- of-ways. I thank you Mr. Chairman and committee members for hearing our concerns, and again, I urge you not to pass SCR 26. CHAIRMAN TAYLOR asked how Homer Electric Association charges for the rental of its poles to the local cable operator. MS. GHORMLEY thought the charge is by pole. CHAIRMAN TAYLOR asked if HEA charges a one time administrative fee, similar to DOTPF. MS. GHORMLEY was unsure. CHAIRMAN TAYLOR thought HEA was charging whatever the market will bear to hang the cable TV on its poles. MS. GHORMLEY said she believes cable TV is provided by microwave to the Homer area. She offered to get Chairman Taylor an answer to his question. CHAIRMAN TAYLOR asked Ms. Ghormley if HEA believes a competitor should be precluded from offering a higher price, such as $1.50 per foot, and force it to pay six cents per foot because that rate has been traditional and fair. MS. GHORMLEY replied she believes the 50 cents per foot charge is in conflict with the historical attitude of the state to promote economic development and development of infrastructure. CHAIRMAN TAYLOR stated the latest charge to cross state park land is 50 cents per foot. He asked Ms. Ghormley if she is opposed to that. MS. GHORMLEY stated she has no direct knowledge or experience with state park land permits so she could not answer. CHAIRMAN TAYLOR noted state agencies are charging whatever the traffic will bear, or charging less if they feel compelled to do so by historic precedent, or charging just an administrative fee, such as DOTPF. He agreed with HEA that the state should be charging the least amount possible to encourage competition. JIMMY JACKSON, attorney for GCI, informed committee members that the APUC regulations and FCC regulations contain a formula which establishes the rates that cable television utilities pay for the use of the poles of electric and telephone companies. The formula is essentially based on a percentage of the electric companies' cost of investment in the poles, and the percentage of the pole space taken up by the cable television facility. MR. JACKSON commented that GCI would not mind if the rates were decreased but what is more frightening than the possibility of paying 50 cents per foot for Chugach State Park is the possibility of the permits being held up while the issue of a consistent state policy is dealt with. CHAIRMAN TAYLOR adjourned the meeting at 5:30 p.m.