SB 219-DISPOSALS OF STATE RESOURCES  4:25:53 PM CO-CHAIR WAGONER announced SB 219 [Rules by request of the Governor] to be up for consideration. 4:26:09 PM ED FOGELS, Deputy Commissioner, Department of Natural Resources (DNR), asked that the DNR chief of operations join him. 4:26:23 PM WYN MENEFEE, Chief of Operations, Division of Mining, Land and Water, Department of Natural Resources (DNR), introduced himself. MR. FOGELS said he would give some broader background to where this bill came from and then would turn it over to Mr. Menefee to go into the details. He said the governor asked all state agencies to take a look at their permitting processes to see if they could be made more efficient. They worked with five principle focuses. CO-CHAIR PASKVAN moved to bring SB 219, version A, before the committee for purposes of discussion. CO-CHAIR WAGONER objected for discussion purposes. 4:28:23 PM MR. FOGELS said this bill is about streamlining the individual permits that each agency issues; enhancing coordination amongst all the state agencies and the state and federal agencies; gathering public input, which they have doing over the last six to eight months; looking for ways to better for collaboration with federal permitting agencies that are key to getting any projected permitted these days; and getting the jump on new activities that they don't have good permitting expertise on like shale oil, underground coal gasification, geothermal, wind et cetera. He said SB 219 makes individual agencies' permitting processes work together better. The Division of Mining, Land and Water at this time last year had a fairly significant backlog of about 2500 permits and authorizations and the legislature gave them additional resources to work on those. With those resources came the promise that money and people alone may not be solution; it would come with the fundamental way of doing business and that is what the division has been working on for the last year. A new director, Brent Goodrum, has an eye toward organizational efficiency and the backlog has been knocked down by about 21 percent already this year. MR. FOGELS said one of the major things they have been doing within the division is looking at the statutes that guide the permitting and it has come up with significant ways to make them work better for Alaskans. SB 219 doesn't make earth shattering changes, but rather small changes that cumulatively will have a big impact on how they do business. It will make some authorizations go quicker and free up resources within the division so more staff can be devoted to the permitting work at hand. As a result the permitting system will run a lot smoother and faster. 4:32:10 PM MR. MENEFEE said when they talk about land leases it's for things like lodges, commercial facilities and fish processing plants not oil and gas. A provision in statute has a threshold of when they can go "negotiated" versus "competitive" and negotiated leases is a shorter process; you can negotiate directly with the individual without competition. Since 1984 the threshold for a direct negotiation is a $5,000 lease and for a period less than 10 years. They are asking for an increase up to $10,000 and he said that would affect just a couple of leases a year. More substantially, Mr. Menefee said they would like to get more competitive category leases under negotiated leases, because right now they have to spend an extra 30 days and publish an auction brochure for the competitive category and that is charged to the applicant. It's just extra time and money that shouldn't be expended if no one is competing for it. They would like to find out if anybody is interested through their public notice process on disposals of interest decisions and if nobody is, they would like to go straight to the negotiated category. These issues were in sections 5 and 6 of the bill. SENATOR WIELECHOWSKI asked him to describe the process for a lease renewal (section 6). MR. MENEFEE replied that leases can be a maximum of 55 years long, although often they are 25 to 30 years and a lease renewal must go through the full best interest process again. The revision in the bill would give the department the discretion to renew it. That means the process would be shortened and it would be an administrative decision rather than the full preliminary and final finding. It would still get public notice and have an appeal option. The department would still see if there is competitive interest, but once that has been ascertained and if the lessee is in good standing the lease could be renegotiated. It just shaves time off. CO-CHAIR PASKVAN asked what percentage of the state's leases is for 55 years. MR. MENEFEE answered not many; some of the leases done in the 60s and 70s are 55-year leases and they are just starting to come up. It doesn't mandate that you have to renew for the full term, you just can't exceed the initial term. They have found there are enough changes going on in land that they feel much more comfortable with a 25 to 30 year lease depending on what is being built. SENATOR STEVENS asked how many leases would be affected. MR. MENEFEE replied the division processes about 10 leases a year and gets applications for about 14 to 20 a year (that's where the backlog comes from). He couldn't predict the amount of leases that would actually hit the renewal, because it depends on whether people are still doing what they started out doing and how many want to continue. But about five leases a year could move from the competitive to direct negotiated category. CO-CHAIR PASKVAN asked what type of operation is going in a 55- year lease. 