HOUSE COMMUNITY AND REGIONAL AFFAIRS STANDING COMMITTEE April 15, 1999 8:10 a.m. MEMBERS PRESENT Representative Andrew Halcro, Co-Chairman Representative John Harris, Co-Chairman Representative Carl Morgan Representative Fred Dyson Representative Reggie Joule Representative Albert Kookesh MEMBERS ABSENT Representative Lisa Murkowski COMMITTEE CALENDAR *HOUSE BILL NO. 178 "An Act relating to removing solid waste collection and disposal service from regulation by the Alaska Public Utilities Commission; requiring certain municipalities, and permitting other municipalities, to regulate solid waste collection and disposal service within the municipal boundaries; and providing for an effective date." - HEARD AND HELD (* First public hearing) PREVIOUS ACTION BILL: HB 178 SHORT TITLE: DEREGULATION OF GARBAGE UTILITIES SPONSOR(S): REPRESENTATIVES(S) KOTT Jrn-Date Jrn-Page Action 4/07/99 670 (H) READ THE FIRST TIME - REFERRAL(S) 4/07/99 671 (H) CRA, L&C, FIN 4/15/99 (H) CRA AT 8:00 AM CAPITOL 124 WITNESS REGISTER REPRESENTATIVE KOTT Alaska State Legislature Capitol Building, Room 118 Juneau, Alaska 99801 Telephone: (907) 465-3777 POSITION STATEMENT: Testified as Sponsor of HB 178. SAM COTTEN, Commissioner, Chairman Alaska Public Utilities Commission Department of Commerce & Economic Development 1016 West 6th Avenue Anchorage, Alaska 99501-1963 Telephone: (907) 276-6222 POSITION STATEMENT: Testified on HB 178. JIM ARNESEN, Owner, President Commercial Refuse, Incorporated 750 East International Road Anchorage, Alaska 99518 Telephone: (907) 562-3700 POSITION STATEMENT: Opposed HB 178. BOBBY COX, Vice President Alaska Division of Waste Management 6301 Rosewood Anchorage, Alaska 99518 Telephone: (907) 563-3717 POSITION STATEMENT: Supported HB 178. DONN WONNELL, Attorney Municipality of Anchorage 410 West 37th Street Vancouver, Washington 98660 Telephone not provided. POSITION STATEMENT: Discussed problems with HB 178. DOUGLAS NEELEY Copper Basin Sanitation PO Box 88 Glennallen, Alaska 99588 Telephone: (907) 822-3600 POSITION STATEMENT: Did not like HB 178. PAM KRIEBER, Co-Owner Valley Refuse PO Box 879109 Wasilla, Alaska 99687 Telephone: (907) 376-8075 POSITION STATEMENT: Identified HB 178 as special interest legislation. PHIL HORTON, Co-Owner Valley Refuse PO Box 878877 Wasilla, Alaska 99687 Telephone: (907) 357-6000 POSITION STATEMENT: Opposed HB 178. MARY HUGHES, Municipal Attorney Municipality of Anchorage PO Box 196650 Anchorage, Alaska 99519 Telephone: (907) 343-4467 POSITION STATEMENT: Opposed HB 178. HEATHER GRAHAME, Outside Counsel for Waste Management in Alaska Attorney, Dorsey and Whitney LLP 1031 West 4th Avenue, Suite 600 Anchorage, Alaska Telephone: (907) 257-7822 POSITION STATEMENT: Testified on HB 178. ACTION NARRATIVE TAPE 99-24, SIDE A Number 0001 CO-CHAIRMAN HARRIS called the House Community and Regional Affairs Standing Committee meeting to order at 8:10 a.m. Members present at the call to order were Representatives Halcro, Harris, Morgan, Joule and Kookesh. Representative Dyson arrived at 8:40 a.m. Representative Murkowski was not present. HB 178-DEREGULATION OF GARBAGE UTILITIES CO-CHAIRMAN HARRIS announced that the only order of business before the committee would be HOUSE BILL NO. 178, "An Act relating to removing solid waste collection and disposal service from regulation by the Alaska Public Utilities Commission; requiring certain municipalities, and permitting other municipalities, to regulate solid waste collection and disposal service within the municipal boundaries; and providing for an effective date." Number 0045 REPRESENTATIVE KOTT, Sponsor of HB 178, Alaska State Legislature, clarified that the issue before the committee is one of re-regulation not deregulation. The deregulation of the refuse industry has been before the legislature for many years. He noted that there is Senate legislation that would deregulate refuse collection and disposal services. Representative Kott believed that there should be some re-regulation of the refuse industry in order to relax some of the regulatory control over the refuse industry. Representative Kott explained that HB 178 would take the regulation of garbage utilities from the state and the Alaska Public Utilities Commission (APUC), and places it in the control of the municipalities and second and third class cities. The local governments merely have the option to take over garbage utilities. The bill includes provisions protecting the current garbage utility operators as well as consumers. Once this transition occurs and the franchise agreements are agreed to by both parties, the bill has a provision which calls for rate stabilization. However, rates can be adjusted for unforeseen circumstances and inflation costs which is basically what is followed today. Number 0351 REPRESENTATIVE KOTT stated that HB 178 is not an unfunded mandate. If cities decide to do their own refuse service, the cost can be recovered through the collection of fees from the consumer. A provision in HB 178 allows the collection of franchise fees between .5 percent to 2.5 percent, from an operator which is not unusual. For example, Anchorage residents receive a quarterly refuse bill from the refuse operator which includes a regulatory charge. He stated that with the implementation of HB 178, there will be competition which generally lowers prices and increases quality. He noted that he has not had any problems with his refuse service. Representative Kott informed the committee that in almost every state, the state government is not involved in garbage utilities. He found it difficult to view garbage collection as a utility. When the re-regulation of garbage utilities is decentralized to the local level, each local government will be better able to determine its needs. The APUC is under great scrutiny by this legislature. The main complaint is that the APUC has such a backlog of issues. Although the garbage utilities are a small part of the APUC's duties, relieving APUC of that duty would reduce its workload and help facilitate its essential operations to other utilities in a more timely manner. There would be a transitional period of about six months. He noted that an amendment has been offered to the committee. Representative Kott requested that the technical experts regarding this issue come before the committee. Number 0830 CO-CHAIRMAN HALCRO asked if the House Special