SPONSOR SUBSTITUTE FOR HOUSE BILL NO. 157 "An Act clarifying the powers of electric or telephone cooperatives to become members of or own stock in other entities." Co-Chair Meyer stated his intent to take public testimony and hold HB 157 over. JON BITTNER, STAFF, REPRESENTATIVE TOM ANDERSON, explained the bill. As it currently exists, the Alaska Electric and Telephone Cooperative Act grants electric and telephone cooperatives broad powers to conduct various activities. Those powers include the ability to become a member of other cooperatives or corporations or own stock in them. These powers allow the formation of subsidiary corporations or cooperatives in which a cooperative can own all or a portion of another legal entity that conducts activities separate from the cooperative's utility operations. For example, some cooperatives provide Internet or cable television services. Mr. Bittner related that recent court decisions have called into question a cooperative's ability to own subsidiary corporations. There is concern that those cases could be used in the future to help interpret Alaska's laws. HB 157 proposes to clarify AS 10.25.020 to make clear that a cooperative utility may own an interest in another entity organized for any lawful purpose. This amendment preserves and clarifies the current statute. Mr. Bittner reported that the second change made in HB 157 is the addition of "limited liability company" to the list of entities a cooperative may become a member of or own stock in. He urged support for this legislation. 3:02:09 PM Representative Croft asked if it would create unfair competition with private fuel operators. Mr. Bittner replied that it would not create unfair competition. The subsidiary corporations fall under the same tax codes and regulations as private operators. 3:03:48 PM Representative Kelly discussed cooperatives and how they are organized related to lowering of fuel costs in the bush. He testified in support of the bill. 3:05:46 PM Representative Hawker asked Mr. Bittner to explain the changes to the Labor and Commerce version of the bill. Mr. Bittner replied that Subsection 9 was removed. Representative Hawker asked if that solved a lot of problems. Mr. Bittner said it did not solve the problems of the fuel providers, but it did solve those involving the Department of Revenue. Without the removal of Subsection 9, coops would have directly been able to sell fuel, which was never their intention. 3:08:10 PM Representative Hawker asked if the coops are tax-exempt. Mr. Bittner said yes. Representative Hawker asked if they are being allowed to capitalize a limited liability company as a tax-exempt entity. He suggested directing that question to Eric Yould of the Alaska Power Association. 3:09:21 PM FRANK CORBIN, NUSHAGAK COOPERATIVE, DILLINGHAM, encourage passage of HB 157 because it offers cooperatives a chance to freely engage in alternative, legal business ventures. He suggested that competition is good. He gave an example from Bristol Bay Fuels. He clarified the tax-exempt issue as it applies to his cooperative. 3:12:30 PM Representative Holm questioned a statement made by Mr. Corbin that profit should not restrain the ability to go forward. He asked where Mr. Corbin's fuel is bought. Mr. Corbin replied that the cooperative is part of the Western Alliance Fuel group and the fuel is put out to bid. Representative Holm restated the question. Mr. Corbin deferred to Mr. Reeves. 3:13:42 PM BRAD REEVES, CEO, KOTZEBUE ELECTRIC, related the various recent increases in fuel price. He stated that last year the fuel was purchased through Yukon Fuel and this year the contract will go to Crawley Maritime. He described how the cooperative was formed in response to the changing economy. He gave an example of a limited liability corporation that his company is involved with. He spoke of his community's needs and how the bill would affect it. 3:19:47 PM Representative Holm asked where Mr. Reeves would buy his fuel previous to developing a cooperative. Mr. Reeves related the history of his cooperative and how the community saved over $20 million dollars by investing in a tank. 3:20:48 PM Representative Holm made the point that no fuel is available to buy in the State of Alaska. Instead it is barged in. Mr. Reeves replied that they purchase fuel from Nikiski, and it has been 12 years since they have purchased out of state. He noted he would be willing to look at purchasing out of state if the price were lower. 3:21:46 PM Representative Holm asked if Mr. Reeve's facility is subsidized. Mr. Reeves replied that they have received grants from the Department of Energy for the wind project, and some state and federal dollars. Some were direct appropriations from Senator Stevens. 3:22:45 PM VERN RAUSCHER, INSIDE PASSAGE ELECTRIC COOPERATIVE, commented that the cooperative has an obligation to listen to requests of the customers. He spoke about fuel business concerns. The Board has discussed these concerns. He mentioned utility billing requests. He stated that they have the authority to diversify into other areas. He spoke in favor of HB 157. 3:24:55 PM Representative Holm asked where they buy their fuel. Mr. Rauscher replied from Petro Marine out of Seattle, and also from one local wholesaler. Representative Holm commented that the volume is predicated by the customers. If a wholesaler had volume removed then it would adversely influence the customer. Mr. Rauscher replied that it was not the intent to put anyone out of business, however, there is room for competition. He gave an example of paying 40 to 50 cents more than barge prices. With talk of competitors coming in, wholesale prices dropped by 25 cents. He stated he would welcome a competitor in any of his communities. 3:27:29 PM Representative Holm pointed out, from the capital investment side, that he would be disturbed by allowing a non-taxable entity to enter into the market place for profit. He voiced concern with unintended consequences. Mr. Rauscher responded that they purchase a minimum of 25,000 gallons to get the first price break. When the wholesale price drops, he said he believes it is from competition. 3:29:53 PM PAT CARTER, LOBBYIST, DELTA WESTERN, addressed competition. He spoke of a concern about an unlevel playing field with a heavily subsidized entity. There are certain markets, which are small and having trouble finding a buyer. Under certain circumstances, there are not problems going into certain businesses. He noted that there is an attempt to work out a compromise. He opined that the legislation is written too broadly. It should be limited to certain rural communities. Mr. Carter thought that a government entity needed to be involved. An LLC does not get to use any of the subsidized assets of the coop. He stated that it should be limited to a specific geographical area and be revenue neutral for the state. Mr. Carter mentioned the competition within the communities. Delta Western is sensitive to high costs in rural Alaska, however Delta Western's margins are not changing due to the high costs of crude oil. He presented an analogy. He concluded that the bill will drive the private sector investor out of business, which will result in no competition. 3:36:23 PM Mr. Carter addressed accumulated tax-exempt wealth. The utilities have a limitation on how much revenue they can receive; 15% without loosing tax-exempt status. He opined that the current bill was written too broadly. Mr. Carter asked for consideration whether it is right to allow a subsidized entity to drive the private sector out. Representative Hawker asked that the excise tax section be present to testify the next time the bill is before the Committee. HB 157 was HELD in Committee for further consideration.