HB 502 - COURT REVIEW OF STRANDED GAS DECISION 1:17:12 PM CHAIR McGUIRE announced that the next order of business would be HOUSE BILL NO. 502, "An Act amending the Alaska Stranded Gas Development Act to eliminate the opportunity for judicial review of the findings and determination of the commissioner of revenue on which are based legislative review for a proposed contract for payments in lieu of taxes and for the other purposes described in that Act; and providing for an effective date." 1:17:56 PM STEVEN B. PORTER, Deputy Commissioner, Office of the Commissioner, Department of Revenue (DOR), relayed that the administration supports HB 502, and that the DOR has submitted a zero fiscal note because it feels that the bill simply provides clarification regarding the DOR's responsibilities as they relate to the Alaska Stranded Gas Development Act. 1:18:36 PM LARRY OSTROVSKY, Chief Assistant Attorney General - Statewide Section Supervisor, Oil, Gas & Mining Section, Civil Division (Anchorage), Department of Law (DOL), indicated that he would be presenting the bill on behalf of the sponsor, the House Judiciary Standing Committee. REPRESENTATIVE GARA opined that the fiscal note should at best be indeterminate because, by losing the right to appeal, the public may lose the right to find that a part of the contract is costing the state billions of dollars [in revenue]. To call it a zero fiscal note is quite inaccurate, he added, because [adoption of HB 502] might end up costing the state a lot. MR. OSTROVSKY offered his understanding that during the legislative process in 1998, the legislation that became the Alaska Stranded Gas Development Act - House Bill 393 - was amended such that the legislature was provided with the final authority to determine whether a contract can be executed. Originally House Bill 393 provided the commissioner of the Department of Revenue with the authority to execute a contract if he/she determined that it was in the "long term fiscal interests of the state," and that that decision would be a final agency decision, which are normally subject to administrative appeal. Amended versions of House Bill 393 provided the legislature with more authority regarding a contract; that language says: The governor may transmit a contract developed under this chapter to the legislature together with a request for authorization to execute the contract. A contract developed under this chapter is not binding upon or enforceable against the state or other parties to the contract unless the governor is authorized to execute the contract by law. The state and the other parties to the contract may execute the contract within 60 days after the effective date of the law authorizing the contract. MR. OSTROVSKY said that in the administration's view, this language allows a premature challenge because the contract cannot be executed until the legislature authorizes it. He characterized this language as unusual because by and large in all other statutes, once certain findings have been made, commissioners are granted the authority to take an action. MR. OSTROVSKY ventured that everyone would agree that it's appropriate that there be judicial review if there is a finding that allows a commissioner to take an action. In the original version of House Bill 393, it made sense that the commissioner's decision would give rise to the right to appeal, because there'd be no step in between the commissioner's decision and the execution of a contract. But in the amended version of House Bill 393, and under current law, the fiscal interest finding itself doesn't enable either the commissioner or the governor to take an action on the contract; instead, the legislature has to authorize the contract, and therefore people have recourse via the legislature if they feel that the contract isn't any good, or that there isn't sufficient factual basis, or that the commissioner's analysis is faulty. MR. OSTROVSKY said that although [the language of current law] does remove an intermediate judicial review, it replaces it with an intermediate legislative review. 1:24:13 PM REPRESENTATIVE GARA pointed out, though, that although the phrase, "intermediate judicial review" implies that there is judicial review later on, HB 502 [appears] to get rid of all judicial review. MR. OSTROVSKY offered his belief that "there is judicial review under the [Alaska Stranded Gas Development Act]; within 120 days of the contract, one can challenge its constitutionality. Furthermore one can always challenge the constitutionality of a statute. REPRESENTATIVE GARA offered his understanding, however, that currently, judicial review is available to determine whether the contract is in the state's best interest [and whether or not we gave away the farm," and yet that provision will be removed and there will be no other judicial review if HB 502 passes. MR. OSTROVSKY posited that there will be a different kind of judicial review. [Under HB 502], when the legislature goes through its authorization process, there will be additional facts developed, and so the court won't necessarily look at only the commissioner's recommendations in isolation but may instead also look at the entire record, depending on the nature of the challenge. 