SENATE BILL NO. 41 "An Act relating to environmental audits and health and safety audits to determine compliance with certain laws, permits, and regulations." Co-Chair Sharp communicated that SB 41 had previously been heard by the committee and that public testimony had been opened. MARIE SANSONE, ASSISTANT ATTORNEY GENERAL, NATURAL RESOURCES SECTION, DEPARTMENT OF LAW (DOL), relayed that the department had successfully worked with the bill sponsor on amendments, but it had several remaining concerns. A principal concern was related to pipeline tariff rates. Additionally, the bill used a number of terms to refer to state, regulatory, and government agencies with enforcement jurisdiction; the term department was defined by the bill as the Department of Environmental Conservation. She elaborated that the bill additionally appeared to relate to municipalities; therefore, DOL wanted to work with the sponsor to achieve terminology consistency within the legislation. She believed consistency would offer a considerable improvement to the bill; there were instances that warranted the specification of a particular agency; whereas, some areas needed a broader term. She elaborated that "the privilege applies in more context than the immunity provisions," which was the reason for the department's concern. Ms. Sansone shared that DOL was concerned with the definition of the terms audit and privileged information (called confidential self-evaluation). The department was also interested in who was responsible for proving exceptions to the privilege related to the burden of proof and whether the privilege should extend to underlying or objective facts. She shared that the department had discussed all of its concerns with the sponsor and would continue to do so moving forward. She shared that Assistant Attorney General Beth Kerttula would address the bill provisions relating to pipeline tariffs. Senator Phillips observed that the committee was responsible for dealing with issues related to money. He wondered whether DOL had worked with the sponsor on its concerns when the bill had been in the Senate Judiciary Committee. Ms. Sansone responded in the affirmative. Senator Phillips asked whether the department and the sponsor had philosophical differences pertaining to the legislation. Ms. Sansone replied that amendments had also been made in the Senate Labor and Commerce Committee. She relayed that some of the basic issues had been addressed in prior committees; however, there were some issues that had not been resolved that were not as high on the priority list. She explained that some of the remaining concerns were of a housecleaning nature, but were important. Senator Phillips repeated his question related to a philosophical difference between the administration and the sponsor. Ms. Sansone deferred the question to Janice Adair, Department of Environmental Conservation (DEC). Co-Chair Sharp wondered whether the administration would continue to oppose the bill if the concerns listed by Ms. Sansone were addressed. JANICE ADAIR, DIRECTOR, DIVISION OF ENVIRONMENTAL HEALTH, DEPARTMENT OF ENVIRONMENTAL CONSERVATION, replied that there was not a philosophical difference on the legislation. She communicated that DEC had been working cooperatively with the sponsor to reach agreements. She relayed that discussions had been productive, but as the bill changed, new issues arose. She explained that when the bill had been amended in the Senate Judiciary Committee to apply only to DEC, terms referring to agency, department, and regulatory agency needed to be clarified. She added that some issues had taken priority over others based on importance. Senator Phillips wanted to ensure that both sides were in agreement on working toward a common goal of a successful piece of legislation. He believed there had been numerous amendments that had been offered in various committees. BETH KERTTULA, ASSISTANT ATTORNEY GENERAL, OIL AND GAS SECTION, DEPARTMENT OF LAW, communicated that the DOL fiscal note had changed due to actions affecting the pipeline tariff. She discussed that the bill had been before the legislature the prior year and had been amended by the Senate Finance Committee to remove any impact on pipeline tariffs; however, because of the way tariff cases were brought, the bill had impacted the tariff that was removed. She furthered that language added to the bill in the Senate Judiciary Committee during the current session also impacted the pipeline tariff. She explained that under Alaska's royalty and production taxes, the state paid for one-quarter of the tariff, which included all of the costs of running the pipeline in its calculation through reduced revenues; the state had the right to challenge the costs of running the pipeline with the Trans Alaska Pipeline System (TAPS) settlement agreement between the state and the carriers. For example, in the 1995 tariff case, the costs being challenged as imprudent and not properly included in the tariff amounted to approximately $300 million (the state's share was approximately $75 million). She detailed that much of the information in the 1995 case was from audits; DOL estimated that it would cost approximately $25 million if the state had to duplicate the same information. Ms. Kerttula shared that under the bill's current language DOL believed that the state could be stopped from obtaining information needed to bring tariff cases. She pointed to page 6, lines 23 through 26 of the CS (she believed Amendment 6 would address the problem) and stated that the bill restricted the state's access to information to the parts of environmental self-audit reports that consisted of information necessary to determine pipeline tariffs. She explained that previously there had been a flat exemption for audit information in tariff cases. She continued that because of the way tariff cases were brought all of the information concerning pipeline