Committee on Utility Restructuring received an oversight hearing on HB 178. REPRESENTATIVE KOTT replied no. The House Special Committee on Utility Restructuring has discussed the issues surrounding the APUC. There will be some substantive changes to the administrative side by providing the chairman of the APUC with some additional duties. The House Special Committee on Utility Restructuring has heard that the APUC has a backlog of about 500 cases. This bill would remove approximately 2 percent of the APUC's workload. The chairman of the APUC has indicated that reducing any of the APUC's workload would be appreciated. Representative Kott pointed out that HB 178 has support from the APUC with some caveats which are addressed in the amendment. CO-CHAIRMAN HALCRO referred to information in the committee packet which states that 47 states have deregulated garbage utilities. He also pointed out that the committee packet includes letters of support for HB 178 from four Anchorage assembly members and a letter in opposition to HB 178 from the Mayor of Anchorage. REPRESENTATIVE KOTT believed that more Anchorage assembly members than the four actually support HB 178. He expected written support from four more Anchorage assembly members. Representative Kott indicated that of major concern to the Anchorage administration is their lack of expertise, which he did not believe was a valid concern. Representative Kott suggested that the different positions were developing from the desire to protect ones own turf. CO-CHAIRMAN HARRIS inquired as to the differences that would result under HB 178. What types of regulations would be changed? REPRESENTATIVE KOTT deferred the question to someone involved in the APUC. Representative Kott understood that once a certificate is issued, there is not much oversight unless there are complaints by the consumer. He did not envision much bureaucratic oversight under HB 178. Number 1244 SAM COTTEN, Commissioner, Chairman, Alaska Public Utilities Commission, Department of Commerce & Economic Development, testified via teleconference from Anchorage. He informed the committee that the APUC met on this legislation yesterday and unanimously supported the concept of HB 178. In addition to the workload reductions under HB 178, the local knowledge and preferences would be most appreciated by the local governing bodies. The APUC recommends two amendments one of which Mr. Cotten understood is being proposed by Representative Kott. The amendment to page 3, line 19, offered by Representative Kott would provide a third alternative which would allow municipalities the option of competition. Currently, a utility may be the only one providing service, but there is the possibility for another operator to obtain a certificate. If the aforementioned amendment was adopted and HB 178 passed, the same situation would exist. Mr. Cotten recommended the deletion of the definition of "fair market value" on page 4, line 18, because that definition is not being used now. Other statutes and case law have been the guide for "fair market value". MR. COTTEN informed the committee that the APUC did an analysis of HB 178 which it would provide to the committee. There are concerns regarding page 3, lines 13-15 which in part states, "the franchise must contain an agreement that will allow the carrier to charge customers at the rates contained in the utility's tariff in effect on June 1, 1999,". Just because those rates are in effect on June 1, 1999 does not mean that those rates are appropriate, just, or reasonable. There is no provision for the reduction of rates as a result of productivity gains or economies of scale. He noted that there has been the consolidation of existing providers which results in the utility acquiring a significant share of the refuse market. Furthermore, HB 178 allows for a rate increase based on inflation without showing that the utility's cost of service increased. This legislation would provide for increased rates for extraordinary increases in operating expenses without defining what constitutes extraordinary. Number 1495 CO-CHAIRMAN HARRIS inquired as to what refuse regulations the APUC requires now that may or may not be imposed by the municipality. MR. COTTEN explained that a utility must receive a certificate from APUC after which, the utility applies to provide a certain type of service in a certain area. A certificate is issued after the APUC finds the utility "to be fit, willing, and able and ... in the public interest to proceed." Mr. Cotten presumed that a municipality would have similar ability. If the utility is economically regulated, the APUC requires the utility to file a tariff. If the utility is a monopoly, the APUC has typically made the utility justify the tariff based on the utility's cost with an allowance for a reasonable rate of return. Mr. Cotten noted that there is less economic regulation in Anchorage now that there is more competition in commercial refuse, although the tariffs must be filed with the APUC. CO-CHAIRMAN HALCRO asked if the APUC's work load would be significantly reduced per the changes in HB 178. MR. COTTEN informed the committee that typically an application, tariff, or dispute is received by the APUC and unfortunately, it may not be the highest priority. Mr. Cotten explained that the APUC has a zero fiscal note because although the work load would be reduced, the APUC would be able to deal with its other business more quickly and efficiently. Mr. Cotten stated that the APUC's work related to garbage utilities is in the single digit range. Number 1687 JIM ARNESEN, Owner, President, Commercial Refuse, Incorporated, testified via teleconference from Anchorage. Mr. Arnesen noted that he had discussed HB 178 with other independent operators who are also opposed to HB 178. He stated that there has been one large company making purchases and consolidating which is turning into a large monopoly. "To turn a statewide monopoly over to local control is probably disingenuous." Mr. Arnesen did not see how local communities can properly control a statewide concern. He acknowledged the discussion of the workload at APUC being taken up by refuse problems. Mr. Arnesen guessed that most of the refuse workload for the APUC has been related to Waste Management, Incorporated buying all the smaller operators in the state. MR. ARNESEN pointed out that in those 47 states with