1:27:01 PM REPRESENTATIVE GARA asked whether under the bill, on the question of whether a contract is in the state's best interest and gets "us" the best deal possible, someone will still be able to go to court and challenge the best interest finding. MR. OSTROVSKY said, "I believe not." He added: I think the purpose of the [bill] ..., and [under] the language of the [bill], it will be very difficult for somebody to come in, after a commissioner's determination, and challenge that determination [by saying], "Well, they didn't have a reasonable basis for it; you can't advance it to the legislature," because this [bill] says that decision is not subject to review, stay, or injunction by the court. REPRESENTATIVE GRUENBERG, after reading portions of existing AS 43.82.430, offered his understanding that the language currently in AS 43.82.430(b) won't be affected by the language in proposed AS 43.82.430(c) of HB 502. Furthermore, he noted, existing AS 43.82.440 states: Sec. 43.82.440. Judicial review. A person may not bring an action challenging the constitutionality of a law authorizing a contract enacted under AS 43.82.435 or the enforceability of a contract executed under a law authorizing a contract enacted under AS 43.82.435 unless the action is commenced within 120 days after the date that the contract was executed by the state and the other parties to the contract. REPRESENTATIVE GRUENBERG pointed out that that statute of limitation and ability to seek judicial review of the contract itself - after ratification by the legislature - won't be affected by HB 502 either. MR. OSTROVSKY acknowledged that perhaps [AS 43.82.430] could be interpreted to mean that the commissioner's determination of the long-term fiscal interests of the state is not subject to judicial review but the final finding and determination that the contract is consistent with the statute is. REPRESENTATIVE GRUENBERG predicted that such language will engender litigation. He suggested that they should make sure that the language is written correctly as a whole; in other words, they should draft the language so that there is no question of the intent - once that intent is decided upon. 1:33:50 PM MR. OSTROVSKY suggested changing proposed AS 43.82.430(c) such that it applies to both (a) and (b) of AS 43.82.430. REPRESENTATIVE GRUENBERG suggested adding to AS 43.82.430(c) a reference to AS 43.82.440 as well; "it seems to me that you might want to put everything involving judicial review in one statute, and make sure that there is no way they can't be read congruently." MR. OSTROVSKY said that as a general rule, courts prefer to take up final decisions. Otherwise, for example, in a situation involving the Alaska Stranded Gas Development Act, if someone challenges the fiscal interest finding, it might not yet be known how the legislature will ultimately deal with the contract; conversely, if the legislature authorizes a contract, it will be after considerable testimony and deliberation, and thus the facts and circumstances surrounding a contract will be more developed than before the commissioner makes his/her decision. MR. OSTROVSKY suggested that if someone were to challenge a commissioner's decision on the basis that the economic analysis that formed the commissioner's decision was faulty, it could well be that ultimately the legislature would come to that same conclusion. Under the change proposed by HB 502, the court, in such a situation, will look at the whole record; whereas if the court were to look only at the commissioner's determination, it would not have the benefit of being able to look at any additional work that the legislature could chose to undertake. House Bill 502 merely takes away the step that allows for judicial review in the middle of the process, he remarked, and puts in a step, that is not normally there, allowing for legislative review. The [administration] would prefer that any judicial review take place after the process is completed rather than in the middle of it. REPRESENTATIVE GARA offered his understanding that under HB 502, no one will be able challenge the best interest finding. MR. OSTROVSKY concurred. Without the adoption of HB 502, the court could find itself inserted into the relationship between the executive branch and the legislature, whereas normally one can't challenge either the administration or the legislature for proposing something. Under current law, when the legislature reserved the power to authorize a contract under the Alaska Stranded Gas Development Act, this normal relationship was changed; essentially, the administration is simply submitting a recommendation to the legislature not much different than submitting proposed legislation, and so without the adoption of HB 502, a person would be allowed to come in and stop the process. CHAIR McGUIRE said she believes that it is in the best interest of the people of Alaska to have the issue before [the legislature] to decide. In the end, the legislature may not approve a particular contract; it may decide, for various reasons, that it wants to challenge different parts [of a contract]. But if the process includes the possibility that an injunction can be filed, then it can become difficult for the legislature to decide when and how to deal with the contract. She opined that there is role for the judicial branch, but that it should be at a different point in time - at the end. Furthermore, the legislative should also play a role, she remarked, surmising that the legislature, back in 1998, felt the same way and so interjected itself into the process via the changes it made to House Bill 393. She offered her hope that legislators will listen to the electorate and then take actions that reflect its wishes. 