Legislature(2017 - 2018)BELTZ 105 (TSBldg)
03/21/2018 01:30 PM JUDICIARY
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SB 175-DNR: DISCLOSURE OF CONFIDENTIAL INFO 1:48:30 PM CHAIR COGHILL announced the consideration of SB 175. 1:49:06 PM ANDREW MACK, Commissioner, Department of Natural Resources, Anchorage, Alaska, introduced SB 175 stating the following: The department has a longstanding issue with respect to the handling of information considered confidential under Alaska law. Specifically, this issue impedes the department's ability to effectively audit and collect the appropriate amount of royalty and net profit share payments due under some leases held under oil and gas producers. A material term of the oil and gas lease requires producers to provide price information to the department. If this price information is higher than the value used by the audited company for computing royalty or net profit share due the state, the department will use this higher value in determining the payment due. Because this sales information is confidential - yet is used by the department in determining the royalty in net profit share values, disclosing the information to the audited party in limited fashion is necessary to complete and finalize the audits. Some audits have been completed using voluntary confidentiality agreements entered into by the department, the owner of the data, and the audited party. More frequently, one or more of the parties refuses to sign the agreements. This again is an obstacle to finalizing the audit. The leases in existing statutes allow for the disclosure of confidential information during an official proceeding or the investigation of the department. What they don't provide is the method of disclosure nor any additional protective measures to ensure the limited use of the confidential information. The department has taken a conservative position and has chosen not to disclose confidential information over the objections of the information owner. To be clear, every member of the Department of Natural Resources who has access to, uses, or handles confidential company information is well aware of the restrictions on that information. They are also well aware of how to safeguard that information and how to use it in the normal course of their duties. It is a trust we take very seriously. In fact, I am not aware of a single instance where inadvertent or malicious release of company confidential material or information has occurred. It is a very serious business to use and we do not take our responsibilities lightly. What this bill does is provide myself, the commissioner, with the ability to determine [whether] disclosure of confidential information is required in the official conduct of state business. And if I do find disclosure is necessary, provide a tool for me to use to safeguard that information. This bill is about protecting company information, not about disclosing it in some haphazard manner. As I mentioned earlier, DNR takes our responsibilities with respect to this kind of information very seriously. This bill gives the commissioner and the Department of Natural Resources a tool to describe in specific detail how that information is to be used, who gets to see it, what it is to be used for, and how to dispose of it if necessary. These are the things we think are important in the conduct of our official duties. I'd like to add, what we're proposing here Mr. Chairman is not something new. It is very similar to the process the Department of Revenue uses when they have to determine tax issues. 1:53:24 PM CHAIR COGHILL listed the individuals available to answer questions. 1:54:33 PM ED KING, Special Assistant to the Commissioner, Department of Natural Resources (DNR), Juneau, Alaska, delivered the following sectional analysis for SB 175: Section 1 adds to the commissioner's authorities under AS 38.05.020(b). Paragraph (15) allows the commissioner to disclose confidential information under a protective order during an official proceeding such as a lease on an appeal or request for consideration. This statute would mirror the Department of Revenue statute AS 43.55.040. It lays out the process for which confidential information can be disclosed to a party that is under audit when another party's information was used to asses that audit value. He explained that what occasionally happens is a lease term requires a lessee to pay royalty based on the highest price that is within the field. For example, if a lessee sells their oil for $50, they would pay DNR royalty based on that $50 sale. If another lessee within that same lease sold their share of the oil for $60, they would pay DNR based on $60. DNR would then audit the first company saying it owed additional royalty based on the second lessee who got more value. Because that sales information is confidential, DNR would need to figure out how to disclose that confidential data through the audited party. The current statute, AS 38.05.036(f), gives the department authority to disclose that information during an audit or during an appeal of an audit. What the statute does not do is provide a process to disclose that information. When the party whose information is to be disclosed objects to the disclosure, the department does not have statutory process to protect that information. What SB 175 seeks to do is provide that process for disclosure through a protective order. Sections 2 and 3 are conforming language to adopt the new section into AS 38.05.020. COMMISSIONER MACK advised that the department has about $40 million in outstanding appeals that are potentially impacted by this legislation. Embedded in the department's thinking is to get the most and best value for the sales contracts within a unit while protecting the confidential data of each of the working interest owners. He was unaware of anyone who has broken the obligation of confidentiality but the fact that there is the possibility of criminal prosecution catches the eye of an employee who is trying to do their job and trying to establish what is the royalty for that unit. What SB 175 seeks to do is allow DNR to show working interests when another working interest has negotiated a higher price contract on that unit. 1:59:59 PM CHAIR COGHILL summarized that competitors are worried that some of their internal workings would be disclosed. COMMISSIONER MACK said DNR's primary objective is to ensure that the state is treated fairly. He referenced Mr. King's example of sales contracts on the same unit for $50 and $60. The entity that negotiated the $50 sales contract will be able to look at the higher priced contract, but the particulars of what is and is not disclosed in the protective order would be very focused. He noted that DNR has the option of going to the court and asking for a protective order but it's a little cumbersome to do so in each case. MR. KING added that the information that would be disclosed is what is used in an audit. The information is several years old so the ability for a company to use it to gain a competitive advantage is very limited. The protective order can also impose limitations on who can see that information. It's necessary to have the flexibility to construct the protective orders to fit each situation. What is lacking is a process. He also pointed out that the higher of provision that DNR is enforcing is a lease term to which the lessee agreed. The department has the statutory authority to prosecute those terms, complete the audit, and get the money that's due to the state but what's lacking is a process. SB 175 provides that process, which is the same as the one the Department of Revenue has. CHAIR COGHILL asked where the industry feels they might be violated. MR. KING suggested the industry answer that because the department doesn't see this as a problem. CHAIR COGHILL said he understands the department's perspective. COMMISSIONER MACK said the department holds a lot of confidential information and has a stellar record for maintaining confidentiality. CHAIR COGHILL commented that there is a notice provision for all parties. He asked if this is new. MR. KING said there is a process in place to do a voluntary confidentiality agreement similar to a protective order. The problem arises in those cases where the other party won't consent to the confidentiality agreement. COMMISSIONER MACK advised that many royalty issues are settled without this being an issue. 2:06:02 PM CHAIR COGHILL stated that he would hold SB 175 in committee for future consideration.