deregulated refuse services there is vibrant competition. In Alaska that is not the case; Waste Management, Incorporated has about 95 percent of the business. Mr. Arnesen felt that now was the time to recognize the need for statewide regulation. He found it difficult to imagine how a consumer would receive a better result from a complaint made to a municipality once the refuse industry has been franchised. CO-CHAIRMAN HARRIS inquired as to how the areas without municipalities would be regulated under HB 178, if there is no local government. MR. ARNESEN did not know. For example, in Glennallen there is no borough or governing agency. He acknowledged that there are other areas in the state that are similarly situated. CO-CHAIRMAN HALCRO noted that he did receive and read Mr. Arnesen's letter. The letter stated, "Localized control would be ineffective in regulating such a large statewide monopoly." Co-Chairman Halcro felt that local control allowed local communities the ability to respond to local needs. MR. ARNESEN believed that currently there is a certain amount of 10local control available while there is statewide control through the APUC. If HB 178 were to become law, the statewide aspect would be lost leaving only minimal local control. Mr. Arnesen recognized that in some instances local control is desirable, but this is a statewide concern which necessitates statewide oversight. CO-CHAIRMAN HALCRO said that giving administrative control of the franchised areas to local governments would seem to be more effective than going through a board or commission. MR. ARNESEN pointed out that when there is one large company that controls 95 percent of the market, that large company will underbid everyone and receive all the franchises. Mr. Arnesen predicted that if HB 178 becomes law, there will be no small operators within five years. He further noted that in the garbage industry, unlike the telecommunications industry, there are not multiple large players that produce competition on equal footing. Mr. Arnesen felt that it would be difficult for a consumer to have a complaint addressed at the local level. Number 2205 BOBBY COX, Vice President, Alaska Division of Waste Management, supported HB 178. Mr. Cox informed the committee that Waste Management is the largest waste company in the U.S. He explained that Waste Management is the result of a merger between USA Waste Services and the former Waste Management. The surviving management of USA Waste took over the operation of Waste Management. In Alaska, Waste Management has a number of operations in various communities as well as applications pending in two communities in Western Alaska. Currently, Waste Management has over 250 employees in Alaska who live and work full-time in Alaska. This is an Alaskan company which has maintained all of its Alaskan employees that were brought in when the operations were acquired. Waste Management has a decentralized approach which makes for a better company and better community relations. He noted that the local managers are empowered with much authority in the daily business. Although it may seem as if Waste Management is a statewide monopoly, it is actually many local companies working under one umbrella. He said that the company has the ability to provide employee benefits and purchasing power on a better scale than what would be possible with a small company. Mr. Cox said that the daily operations and management of the individual companies is handled at the local level. MR. COX stated that Waste Management believes that local regulation is a better approach to managing a business. Historically, the refuse industry in Alaska has been regulated as a utility service. The refuse industry does not really fit the utility regulation model. Typically, utilities have large capital investments and infrastructure support to enter the business. Garbage service is a local issue. He noted that many cities have taken over garbage service and others have chosen to establish their own certificate within the APUC and provide their own service. Mr. Cox believed HB 178 would benefit all of Alaska. Number 2372 MR. COX noted that existing statutes allow the cities and municipalities to provide service if they so choose, but the city would have to go to the APUC to receive a certificate of convenience and public necessity. This legislation, HB 178, would allow cities to do that directly. The legislation also provides protection for current certificate holders in the community. Mr. Cox stated that the amendments proposed by Representative Kott are a reasonable compromise that would allow the following: 1) A city could take over and provide its own garbage service with its own employees and facilities. 2) A city could continue to contract with a an existing exclusive provider by establishing a franchise system. 3) A city could allow competition in its local market. The ability to allow competition should address the concerns of many of the smaller providers. Currently, Anchorage, Wasilla, and Fairbanks are the only communities with active competition sanctioned by the APUC. Mr. Cox reiterated that competition would protect the rights of the smaller providers as well as providing tremendous leverage to the local community. MR. COX disputed the notion that HB 178 is an unfunded mandate because of the provision for franchise fees. Currently, as a utility, service providers pay a regulatory cost charge to the APUC which is typically passed on to consumers in their garbage bills. Those revenues could be redirected to communities in the form of the franchise fee in order to cover administrative or regulatory costs. For example, if the Municipality of Anchorage granted Waste Management an exclusive franchise, a 2.5 percent franchise fee would generate nearly 500,000 per year. With regards to the comment that there is not enough local expertise to manage a garbage utility, Mr. Cox pointed out that almost every major city has a solid waste department or a public works department which is handling solid waste. Furthermore, most of the disposal operations are handled within the municipality, borough, and city structures. In most localities, disposal is half of the cost of the refuse service. Therefore, there is no need to establish a new bureaucracy at the local level. Mr. Cox explained that typically, a local government can issue an RFP for a franchise and