1:42:10 PM REPRESENTATIVE GRUENBERG mentioned that perhaps Section 1 of the bill is unnecessary. With regard to Section 2 of HB 502, he suggested that perhaps they could change it such that it simply says that except for a constitutional challenge, "this" process isn't ripe for review "until it's over." In response to comments and a question, he remarked on the concept of judicial economy; because things can change, courts don't normally get involved until the process is complete - this is a very well established legal principle as well as sound public policy. If faced with a challenge before the process is complete, one ought to be able to ask the court for a stay on the basis that the situation is not ripe for review. MR. OSTROVSKY concurred. CHAIR McGUIRE pointed out, though, that in including itself as a real player in the process, the legislature neglected to state how it felt about judicial review of a final finding. She posited that changing the current language as HB 502 proposes to do is a way for the legislature to say, "These are recommendations; these are not a final finding; and we want the legislative process to take its normal course, to not have the court intervene." 1:46:21 PM REPRESENTATIVE GRUENBERG suggested simply changing the bill to say that "the process" should not be considered a final decision and ripe for review until after the legislature has approved it. MR. OSTROVSKY said that captures the intention and is consistent. CHAIR McGUIRE relayed that they would hold the bill over so as to provide members with more time to consider some of the issues raised. REPRESENTATIVE GRUENBERG suggested that interested parties meet with him before the bill is heard next for the purpose of developing alternative language. AN UNIDENTIFIED SPEAKER indicated that the administration's representatives would make themselves available. REPRESENTATIVE GARA said his question is whether, under the bill, one would be able to challenge whether a contract is in best interests of the state even at the end of the process. Having judicial review at the end of the process would be fine, he remarked, but he wants to ensure that people aren't precluded altogether from challenges regarding the best interest findings. REPRESENTATIVE COGHILL questioned whether they really want a challenge regarding the best interest findings to occur after both the administration and the legislature have acted - perhaps such a challenge should be precluded altogether. MR. OSTROVSKY, in response to a question, said: The legislature has powers to determine what's in the best interest of the state, [though] it can't perform unconstitutional acts. And a commissioner is sometimes empowered by [the] legislature ... to make a best interest finding, and a court will review it under [the] standards of review that it's articulated. It's different, however, [if] ... the legislature determines something's in the best interest of the state before it takes an action. ... In a sense, it's really implicit in all legislative actions - everything the legislature does is because, as a collective body, it believes it's in the best interest of the state. And that's normally not a basis for challenge of legislative action. So I think Representative Gara is correct that if the commissioner makes a determination [and] then the legislature looks at [it] ... - and does whatever it's going to do with the contract ... - and makes a determination to pass that contract, that there's probably not a viable claim that it's not in the best interest of the state, because the legislature is the ultimate determiner of what's in the best interests of the state. However, somebody might claim, for example, that notwithstanding that legislature, you can't have a tax contract or the contract violates another constitutional provision. So, in my opinion, there wouldn't be a basis for a challenge [of] either the commissioner's finding or ... the best interest [finding] because that's what the legislature will determine, and the court would look at the whole record. And the courts generally ... won't second-guess that because that is the essential legislative function. ... CHAIR McGUIRE suggested that in addition to a "process problem," there is also the fundamental policy question of what the appropriate role of the legislature is and what did it intend when it amended the Alaska Stranded Gas Development Act to include legislative authorization. She offered her belief that the legislature intended to insert itself in the process so as to be in the position of making the best interest finding, because, as representatives of the people of the state, legislators were better suited than the courts for that task. She characterized HB 502 as providing clean up language in the sense that no one understood at the time that the judicial branch was being left in along side of the legislature - seemingly to duplicate the process that the legislature [and administration were] supposed to be doing; HB 502 is merely further effectuating the legislature's intent in included the provision regarding legislative authorization. She stated that she would not support a proposal that authorizes the court to duplicate all the work done by the legislature, or one that would allow a person to challenge the legislature's decision- making; such a proposal would raise constitutional separation of powers issues for her. 1:56:26 PM REPRESENTATIVE GARA opined that the real issue pertains to the legislature and public's access to information. Currently, if someone challenges the best interest findings, he/she would be entitled to all the documents relevant to whether a contract is in the best interest of the state. He offered an example of documentation that might prove that the state didn't need to offer a particular concession to the oil companies. If the legislature gets rid of the right to challenge the contract