management would be necessary (the costs of running the pipeline were figured into the rates). She relayed that the primary concern was that the bill's language could be interpreted to mean that the state could only obtain information using the carrier's initial calculation or it could be read to be a determination of the rates (the upfront rates the carriers filed before the Federal Energy Regulatory Commission); the problem was that the state only challenged rates and did not determine them. She stressed that DOL and carrier attorneys could have strong disagreements related to the language and she did not believe it was worth jeopardizing the tariff. Ms. Kerttula did not believe the sponsor felt a language change was necessary, but she believed the sponsor did not have a strong objection to the language either. The department had worked with the Alaska Oil and Gas Association on the language; she did not believe it meant to impact the tariff. She stated that typically work in "arcane" areas presented problems such as the ones listed. The department's final concern was related to the immunity section of the bill; the second part of Amendment 6 would address the issue by adding an amendment to the definition of penalty that would clarify that any administrative or civil sanctions in tariff proceedings were not subject to the immunity created under the legislation (page 13, line 1). She detailed that once pipeline tariffs were not excluded from immunity tariffs an argument could take place that the carriers were immune from having to reimburse the state under tariff cases because it was a civil penalty in some cases in addition to an administrative penalty before the APUC [Alaska Public Utilities Commission]. She communicated that the amendment was fairly small and the state was definitely impacted. She relayed that it was difficult to determine what the impact would be in the department's fiscal note; DOL had reduced the note by one-third to account for changes that were made in the removal of health and safety audits; however, it had been increased by $75,000 annually to provide DOL with an expert witness for tariff cases. She communicated that Amendment 6 would make the department feel much more secure about its cases. Co-Chair Sharp asked whether the proposed Amendment 6 would address the pipeline tariff. Ms. Kerttula responded in the affirmative. Senator Adams was satisfied that Amendment 6 would address the concern. Co-Chair Sharp remarked that Co-Chair Pearce and Senator Torgerson had joined the meeting at an earlier time. Senator Adams MOVED to ADOPT Amendment 6. Senator Parnell OBJECTED for discussion. He asked to hear from the bill sponsor. Senator Phillips asked whether Co-Chair Sharp intended to address the bill markup at present. Co-Chair Sharp replied that his intent was to "wade" through the amendments with patience. Senator Adams hoped to address amendments at present; he planned to offer Amendment 8 related to burden of proof and Amendment 9, which was a housekeeping measure. Additionally, he would like the sponsor to have an opportunity to see the amendments as well. Co-Chair Sharp expressed his desire to discuss the most important amendments and to hear related agency and sponsor testimony. He asked members to work with the departments and sponsor for incorporation into a CS related to amendments the committee would not have time to hear. Senator Parnell communicated that he intended to move Amendments 1 through 3 for the bill sponsor and for explanation by the sponsor. He believed Amendments 4 and 5 would not be offered. MIKE POLLEY, STAFF, SENATOR LOREN LEMAN, shared that the sponsor did not see a problem with the existing bill language despite conversations with DOL. The sponsor did not believe the current language would prevent the state from acquiring the needed portions of audit reports to determine correct tariffs. He furthered that the language clearly stated that the parts of an audit report necessary to determine pipeline rates and tariffs were not privileged. However, the sponsor had no objection to Amendment 6, given his belief that it would not do any damage to the bill. Ms. Kerttula believed one change would help companies; previously the bill did not contain language that would have required confidentiality in tariff cases. Amendment 6 would implement a protective order in the proceeding, which would prevent the department and its experts from releasing confidential information. Mr. Polley did not believe AOGA had any objection to the amendment. Senator Parnell WITHDREW his OBJECTION to Amendment 6. There being NO further OBJECTION, Amendment 6 was ADOPTED. Senator Parnell MOVED to ADOPT Amendment 1 and asked for an explanation from the sponsor. Senator Adams OBJECTED for discussion. Senator Parnell clarified that Amendment 1 had been redrafted as Amendment 7; therefore, he WITHDREW Amendment 1. There being NO OBJECTION, it was so ordered. Senator Parnell MOVED to ADOPT Amendment 7. Senator Adams OBJECTED for discussion. Co-Chair Sharp asked for the sponsor's reaction to the amendment to be followed by the department's view. Mr. Polley communicated that the amendment had been suggested by some of the industries that would be affected by the legislation. He explained that under the law if an entity made a disclosure there was a significant amount of conditions and caveats on the immunity; there were a number of items an entity needed to qualify for in order to be granted immunity. He furthered that when an agency made a disclosure of an inadvertent violation discovered through an audit, it would not necessarily know whether it would be eligible for immunity under the legislation. He added that an agency may think it was eligible, but DEC could have a different interpretation. The concern had been expressed by industry attorneys that it was unclear whether a disclosure would have to include a guilty plea that