take a competitive bid which would delineate the conditions and terms of service. Mr. Cox also identified the control of rate-making as a concern for some. Representative Kott's amendment seems to address that concern by providing the municipalities with the option to establish competitive franchises which will serve as a rate regulator without a formal rate-making process. He noted that one of the difficulties in rate-making is that the refuse industry is not structured similar to a typical utility. Therefore, the refuse industry often has to go through a very expensive and intensive rate process in order to justify rates. MR. COX informed the committee that Waste Management has a number of franchise situations in the Lower 48. He acknowledged that in those areas there is active competition. The regulatory system in Alaska is one of the reasons there is not much competition here. Mr. Cox predicted that HB 178 would result in more active competition. Mr. Cox discussed the situation in Kodiak in which competitive bids were used. He stated that if competitive bidding can occur in a community the size of Kodiak, it could probably occur anywhere in Alaska. Mr. Cox hoped that the committee would take favorable consideration of HB 178. Number 2687 CO-CHAIRMAN HARRIS inquired as to what type of operation would occur in areas that are not boroughs or cities with an APUC certificate. MR. COX noted that such areas today are below the regulatory threshold and would not be filing rate-regulated tariffs with the APUC. Such unincorporated areas would have a certificate to provide service and there is no rate regulation. In further response to Co-Chairman Harris, he explained that the original certificate is obtained by making a proposal to the APUC that the entity is fit, willing, and able to provide the service. In recent years, the APUC has significantly reduced the standard of fit, willing, and able. Under HB 178, Mr. Cox stated there would be no need for a certificate to provide the service. Mr. Cox pointed out that HB 178 does not transfer regulatory authority to any community that is not at least a Class 2 city. Therefore, the markets in the unincorporated areas would probably not be impacted. CO-CHAIRMAN HALCRO inquired as to how competition would be helped, if there are competitive bids and the company not receiving the competitive bid would be locked out for say five years. MR. COX said that the municipality or the borough would have the choice of competition under HB 178. Currently, multiple certificates in an area would be nonexclusive franchise areas. If a municipality decided it did not want to continue a nonexclusive franchise area, the municipality would be free to issue nonexclusive franchises which, per the amendment, would deregulate the rates. Therefore, open and free competition would be available. He noted that most smaller markets have an exclusive provider of service which would be continued for a period of time unless the municipality chose to enter into competition. Therefore, a rate-based market for the rate system would occur and the ongoing regulation would not occur. A nonexclusive franchise would be the result. CO-CHAIRMAN HALCRO asked how HB 178 would effect those municipalities or boroughs that provide their own solid waste services. MR. COX stated that such areas would not be effected; HB 178 would merely reinforce the authority over their own service areas. In the past there has been concern regarding whether the municipality had an exclusive right to continue service in their areas which HB 178 would eliminate. Number 2916 REPRESENTATIVE JOULE noted that Mr. Cox had mentioned expansion in Western Alaska, in Dillingham and Nome. Representative Joule wondered if HB 178 ran the risk of putting small local businesses out of business. In economies of small communities, a single job is so important. MR. COX explained that in Nome, Waste Management is acquiring the existing operation with the existing employees. Under the acquisition, those employees will receive a better benefit package. Although the operation will be under a larger organization, the operation would continue the same as before the acquisition. TAPE 99-24, SIDE B MR. COX stated that what is in the best interest of local government should be the choice made. CO-CHAIRMAN HALCRO asked if Waste Management controlled the landfill in any of the Alaskan communities in which it operates. MR. COX informed the committee that it owns the landfill in Juneau. In further response to Co-Chairman Halcro, Mr. Cox stated that approximately half of Waste Management's revenues come from landfill operations in the Lower 48. He pointed out that Waste Management has many contracts with municipalities to operate landfills. Mr. Cox informed the committee that the Municipality of Anchorage has one of the finest landfills in the country. In some communities where there is a landfill problem, Waste Management provides the community the opportunity to solve some of its disposal problems. Many of the rural areas in the Lower 48 are trying to consolidate into a regional landfill. Obviously, there are logistical problems with that concept in Alaska and Waste Management is trying to work on that. CO-CHAIRMAN HALCRO inquired as to whether there is a vehicle in the franchise agreement which would allow local governments to place restrictions or requirements on the development of a disposal site. MR. COX pointed out that disposal has typically been separate from collection because the APUC does not regulate disposal which is regulated through DEC. He did not envision that tying in with the franchise. Mr. Cox noted that even under DEC, disposal must occur in an approved DEC facility. CO-CHAIRMAN HARRIS asked if Waste Management or other companies would be looking to Ketchikan as an example which currently ships its garbage to the Lower 48. MR. COX informed the committee that Waste Management has a collections operation in Ketchikan. The City of Ketchikan contracts with Allied Waste to ship the refuse to a landfill located in the State of Washington. He believed that is coming up for bid in Ketchikan soon. Waste Management would certainly look at that as a possible opportunity. In Southeast Alaska, there are landfill issues because land is at a premium and there are not good locations for landfills. Waste Management has a facility in Oregon to which refuse