on the basis of best interest, then what right will anyone - public member or legislator - have to the necessary documentation? He noted that some limitations regarding access to documentation already exist under AS 43.82.310(e), and indicated that these limitations illustrate the legislature's importance in its current roll under the Alaska Stranded Gas Development Act. Currently under HB 502, he opined, the public will lose the right to access important documents, documents that will prove whether a contract is fair. He said that he wants this issue addressed such that a person will have the right to look at documents regardless of whether the administration approves such disclosure. MR. PORTER said, "It is our intent to provide a full and complete record to assist both the legislature and the public to do the same evaluation that we did." In response to a question, he offered his belief that HB 502 already stipulates this. REPRESENTATIVE GARA, in response to comments, offered his understanding that what Mr. Porter said was that the administration is going to provide documents that it believes are relevant. Representative Gara indicated that his concern pertains to what happens if a person disagrees with the administration with regard to what documents really are relevant. He again offered his understanding that AS 43.82.310(e) says that it is the administration that gets to determine what documentation is relevant. REPRESENTATIVE COGHILL expressed disagreement with that interpretation. REPRESENTATIVE GARA argued that it is not correct to think that AS 43.82.310(e) would allow a legislator to get information directly. He mentioned that he would support a change that would allow a legislator to request information from the administration. REPRESENTATIVE COGHILL asked for clarification regarding who is considered to be the applicant under AS 43.82.310. MR. OSTROVSKY offered his belief that the first sentence of AS 43.82.310(e) ought to contain a comma between the words, "by" and "request" so that it is clear that a legislator may request information directly. Without that comma, the language does suggest that a legislator would need to go through the administration in order to request information. 2:06:17 PM REPRESENTATIVE GRUENBERG concurred, but remarked that if that comma were to be inserted it would constitute a very substantive amendment. REPRESENTATIVE GARA expressed concern that even if that problem is fixed and it is clear that a legislator can request documents, they must be provided in a timely fashion - as in, "immediately" - and even then it will be hard to know exactly which documents to request. CHAIR McGUIRE surmised that a legislator could craft a request that would be similar to a discovery order wherein it would apply to all documentation related to a particular subject, and then, if those documents aren't forthcoming, that in and of itself will create serious questions about the contract. She reiterated that HB 502 would be set aside in order to address members' concerns, and, in response to a comment, indicated that she would not be assigning the bill to a formal subcommittee. REPRESENTATIVE GRUENBERG offered his understanding that a letter written by Jim Clark addresses AS 43.82.310(f), and that Representative Gara is suggesting that a lawsuit might be filed as a means of discovery to get documents. Representative Gruenberg then made remarks regarding the issue of privilege - specifically, executive privilege and deliberative privilege. CHAIR McGUIRE mentioned that she would be keeping public testimony open on HB 502. REPRESENTATIVE GARA said that at some point he would like the administration to describe what documents are available and how they can be obtained under current law as well as under the bill. MR. PORTER agreed to provide that information. 2:13:29 PM JIM SYKES said he opposes HB 502. He elaborated: There is a process that is established - I've been through it a number of times - where, if you don't like a decision [the Department of Natural Resources (DNR) comes out with, you can ask for reconsideration, you can appeal it, and you can appeal it to court. I think where you're going with this, in terms of trying to write the legislature [in] as the authority on this because you've had all these deliberations, I don't think that's likely to stand up under a separation of powers test. I don't know how many laws, but there have been perhaps hundreds of laws passed by the legislature that have been successfully challenged in the court system, and [just] because you have deliberated doesn't necessarily mean that you found all the wisdom that was there to be found before the law was passed and signed into law. And so I think it's very important to recognize the role of the judiciary, and it probably invites a separation of powers kind of test, then, in itself. So you may wish to consider that. In terms of the rest of the bill, even if a court were to consider what the legislature has done, the legislature has already been provided evidence, by it's own contractors, that plainly states that the [Alaska Stranded Gas Development Act] probably doesn't apply. And so you've already got [that] legal question preceding all of what is taking place up until now. And so that's certainly a fair question for any court to consider as part of the record. ... As has been expressed in the past, I don't think that there [are] a lot of people out there just intending to scuttle the contract - I think the public gives the legislature a great deal of deference if they've done something, and gives them the benefit of the doubt. And so if you