4:42:00 PM MR. MENEFEE said he didn't have an exact example, but lodges were done with longer lease terms in earlier times. SENATOR FRENCH asked if Alyeska Ski Resort leases its land from the state. MR. MENEFEE replied Alyeska is a recreational development lease through the state; there is only one recreational facility under that statute and it is Alyeska. Examples of some other ones are a Princess Lodge, fish processing plants, large docks like Juneau's Jacobson Dock as well as submerged lands and uplands where larger development is being put in. CO-CHAIR PASKVAN asked the total number of leases and the ranges of operations one might see. MR. MENEFEE replied that a large scale lease would be a gas processing plant that was completely separate; for instance the proposed Dead Horse LNG processing plant to Fairbanks Natural Gas or for a smaller project a guide service putting in something more than a just a camp like a structure with foundation for a mess hall that will last longer than five years. 4:45:33 PM CO-CHAIR WAGONER asked for list of lease samples, large to small. 4:45:53 PM MR. MENEFEE said he would certainly get those for him and moved to sections 10, 11, 14 15 that separate timber sales from material sales. Statutes were intertwined and a little bit confusing; so they left the timber sale statutes (sections 10 and 11) the same, but pulled out all the material sale parts and put them into sections 14 and 15. Changes were made to the process of material sales that save time and money. Typically, when someone applies for a new site it will take 130 - 160 days. If somebody wants to come into the same area, they are still going to have to go through the same process; so they are proposing creating a material site disposal area of about 15 acres. The point is that the material will be exhausted and subsequent sales would not be publicly noticed or have new decisions. You would just write the contracts for them. They do 30-50 material sales a year and this would save a lot of time and some costs. The same materials section also deals with a couple of other changes that have cost savings for the applicant dealing with appraisals. He explained that these areas sell for appraised fair market value and an appraisal actually has to be done to get that. Those run about $5,000 per appraisal. They want to use the representative regional sales price which they have developed by comparing the property to private markets to find out what the cost of in situ material is and if someone wants to challenge that and do their own appraisal, they are welcome to do that, too. MR. MENEFEE said they also added language about the low appraised fair market value sales for material that is in the state's interest to get out of a river, for instance, where excess material is causing flooding that the state would have to spend money on preparing roads, bridges and emergency response, like in Seward where the river bed is higher than the surrounding land. 4:50:09 PM He said point 4 of the briefing paper was about temporary water use authorizations in section 21 of the bill. The department currently believes it has the authority under current statute to issue a temporary water use authorization for a period up to five years. If a business continues to need that same water source, they can issue another one for another five years after that. This makes it clearer in statute that they really can, because there have been some water right challenges. Temporary water use authorizations are used by industry all over Alaska and are revocable, he said, but a water right stays with the land forever. 4:51:27 PM CO-CHAIR PASKVAN said point 1 of the briefing paper says that change doesn't apply to oil and gas leases and asked if point 4 temporary water use authorizations are used on the North Slope as compared to water rights. MR. MENEFEE clarified that oil and gas leases have a separate authorization, but people use the temporary water use authorizations for getting water from lakes, streams and sometimes chipped ice to make ice roads going out on the North Slope. Some actually get water rights if they have a well that is going to be producing for a long time. CO-CHAIR PASKVAN asked if the state has a developing problem with water interests on the North Slope either through a water use authorization or a water right. MR. MENEFEE replied that this bill isn't about water shortages, just about the process of doing a second authorization. And yes, some areas on the North Slope have less water available especially in the foothills. If you build an ice road there, you will have to haul water from a further distance which is more expensive. CO-CHAIR PASKVAN said the temporary water use authorizations are for five years and he didn't want to create a system that excludes independents or the "new kids on the block." 4:54:28 PM MR. MENEFEE replied that the department takes other uses into account when it reviews the temporary water use authorizations. Also, they are revocable and modifiable. SENATOR FRENCH commented that they do hundreds of these. MR. MENEFEE replied that was correct. SENATOR FRENCH asked if there is any limit to the number of times that a temporary water use authorization can be renewed. MR. MENEFEE replied no; each time you reach the five-year cycle he would have to re-review other uses before issuing it again. He would take into account if the company was a "good actor" and abiding by the terms of its permit. SENATOR FRENCH asked if each authorization is noticed. MR. MENEFEE replied that it's agency noticed but not publicly noticed; he added that statute does not require public notice. SENATOR FRENCH asked if there is no public comment or right of appeal. MR. MENEFEE replied yes there is the right of appeal. They were recently challenged on it and the court upheld going without public notice on these. Some people have asked how they would know they have a right of appeal if it's not noticed and that's a catch-22 situation. SENATOR FRENCH said it's hard to imagine the circumstances under which they would be aware of the decision. MR. MENEFEE replied that temporary water use authorizations rarely come by themselves. If it's on state land it has some other authorization from the state going. For instance, Golden Valley is going to do a wind energy project at Eva Creek; they are going to need a water authorization to keep the dust down on the road as they build it. That is all noticed. 