from Southeast Alaska could be shipped. Mr. Cox cited an alternative option to review keeping the refuse in the state in order to create more jobs. Mr. Cox noted that Waste Management is evaluated with regard to how it performs in Alaska not overall. Therefore, keeping the refuse in Alaska and creating jobs would be in the best interest of Waste Management. Number 2735 DONN WONNELL, Attorney, Municipality of Anchorage, testified via teleconference from Anchorage. He informed the committee that he represents the Municipality of Anchorage primarily in matters of telecommunications and electric matters. Upon the request of the Municipality of Anchorage, Mr. Wonnell said that he would address the regulatory and competitive implications of HB 178. He informed the committee that he is a 20 year property owner in Paxton, Alaska. MR. WONNELL acknowledged that if competition could provide lower prices there is an inclination to do so. Mr. Wonnell did not believe that HB 178 is an effective vehicle to obtain competition. The principle problem is market power which is when one entity in a market place extracts excessive profits because of the entity's ability to affect prices contrary to competitive principles. For example, if one owned 10 gasoline stations in a state, a competitor in that state would have two choices and must recognize one of two conditions. "If you try and enter against any one of my gas stations, you must consider the possibility that I, in the exercise of my market power, will use the profits from my other nine stations to subsidize the pricing at that one gas station to a level which, in effect, prevents you from entering. Or if you try and enter, drives you out of the market after a period of time. I'm secure in the knowledge that once you leave, I can resume my pricing practices because there is nobody left. The alternative if I am an entrant, is to consider entering against all 10 of your gas stations simultaneously. That has the benefit of keeping you from subsidizing any one of them, but on the other hand, it represents a huge barrier to entry since I must fund and enter all 10 of those locales." Mr. Wonnell believed that various provisions of HB 178 make such a scenario possible. MR. WONNELL referred to Section 1(b)(1) which fracture the jurisdictional oversight to be applied to the refuse industry. As a result of moving the oversight from a unitary entity to various local divisions, no one local entity can see the totality of the operation of a large statewide company. He said, "Nobody has the ability to see if the whole equals the sum of its parts." Such may not be problematic in a truly competitive market, but in the aforementioned scenario it would be a problem. The cross subsidization and predatory pricing escapes detection and remedy. Mr. Wonnell believed this problem is exacerbated because the control to be exercised is not the same control that the APUC has now. Although the legislation specifies that the local jurisdiction will negotiate, the local entity has no knowledge of what is going on in other negotiations. Number 2476 MR. WONNELL referred to page 7, Section (2)(B) which he said was perhaps, the most disturbing portion of HB 178. The language in Section (2)(B) says that if sole source status is achieved, that entity is then immune to the anti-trust laws. Mr. Wonnell clarified that he did not want to equate the aforementioned example to any company involved in refuse in Alaska, but wanted to point out the potential of HB 178 to result in an unregulated monopoly. An unregulated monopoly does not seem to be what Representative Kott has in mind nor would it achieve the lower prices. Mr. Wonnell emphasized that the amendments are essential and support the Municipality of Anchorage's belief that HB 178 is flawed. The amendment referring to Section 2(e)(2) which grants competing franchises is a start, but does not address the fractured oversight. MR. WONNELL pointed out that there is no knowledge that the existing rate levels do not contain excess profits. Those rates can be increased for inflation and extraordinary events which is not defined in HB 178. Mr. Wonnell cited such areas of additional revenues as the reservoirs from which cross subsidization and predatory pricing can arise. The municipality is not arguing against local control, but rather that HB 178 is flawed in terms of how that local control is influenced. CO-CHAIRMAN HARRIS pointed out that some of the proposed amendments may address some of Mr. Wonnell's concerns regarding exclusive franchises. MR. WONNELL commented that it would be an improvement to say that competing franchises can be granted, but that provision does not address the market power which arises from the fractured control. Mr. Wonnell suggested that a more significant change would be to reinstate anti-trust oversight. Furthermore, the local control should be empowered to enforce the same type of powers the APUC does now. Even with such changes to HB 178, the risk of escape and evasion with regard to the ability to monitor the overall economic effects of consolidated activity remain. Mr. Wonnell said, "The industry is clearly consolidating now at a time when you are disaggregating the regulatory oversight." Those seem to be inconsistent and incompatible tendencies in terms of the public interest. Number 2212 DOUGLAS NEELEY, Copper Basin Sanitation, testified via teleconference from Glennallen. He informed the committee that he had faxed the committee some information and that he did not like HB 178. Mr. Neeley informed the committee of the franchised area to which he provides service as well as the landfill he maintained. The committee should have information which reports that 85 percent of Mr. Neeley's customers reside within 15 miles of Glennallen. The remaining 15 percent of Mr. Neeley's customers reside on the 100 mile run in four directions. Mr. Neeley stated that if under deregulation, someone wanted to 'cherry pick' his service area he could lose 75 percent of his customers, those in Glennallen and Tazlina. Therefore, Mr. Neeley would be left with 15 percent of his customers and the balance of the cost of the operation, 85 percent. He said that in such a situation he could not afford to serve the extended area garbage haul. MR. NEELEY noted that he has operated Copper Basin Sanitation since 1963. Copper Basin Sanitation is part of a