come up with something that's a decent contract, if you've thoroughly investigated the options and the alternatives and shown the public that you've really prepared what's available and made of that deal, I don't think there's going to be problem with it. But this has the appearance to me of, is the legislature trying to create a greater role for itself in government than it deserves, and I don't think that's going to help the process of getting a gas contract. And so - as everybody knows, you have to choose your battles - I'd let this one go. ... I'll be happy to answer any questions if there are any. 2:16:17 PM MARK MYERS said he would like to second some of Representative Gara's concerns regarding the ability of the legislature to get information. A third dynamic to also consider is ensuring that the public gets the information. Part of the finding process that has been so critical, particularly with regard to royalty oil sales, is that the public comments are meaningfully taken and received, and that the finding adequately addresses public concerns. Therefore, if the public doesn't have access to the data or if the public's concerns are not addressed in the finding and there is no legal recourse available to the public, it will have its ability to influence the process greatly diminished. MR. MYERS said he understands the legislature's desire to be the final authority on the finding, but when one considers the magnitude of the finding and the issues, the legislature simply doesn't have the expertise, necessarily, to look at the finding in the time allotted. That's why public input becomes critically important, as does the administration's responsibility to answer questions in an unbiased manner and prove that the finding is in the state's interest. He mentioned that a couple of key issues and concerns pertain to whether it can be demonstrated that the gas is actually stranded. If the administration, in its finding, chooses not to go into a quantitative or reasonable analysis of that issue, and the legislature doesn't [indisc] it, the public will never know whether that standard was met. MR. MYERS pointed out that another major issue revolves around the question of whether the contract was legally negotiated, legally in the sense of occurring within the constraints placed on the administration by the Alaska Stranded Gas Development Act at that particular point in time. Again, this is information that the [public] needs to have and needs to be able to comment on, and those comments need to be meaningfully addressed. Furthermore, historically, if the state has made procedural errors in its process, the public "has a bite of that apple." And yet that [right] will be taken away via the adoption of HB 502. MR. MYERS acknowledged that the legislature could make a de facto finding that every contract it approves is in fact in the state's interest, but in such instances, "the whole question of having a finding comes into question." He added: Our findings, historically, have been the public's vehicle, to comment on our major policy decisions; unless [there is] some sort of ability for the public, if they're unsatisfied, to get some review beyond the constitutional issues, I think we undermine a fair amount of public trust - we also don't place the administration in the position of having to write the very best finding. MR. MYERS opined that some of the issues that should be thoroughly addressed and reviewed in the finding are things like whether the gas is in fact stranded; whether, compared to other available alternatives, [the contract] is in the interest of the state; and whether there is a quantitative comparison of alternatives. If those issues are not addressed in the finding, what is the public's recourse to obtain that information? Or should the public rely totally on the legislature's belief that those areas of concern have been satisfied? 2:20:15 PM CHAIR McGUIRE asked Mr. Myers to comment on how he envisions the situation playing out if HB 502 is not adopted. MR. MYERS said that one must first consider what the purpose of the finding is. He offered his belief that if the purpose of the finding is to provide a vehicle and justification for the contract, and the public has a role in that, then there simply must be a way for the public to challenge the decision-making process regarding major issues: major factual issues, omissions and errors, major procedural issues, and constitutional issues. If there is no way for the public to do that, the public will never have any faith or trust in the process. Should such challenges occur later in the process? Possibly. Public review during the best interest finding process has not only improved the administration's findings but has always been a critical element of public acceptance. If issues raised by the public during the process are not addressed by the administration, then the courts play a role. MR. MYERS said that if the legislature chooses to step in and play the role [currently handled by the courts], then the legislature will have to really micromanage the finding and research whether the issues raised by the public really have been adequately addressed by the administration. [Under HB 502] the judicial system can't be used to ensure that the public's best interest is served. Somewhere in the process there has to be the ability to challenge the contract - on judicial issues, on procedural issues, and on constitutional issues - in order to build public confidence. Again, he remarked, the ability to challenge could occur later in the process and perhaps that makes more sense, but it should occur somewhere or else the public trust won't be gained. MR. MYERS said: And I'll give you an example. [In] the shallow gas leasing program, we removed the finding process altogether, [and] the legislature made a determination that the shallow gas leases were in fact [in] the best interest of the state. That whole program blew up on us, and we ended up having to spend all that time with the legislature but also with [the Department of Natural Resources' (DNR's)] public process. The fundamental reason it blew up: there was no public input into a best interest finding process. So that to me was a living example, where fixing it after the fact took years and we still, probably, haven't totally regained public trust. 