4:57:50 PM SENATOR FRENCH said he was thinking of the shale oil development explosion on the North Slope and many companies could be competing for what is fairly scarce ground water available year- round. He asked how many times an authorization gets renewed before it becomes a permanent water right. MR. MENEFEE replied, "There is no more permanent water right." If someone is going to invest in shale oil in an area where they know there is limited water, it's probably in their best interest to get a water right immediately versus a temporary water use authorization, because that would exclude all others that come subsequently. SENATOR FRENCH said he guessed that would be a far more exacting procedure. MR. MENEFEE agreed. SENATOR WIELECHOWSKI asked the standard of review on appeal if someone has a temporary water use permit and the commissioner decides he wants to grant a new one and someone says, "Hey, what about me?" MR. MENEFEE replied statutes and regulations guide the appeal process. SENATOR WIELECHOWSKI asked the standard of review by the court or the reviewing entity. MR. MENEFEE answered the reviewing entity is actually the commissioner of the reviews under appeal. Once he makes a decision to uphold the decision the staff made or not, at that point an individual has 30 days to appeal to Superior Court. SENATOR WIELECHOWSKI said he was concerned that someone gets the temporary water use authorization, there's no public process for renewing it and the commissioner just decides to renew it; then there is an appeal. If it is about abuse of discretion it's virtually impossible to overturn. So you essentially turn the temporary water use authorization into a de facto permanent water right. 5:00:50 PM CO-CHAIR PASKVAN said he was reminded of an AOGCC hearing within the last year that investigated Pioneer's difficulty in getting water from ConocoPhillips. Was that because there was a limited access to water or a water rights issue? He wanted to know if the state is facing a water shortage on the North Slope and if so, they need to know what permitting processes or interests the system provides. MR. MENEFEE replied there is no general water shortage on the North Slope and he would get the details of the Alaska Oil and Gas Conservation Commission (AOGCC) hearing. CO-CHAIR WAGONER said once they start fracing with water, the practice is recycling the same water; so there isn't that big of a demand except initially. 5:02:27 PM MR. MENEFEE discussed the sealed bid procedure in sections 1-4 and 7-9. He said the Department of Law helped discover a lot of inconsistency about public auctions and sealed bids and they tried to make them consistent so it's clear they can use cry option or sealed bid if they choose. Point 6 in sections 18 and 19 are the public notice requirements for when they do public disposals of interest (38.05.945 public noticing). It spells out the choices and who they have to notify: things like statewide distribution newspapers and local newspapers and posting in a conspicuous place locally. The one part they are de-emphasizing is the posting of legal notices in the newspapers that refer back to the public notice website by phasing it out over five years. The issue is that the applicant has to pay for all of this and a typical ad costs $300 to $900. Point 7 deals with mining royalty in section 12. They found that miners who are only making $10,000 in gross income in a year don't pay royalty, because they can deduct their rental rate and the cost of extracting the material; and because mining royalty is paid off of net income, they don't end up paying any. They found the threshold is right around $10,000 or about 6 oz. of gold, not a lot of production. So they are saying save the paper work and audit and just exempt them. The idea is to do the exemption for the areas where the state is not getting revenue anyway. SENATOR FRENCH asked if this superseded Senator Wagoner's bill on small gravel pit operators. MR. MENEFEE replied this measure is specifically aimed toward mining royalty on locatable minerals like gems, gold, diamonds, platinum and silver. SENATOR FRENCH asked the definition of small operations. MR. MENEFEE replied it's essentially a value of $10,000 or less, but the reason they didn't put that figure in is because the prices of materials change so much that it wouldn't make sense. The value would have to be addressed by regulation. SENATOR FRENCH said that's on the gross. MR. MENEFEE agreed. 5:06:42 PM The next issue this bill addresses is it allows mining royalty to be filed on a fiscal year basis rather than the calendar year. Minors already have to file their federal income tax in a fiscal year and having to switch over to the calendar year for filing royalty is an accounting challenge. 5:07:44 PM MR. MENEFEE said point 9, section 13 in the bill, talks about submerged mining leases and Nome that has a gold rush going on is the only one with them. Current law says when it comes to the end of a lease (10-20 years), if somebody is still producing minerals in paying quantities, they get one-year extensions. But knowing you have only one year of authorization is not good business sense. So, if they are still producing in paying quantities and making royalty revenue payments to the state, and they have sufficient land to continue their operations, the department can make a judgmental call how far out to issue another lease and that can't exceed the terms of the initial lease. MR. MENEFEE said these changes were small, but incrementally and cumulatively they would make a difference in time and money for both the state and the applicant; they would also help in reducing the backlog. CO-CHAIR WAGONER said, "Whatever we can to do to decrease that backlog and keep it from building again, we're interested in." Finding no further questions, he thanked them for presenting the bill to the committee. [SB 219 was held in committee.]