a regulation had been violated or whether a mere report that the situation had been discovered was sufficient (leaving the decision to the agency about whether a violation of the law had occurred). He pointed to Texas as an example of a state where agencies did not say that they had violated regulations, but instead included the language "we found the following circumstances, which may constitute a violation of the law." He expounded that Amendment 7 clarified that circumstances, conditions, or occurrences could be reported in the disclosure that constituted or may constitute a violation. Ms. Adair shared that DEC believed the bill addressed the issue and that the amendment was not necessary; however, the agency had no objection to the amendment. Senator Adams WITHDREW his OBJECTION to Amendment 7. There being NO further OBJECTION, Amendment 7 was ADOPTED. Co-Chair Sharp noted that Senator Donley had joined the meeting at an earlier time. Senator Parnell MOVED to ADOPT Amendment 2. Senator Adams OBJECTED for discussion. Mr. Polley relayed that Amendment 2 applied to the area of the bill where the conditions under which an audit report could be disclosed to another party. He explained that because the bill created a privilege for audit reports it became critical to define who the reports could be disclosed to; traditionally privileged information was supposed to be kept confidential. He elaborated that industry had expressed concern that the current language did not adequately provide for some of the transfers of the privileged report that may be necessary. For example, there was concern that the bill would not allow a contractor who conducted an audit to disclose the document to its client; the amendment was designed to address the problem. Co-Chair Sharp asked for verification that the amendment addressed the multi-intermingling of operator responsibilities on the same job site. Mr. Polley responded in the affirmative. He expounded that a contractor should have the ability to share any environmental problems it discovered during an audit with the owner. Senator Adams WITHDREW his OBJECTION. There being NO further OBJECTION, Amendment 2 was ADOPTED. Senator Parnell MOVED to ADOPT Amendment 3. Senator Adams OBJECTED for discussion. Mr. Polley communicated that Amendment 3 impacted the definitions section of the bill on page 12, lines 28 through 29. He explained that the amendment broadened the definition of owner operator; the amendment clarified that if a contractor conducted an audit that it was eligible for the privilege and immunities granted under the bill. There was a representative from the Alaska chapter of the International Association of Drilling Contractors available for questions. Co-Chair Sharp asked for comments from the administration. Ms. Adair replied that DEC had concerns with Amendment 3. She detailed that current laws that would be impacted by the bill looked to two kinds of people to hold responsible for reporting actions: the owner (usually the permitee) and the facility operator (with some type of legal obligation). The terms were defined in statute and other provisions and were typically defined separately; owner was defined as someone with a proprietary or possessory interest in a facility and an operator was someone who directed, managed, or supervised the facility. She stated that it was unclear to her how an operator would not be an operator of a facility. She elaborated that if definition of owner or operator was expanded to include some other entity (due to a private contractual arrangement between parties that could change any time) DEC was concerned about who the responsible party would be. She furthered that the bill set some parameters on when the privilege was available; it was not available for items that were required to be reported under the law. She continued that only owners or operators had the legal responsibility, but those with the privilege could preclude someone else from disclosing the information. If an entity was given the privilege but was not legally responsible to report things, they could preclude someone who was legally responsible from reporting because the bill said specifically that the person with the privilege could preclude someone from reporting the information to the department. Ms. Adair shared that the department would prefer to see owner and operator split out and properly defined. The definition of operator could then be looked at to determine how the definition would not work for drilling contractors. Senator Parnell remarked that the department had identified the issue as a problem, but had then stated that an operator could be covered under operator of a facility. Ms. Adair did not see how operators would not be covered. Senator Parnell asked what the department thought was wrong with the amendment. Ms. Adair replied that the amendment could apply to people who were not operators. Senator Phillips asked to hear from a representative from the International Association of Drilling Contractors. KYLE PARKER, INTERNATIONAL ASSOCIATION OF DRILLING CONTRACTORS - ALASKA CHAPTER, communicated that the association had proposed Amendments 2 and 3. He voiced the association's support for the legislation and noted that the concept had been adopted in most other oil producing states. He furthered that the association had been concerned that the bill had not originally covered the relationships of the drilling contractors on the North Slope; therefore, the association had drafted an amendment that had initially combined components of Amendments 2 and 3. After working with the sponsor, the amendments had been divided. Amendment 2 allowed drilling contractors to share their audit reports with operators and vice versa. He detailed that the provision would allow the association to analyze when relationships were and were not working. Mr. Parker pointed to Amendment 3 and explained that the