2:23:37 PM CHAIR McGUIRE asked Mr. Myers to suggest a way to change the bill so that it provides the public with the assurance that the best interest finding was really made. MR. MYERS suggested preserving the traditional checks and balances and allow the public - at that latter date - to address not only constitutional issues but also substantive issues and procedural errors. In other words, provide a demonstration that the statutory requirements have in fact been met. The legislature sets a policy by the way it writes a law and by the way it might amend the law before the process is done. Therefore, the legislature must make sure that the contract complies with the law, and the finding is the vehicle that pertains to substantive issues such as whether the gas is actually stranded. Though if that is not the goal, then the law should be dramatically changed such that it doesn't require a demonstration that the gas is stranded. Also, all other reasonable alternatives should be looked at, and a balancing test performed on them. He predicted that during any court review, the court will give the legislature a lot of discretion with regard to its determination. MR. MYERS, in conclusion, said that the ability of the public to challenge the administration forces the administration to ensure that the finding is very, very good. REPRESENTATIVE GARA asked how long the public has to look at a draft contract after it is released by the administration. MR. OSTROVSKY and MR. PORTER said a minimum of 30 days. REPRESENTATIVE GARA asked how they could ensure that the public gets access to the documentation it needs before running out of time to comment. MR. MYERS offered that the logical time for the data to be released is at the same time that the preliminary best interest finding comes out. Usually the public comment period is long enough to sufficiently absorb the data and provide meaningful input; this should also gives the administration adequate time to adjust the final contract appropriate to the comments. REPRESENTATIVE GARA asked how much time should be allowed in this case once the documents are made public. MR. MYERS suggested a 90-day period at a minimum. REPRESENTATIVE GARA asked Mr. Myers whether he would be amenable to a change that would provide for a 90-day public comment. MR. MYERS acknowledged that delaying the legislative process could be problematic if the contract engenders early spurious lawsuits. He reiterated the need for the finding and its supporting documentation to be made available to the public at the same time. 2:31:02 PM MR. MYERS, in response to a question, stressed the importance of building the public trust via allowing public input and of the administration's responsibility in addressing the public's comments. In the case of the proposed gas contract, however, it is going to be very difficult for the public to provide input without first seeing the economic and other analyses that the administration and its consultants have performed. Public confidence is built in a robust finding process where the public's input has to be considered and, if it's failed to be considered, then there is redress via the courts. He mentioned that the aforementioned failed shallow gas leasing program had to be repealed and replaced with a program that had a meaningful finding process. REPRESENTATIVE GRUENBERG characterized that as an important point, offered his recollection of what occurred when the Trans- Alaska Pipeline legislation was passed in Congress, and suggested that perhaps taking a similar approach might prove a viable alternative. REPRESENTATIVE WILSON questioned whether the legislature is really going to get enough information in to order make a decision. MR. MYERS remarked on the Legislative Budget and Audit Committee's arranging for its members to be able to see the confidential contract if they signed a confidentiality agreement. He acknowledged that absorbing the information is a daunting and challenging task, and pointed out that currently the public has almost no information. So what is needed is either some mechanism in place to release that information or some way that the public can engage in a discovery process of some sort. He acknowledged that releasing the data is also a difficult process for the administration to undertake, but in order for a member of the public to truly understand the underlying analyses, he/she must be provided with some information from all categories. Under current law, a lot of that type of information wouldn't have to be released if the administration chose not to release it; therefore, some form of discovery process might have to occur in order for members of the public or legislature to be satisfied that they have enough data. CHAIR McGUIRE, in response to a question, expressed a preference for addressing this bill separately from any others that might be somewhat related. [HB 502 was set aside.]