larger company owned by Mr. Neeley. He acknowledged that the Anchorage landfill is of high quality, but much of it is supported by tax revenue. Mr. Neeley stressed the need for some statewide oversight for permitted areas. The legislation before the committee does not take into consideration those areas that are unorganized. Mr. Neeley emphasized, "I think you need to get off your high horse down there ... worrying about Anchorage and Fairbanks and think about the rest of the State of Alaska." CO-CHAIRMAN HALCRO commented that he did not see any "high horses" in the committee room. MR. NEELEY stated that most everything coming out of Juneau deals with the big cities and not much deals with the rural areas. He indicated that every year deregulation seems to be an issue. Mr. Neeley said that he did not have a problem with deregulation as long as oversight to protect the operator as well as the customer is provided for unincorporated areas which HB 178 does not address. Will that be addressed? CO-CHAIRMAN HARRIS said that he believed it would be addressed. REPRESENTATIVE KOOKESH commented that four of the six committee members represent rural Alaska. MR. NEELEY said that he was glad to hear that. Number 1801 PAM KRIEBER, Co-Owner, Valley Refuse, testified via teleconference from the Mat-Su Valley. She informed the committee that Valley Refuse is one of the six certificated refuse haulers operating in the Mat-Su Valley. The rates of Valley Refuse are regulated by the APUC. Valley Refuse has been operating competitively for five years. Ms. Krieber stated, "Waste Management's HB 178 is special interest legislation at its finest. This bill achieves nothing more than assuring a huge international company fixed rates for five years with absolutely no scrutiny or rate justification and allows municipalities the ability to enhance their revenue by cross subsidization through their garbage rates." Ms. Krieber pointed out that competition already exists under the jurisdiction of the APUC. The APUC has supported and encouraged competition by issuing overlapping certificates and service areas while retaining rate setting oversight to ensure fairness among competitors. "Competition exists where it works such as in the Mat-Su Valley and Anchorage. Competition did exist in Fairbanks until Waste Management bought both companies." MS. KRIEBER stated that HB 178 was requested by Waste Management for their own self-serving purposes. She inquired as to why HB 178 would remove Waste Management from APUC regulation as well as the attorney general's anti-trust jurisdiction, if Waste Management supports competition. Language in HB 178 would exempt solid waste collection and disposal companies from the attorney general's anti-trust jurisdiction. Section 8 of HB 178 would amend trade and commerce law to extend the exemption of regulated public utilities. She pointed out that in AS 45.50.562, "Every combination in the form of trust or otherwise or conspiracy in restraint of trade or commerce is unlawful. Currently, per AS 45.50.572(d) public utilities holding a certificate of public convenience and necessity are exempt from these statutes because they fall under the jurisdiction of the APUC." However, HB 178 does not explicitly provide the attorney general such jurisdiction. If APUC oversight and the attorney general's power to prosecute anti-trust violations is eliminated, who will protect Alaskan citizens from unfair and unlawful business practices. Ms. Krieber emphasized that if HB 178 passes, competition will cease to exist and boroughs, second class cities, and unincorporated areas will face an additional level of administration. Regardless of its size or financial status, the burden of regulation will be placed on local governments which will result in citizens paying more for the same service. MS. KRIEBER identified the rate freeze as of June 1, 1999 under HB 178 as another problem. Those rates were established under a different set of circumstances than currently exist. "Small private companies could justify rates to cover their overhead expenses. A large international company with the ability to consolidate and lower expenses now owns these companies." Ms. Krieber noted that the APUC has several rate studies in progress due to such concerns. Ms. Krieber pointed out that the 2.5 percent franchise fee under HB 178 is much greater than the current regulatory charge of .6663 percent. Furthermore, she noted that the APUC currently mediates disputes among utilities. She inquired as to who would take precedent in areas with no regulatory oversight such as Fairbanks in which both the city and the borough qualify as municipalities under Title 29. Ms. Krieber emphasized, "This bill does nothing more than hand the Alaska refuse hauling market to Waste Management." Ms. Krieber pointed out that many Alaskans are concerned with the CARRS-Safeway merger and the BP-ARCO merger which she indicated would be parallel to the way that Waste Management has infiltrated the Alaskan refuse market. CO-CHAIRMAN HALCRO inquired as to whether the Mat-Su Borough has taken a position on HB 178. MS. KRIEBER did not know. Number 1510 REPRESENTATIVE DYSON inquired as to the basis the refuse operators compete for the contracts in the Mat-Su Valley. MS. KRIEBER stated that currently, residential refuse collection is open to competition. Ms. Krieber noted that Valley Refuse competes with Waste Management for the residential market. In further response to Representative Dyson, Ms. Krieber said Valley Refuse competes on the basis of price. Valley Refuse's price is much lower than the competition. REPRESENTATIVE DYSON asked if there are other factors for selection of a contractor beyond price. MS. KRIEBER identified price, quality of service, and service options as the factors taken into consideration for the selection of a contractor. Valley Refuse has multiple levels of residential service. REPRESENTATIVE DYSON asked what Ms. Krieber would foresee the competition to be, if state oversight is eliminated and competition for customers still exists. MS. KRIEBER informed the committee that there is always the possibility of predatory pricing with a large company whose projected revenues for 1998 were $12.5 billion. REPRESENTATIVE DYSON inquired as to what keeps Waste Management from predatory pricing now. MS. KRIEBER pointed out that Waste Management is regulated by