Legislature(1993 - 1994)
02/26/1993 03:40 PM RES
* first hearing in first committee of referral
= bill was previously heard/scheduled
= bill was previously heard/scheduled
SENATOR MILLER called the Resources Committee meeting to order at 3:40 p.m. and announced SB 104 STATE SHARE OF FEDERAL GAS ROYALTIES to be up for consideration. SENATOR PEARCE, sponsor, said if this bill were enacted it would constrain the department from abandoning the contract price as a means for determining gas royalty value on federally leased land. Currently, DNR is interpreting its obligation to adopt an average Cook Inlet area price as the gas royalty price on federal leases. They wish to apply that standard retroactively. The legislation is directed at changing the statute, thus relieving DNR from that perceived obligation. It we don't enact this, the financial impacts of royalty reevaluation could impose a considerable burden on consumers. Gas lease owners would have to pay roughly $5 million in retroactive royalties and an estimated $5 million in additional interest. Utility and gas lease contracts provide for such costs to be passed directly on to the consumer, she said. Number 170 SENATOR ADAMS said he thought this legislation was bad public policy. He wanted a legal opinion on Chugach's appeal and to go over some of the contract prices. He asked if there would be an evaluation of the impact of this legislation since it is retroactive to 1959. SENATOR PEARCE said she would be happy to get any legal opinion he wanted. JIM EASON, Director, Division of Oil and Gas, testifying via teleconference from Anchorage, said they couldn't tell what revenues were lost for a period other than that covered by the audit which prompted this legislation. To his knowledge, no other piece of legislation affecting royalties has had such a retroactive provision in it. Number 170 SENATOR ADAMS asked if we believe the state is due approximately $10.4 million for the audit period from October 1, 1984 until June 30, 1987? MR. EASON said the principal amount would be half that, but including the interest that is the approximate amount. SENATOR ADAMS asked what his position was on this legislation. MR. EASON said the Administration is neutral on whether or not the legislature adopts this bill. He said his department has an obligation under present law to protect our natural resources, but the legislature could act otherwise. Number 234 SENATOR ADAMS asked him what were the financial implications of the 1959 retroactive date to the state and federal government. MR. EASON said he couldn't answer that, but he didn't think it would be significantly different than what is at stake now. SENATOR ADAMS asked if SB 104 passed, would the state be paying out dollars to a number of parties other than Chugach Electric? MR. EASON answered no. He said it is conceivable in the future there could be other utilities. SENATOR PEARCE said the state would not be paying out dollars to anyone. MR. EASON said that was correct, we would be foregoing the opportunity to collect that money from the federal lessees. SENATOR ADAMS asked if SB 104 was limited to leases from natural gas that is used for electric utilities. MR. EASON said he understands that it would be for natural gas produced on federal leases and then sold by the lessee to a gas or electric utility. SENATOR ADAMS said he wanted to be shown where there is that strict limitation. He wanted to make sure the language was tight. He asked for the department's position in writing from Mr. Eason. Number 289 Jon Tillinghast, Chugach Electric Association, accepting the contract price as the royalty value for sales to gas or electricity is not a new policy. It was made in 1986 by the legislature with the strong support of DNR. This does not expand the policy, it merely applies it to federal leases for which there is no rational distinction between the two. The status of the appeal is that the Minerals Management Service (MMS) rejected the state's position and held that rejecting the contract price as a matter of federal law would be inconsistent with federal law. DNR appealed that determination within MMS and they have not decided whether they would hear the appeal. Prior to the audit period, MR. TILLINGHAST said, any claim for a refund or rebate would be barred by two things. One is that virtually all the Cook Inlet gas controversies and the Beluga controversy have already been settled; and besides that, there is a six year statute of limitations on any claim by either party on royalty disputes by federal law. He said there wouldn't be any controversy under federal law for any production that occurs after March 1, 1988. Number 341 SENATOR ADAMS asked didn't the problem rise because of interpretation of who we are supposed to be paying under? MR. TILLINGHAST said that was right. Up until March 1, 1988 the federal law was fuzzy, and they said if it's an arm's length contract we're going to take the contract price. On the state law side, you have the same controversy - the Armerada-Hess controversy. In 1986, the legislature took a very focused look at that controversy in the context of the sale of natural gas to public utilities and decided they were going to end that controversy. They created a rule saying that they would accept the contract price, because even if the state lost a little money by accepting that contract price, that loss of money would be passed on to a majority of Alaskans. That was an integral part of a very active and successful state partnership in a provision for reasonably priced power. In Southcentral Alaska that took the form of accepting the contract price for gas. In rural Alaska it took the form of the cost of equalization program. The only aspect of the policy we have before us today is the gas sales for Cook Inlet. SENATOR ADAMS asked if he didn't believe that Chugach Electric still has a contract obligation just because they entered into a long term contract at low prices. It should not deprive the state or federal government from seeking a fair royalty for that gas. Number 366 MR. TILLINGHAST answered that there were two contracts. One was the contract Chugach has with Beluga Producers where it agreed to buy gas at prices that DNR thinks is too low. The reason the contract prices were so low, he explained, was to give Chugach the financial incentive to build a major power generation facility at Beluga River. If Chugach hadn't made that capital investment, there would have been no market for the Beluga gas and the state wouldn't have gotten any royalties whatsoever. They believe strongly about honoring contractual commitments. The one they want to see honored is the promise made to them back in the 1960s that they would be paying back on the contract price. The second contract is the lease between the state and Chugach. It's an ambiguous document. It is bad public policy to keep the fight going in the context of sales of gas to utilities. Number 389 DAVE HUTCHENS, Director, Alaska Rural Electric Cooperative Association, said SB 104 is of vital concern to all the utilities in the Railbelt. It is important that today's consumers are not burdened with a dispute that goes back to yesterday's consumers. For that reason, they support this legislation.