terms owner and operator had a "very definite" meaning in the oil field. The drilling contractors were not owners or operators (e.g. Nabors and Doyon); the owners or operators were BP and Arco. He stated that Amendment 3 had been drafted to clarify that owners, operators, and independent contractors including other oil field service contractors (e.g. VECO Corporation and other) were covered by the legislation. Drilling contractors were responsible to the state for complying with environmental laws. He discussed that the definition as originally proposed read "who owns or operates a regulated facility, operation, or property." The association believed it was necessary to clarify that independent contractors were not owners or operators in the oil field. He elaborated that Senator Leman had developed the second half of the definition that read "however, within the context of this definition independent contractor shall not be construed to include somebody who is retained for the sole purpose of coming in and conducting the audit." He believed that the language may address DEC's concern about someone trying to assert the privilege that they were not entitled to. He detailed that Mr. Polley had also raised the concern earlier in the process; therefore, the exclusion in the amendment had been developed. Senator Adams asked whether the owner definition could be expanded to read that the owner or operator was responsible for the actions of the independent contractor. Mr. Parker suspected that North Slope owners and operators would have a difficult time taking on the responsibility for all of their independent contractors. Senator Adams replied that Mr. Parker had stated that two oil companies were the owners on the North Slope. He opined that the companies should be responsible for the actions of the contracts they delegated to independent contractors. Mr. Parker replied that under current law there were ways in which owners and operators were responsible for their contractors' actions; however, in contracts, owners and operators tried to ensure that contractors took responsibility for their own actions. Senator Adams believed that it should be clearly stated that contractors took responsibility for their own actions. Ms. Adair communicated that her concern with the amendment was related to expanding owner and operator to include people who were not owners and operators under AS Title 46. Co-Chair Sharp asked what incentive a major independent contractor (e.g. a driller) would have to conduct voluntary compliance. Ms. Adair responded that DEC considered contractors as operators. Co-Chair Sharp surmised that DEC considered contractors as operators; however, the contractors did not view themselves the same way. Ms. Adair expressed concern about changing the definition in order to satisfy private contracts, which could subsequently be changed whenever the need arose. She stated that privilege was unusual and the department was working to balance it with its trust responsibilities to the legislature and public. The department believed it needed to be very clear who could take advantage of privilege and immunity; DEC believed that eligible parties needed to be those that the law held responsible. Senator Parnell remarked that DEC required environmental compliance from contractors in addition to the operators. He explained that the bill would give owners, operators, and contractors a reason to audit. He did not understand why the provision wouldn't be as applicable to an independent contractor as it would to an owner or operator. Ms. Adair pointed to an exclusion that pertained to required reporting under a permit or statute. She stated that reporting requirements related to owners and operators as defined in Title 46; they may not be operators as defined in the contractual arrangement between drilling contractors and the oil field owners; however, by including them in the bill they would be given a "blanket" privilege without the sideboards included in the bill for owners and operators because they would have no legal mandate to report to DEC. Senator Torgerson pointed to Section 9, page 4 related to privilege and waivers. He referred to page 5, line 10 that listed "independent contractors retained" and surmised that the intent of the bill covered the issue. He did not believe the department would want all of the provisions in the bill related to owner and operator to apply to contractors. Mr. Parker explained that Section 9 dealt with disclosures between two parties, which applied to the privilege. He elaborated that a separate section related to immunity. The association believed the definition needed to be changed in order to "reflect the reality." He opined that part of the problem related to the fact that relationships on the oil field had changed significantly over the past 15 years and that the statutory definition of owner and operator may be out of date. The association believed that the legislation's definition for owner and operator was not broad enough to include the independent contractors that were doing business on the North Slope. Senator Torgerson asked whether the section related to immunity could be amended to include independent contractors. He thought amending the section would accomplish the goal and would be more proper than including independent contractors in Amendment 3. Senator Adams added that the amendment language was too broad as it referred to independent contractors and did not specify independent contractors in the oil field services. Co-Chair Sharp informed the committee that Amendment 3 would be taken up at a subsequent meeting. He discussed the schedule for the following day. Senator Pearce noted that the schedule for the following day was relatively light and that the committee may have time to hear SB 41 as well. Co-Chair Sharp stated that the committee would return to the bill the following day if time permitted.