the APUC as is Valley Refuse. All refuse operators are subject to the rate scrutiny provided by the APUC. Number 1361 PHIL HORTON, Co-Owner, Valley Refuse, testified via teleconference from the Mat-Su Valley. Mr. Horton opposed Waste Management's HB 178. Waste Management's take over of the Alaska refuse hauling market has been like a military operation. Under HB 178, the removal of statewide oversight will assist Waste Management in their divide and conquer strategy. Additionally, Section 5 would allow Waste Management to acquire its own landfill. Mr. Horton pointed out that the approval of only one person is required to lease state owned land for a landfill at less than appraised value. Mr. Horton said, "They [Waste Management] seek to achieve complete vertical integration in this state as they have in other areas of the country." When Waste Management owns landfills, transfer sites and hauling companies, Waste Management will completely control the market which would allow the elimination of all competition whether it is private or municipal. Waste Management has the economic advantage of size, pricing structure, and the ability to absorb interim losses. MR. HORTON informed the committee that he has been in the garbage industry for five years and garbage companies are not easy to start from scratch. Starting a garbage company requires a large investment in equipment, working capital, and time to develop a viable customer list large enough to pay the bills. He pointed out that such is the reasoning behind larger companies buying smaller companies. Mr. Horton noted that there was an attempt to deregulate refuse hauling in 1997 which he did not support. Many of the colleagues who testified against that bill in 1997 will not be heard from today because those companies were purchased by Waste Management. Mr. Horton concluded by saying, "What intelligent business competitor will risk their assets by attempting to enter such a restricted market? Who would dare play chess with an opponent who owns the board, the chess pieces, and has deep pockets in which to hide an extra King?" CO-CHAIRMAN HARRIS noted that municipalities or other areas control the landfills and DEC regulates all landfills. Why would the refuse industry be any different than any other industry in which competition would be beneficial to the consumer. MR. HORTON said that he believed competition is good. If Waste Management, who does 95 percent of the refuse hauling in Alaska, was to obtain a landfill or develop their own, that revenue would be diverted into that landfill. Therefore, those landfills with fixed costs will have to charge more in fees in order to continue operating. This would result in Waste Management squeezing out the municipal and the private carriers. CO-CHAIRMAN HARRIS indicated that the municipality or the borough would be able to dictate the location of the landfill and could require the use of an existing landfill. MR. HORTON replied no. In HB 178 there is a provision that would allow the purchase of state land. CO-CHAIRMAN HARRIS noted that the company would have to abide by zoning regulation, et cetera. MR. HORTON pointed out that there is no zoning in the Mat-Su Borough. Number 0997 MARY HUGHES, Municipal Attorney, Municipality of Anchorage, testified via teleconference from Anchorage. She referred the committee to the March 24, 1999 letter from Mayor Mystrom to Representative Hudson. Ms. Hughes acknowledged the comments regarding whether the Municipality of Anchorage is united in its position on HB 178. Each year the Municipality of Anchorage formulates a legislative policy for the municipality. Within that legislative policy, the second priority of the municipality is refuse collection issues. The assembly passed that document by a vote of 11-0. Ms. Hughes indicated that the difference in position between the municipality and the assembly could be from inadequate knowledge of the issue. Ms. Hughes pointed out that the assembly acts by resolution not by individual letters. MS. HUGHES stated that the Municipality of Anchorage is the largest local government in Alaska. The Municipality of Anchorage agrees with the rural providers of refuse collection; HB 178 is not good for the consumer in rural Alaska or Anchorage. Ms. Hughes noted that there are no complaints with respect to any aspect of refuse service. The Municipality of Anchorage, as an owner of a refuse entity, has millions invested in solid waste services which is tax payer money to which the mayor and the assembly have a fiduciary duty. She emphasized that when there are no complaints from consumers that would indicate a good situation. Number 0688 MS. HUGHES informed the committee that the Alaska Municipal League (AML) was contacted upon the receipt of HB 178. In the past, AML has expressed concern regarding the regulation of refuse primarily because it costs the smaller providers so much. Now that Waste Management has purchased approximately 90 percent of the refuse market in Alaska, AML's position has substantially changed. That should be considered. Ms. Hughes emphasized, "There is no ground swell from the local government to do what Waste Management would like us to do." State regulation is the only way in which market power can be controlled. She acknowledged that the municipality could garner the expertise to control the municipality's portion of Waste Management's empire in Alaska if that is required. However, that is not good public policy; a statewide entity cannot be controlled through local government. The Municipality of Anchorage does not want this control. Ms. Hughes commented that it is odd that a monopoly, the company with the market power in Alaska, is before the legislature requesting a change in the structure of the refuse industry in Alaska. "What happens when the entities to whom you wish to give the power do not wish it and would prefer not to have it." MS. HUGHES indicated that the House Community & Regional Affairs Standing Committee could learn from the House Special Committee on Utility Restructuring which commissioned a study to review electric utility restructuring. If the refuse collection in Alaska is to be changed, then the AML, the large and small municipalities and boroughs should be involved. She suggested that HB 178 be studied and a legal opinion sought. When a system that has been working effectively is changed, that change is not done on the basis of a bill provided by the group having the market power. The Municipality of Anchorage would be happy to work with any legislative committee on the issue in a studied approach. Ms. Hughes commented that local government may be willing to take on refuse regulation, if the local government was able to effect the provisions of AS 42.05. Under HB 178, a local government does not receive the provisions of AS 42.05. Ms. Hughes stressed that the local governments' power is specifically determined by the company whom the local government must regulate. MS. HUGHES informed the committee that in the end of April the Assembly of the Municipality of Anchorage will be in Juneau. She predicted that the assembly will express the same sentiments as the March 24, 1999 letter from Mayor Mystrom which relayed that the Municipality of Anchorage is very concerned with HB 178, that the municipality is opposed to HB 178, and the municipality is available to work on this legislation. Ms. Hughes said that HB 178 is not an appropriate vehicle to benefit all Alaskans. "This bill is very, very poor public policy." Number 0187 CO-CHAIRMAN HALCRO asked if the assembly members have had discussions with the mayor since providing the committee with their letters. MS. HUGHES was not sure if those assembly members have had subsequent discussions with the mayor, but she noted that they have had discussions with her. In further response to Co-Chairman Halcro, Ms. Hughes acknowledged that the assembly letters do contradict the municipality's position. From Ms. Hughes' perspective, there is communication between the assembly and the mayor. There is also discussion at the AML level. TAPE 99-25, SIDE A Number 0047 REPRESENTATIVE DYSON asked if Ms. Hughes was inferring that the assembly members sent out their letters before they had full knowledge of HB 178 and would those assembly members have perhaps, changed their mind since. MS. HUGHES stated that the assembly members sent out their letters before the bill was in the municipality's possession. Those letters were already in Juneau while the municipality's and the mayor's position was being developed. Ms. Hughes said that she had not spoken to each individually with regard to whether a change of position has occurred. Upon discussions with some of the assembly members who sent the letters, Ms. Hughes said that those assembly members were not aware of the ramifications of HB 178. CO-CHAIRMAN HARRIS commented on his frustration with the lack of presence from the AML on issues such as this. MS. HUGHES noted that as Mayor Mystrom's letter indicates, the municipality has been in touch with the AML. She said that the AML's position is similar to that of the Municipality of Anchorage's position. The AML is focused on the decrease in the state budget for local governments. She informed the committee that Mayor Mystrom would be testifying today, but he is working on restoring revenue sharing and safe communities. Ms. Hughes believed that refuse deregulation would be addressed by the AML's legislative committees in April in Juneau. CO-CHAIRMAN HARRIS asked if the millions of dollars that Ms. Hughes commented Anchorage has in its solid waste system was spent on trucks and dumpsters. MS. HUGHES said that each of the Municipality of Anchorage's utilities operates independently. The Municipality of Anchorage has approximately $30-$40 million of equity in its solid waste system. That equity is in rolling stock and facilities. That number includes the unregulated and regulated refuse collection. She offered to provide the committee with the specific numbers. Number 0486 HEATHER GRAHAME, Outside Counsel for Waste Management in Alaska, informed the committee that she is an attorney for Dorsey and Whitney LLP in Anchorage, Alaska. With regard to predatory pricing, there was a comment that under HB 178 Waste Management would be excluded from predatory pricing provisions. Currently, any carrier with a certificate from the APUC is exempt from the anti-trust laws and therefore the carrier cannot be sued for anti-trust. Under "our proposed bill", HB 178, Waste Management loses that protection and therefore, Waste Management can be sued for anti-trust and predatory pricing. Ms. Grahame noted that there is one exception in HB 178. In an area where a local government desires service from a single provider, there is anti-trust protection as is the case currently for a monopoly carrier. Ms. Grahame reiterated that Waste Management would lose that shield under HB 178. If there is language that could clarify this, Ms. Grahame said that would be supported because Waste Management's position is that it should not be exempt from anti-trust legislation. REPRESENTATIVE KOOKESH noted that Ms. Graham had used the phrase, "our proposed bill". He asked if Waste Management is the author of HB 178. MS. GRAHAME stated that Waste Management has had a heavy hand in drafting HB 178 as have many others. She said that she referred to HB 178 as "our proposed bill" because Waste Management is supporting the legislation. Number 0719 MS. GRAHAME continued with discussion regarding rates. A carrier's rates which are subject to tariffs, such as the case with Waste Management and other carriers, are presumptively just and reasonable. If a rate has been approved by the APUC, that rate is considered to be just and reasonable. Therefore, Waste Management's rates are just and reasonable. With respect to the suggestion that refuse regulation should be the subject of a study, Ms. Grahame stated that this issue has been "studied to death." She pointed out that the committee should have attachments to the APUC staff analysis regarding three different legislative audits going back as far as 1973. Each audit recommended taking away refuse regulation from the APUC. This issue has been around for some time. MS. GRAHAME noted that other than the Municipality of Anchorage there is no other community testifying in opposition to HB 178 today. Many communities already provide refuse service on a RFP or bid basis. Waste Management supports HB 178 because it believes HB 178 to be a responsible approach to refuse management. The Senate has legislation that would call for complete deregulation. Number 0910 REPRESENTATIVE DYSON inquired as to the intention of the Chair. CO-CHAIRMAN HARRIS informed the committee that initially he had intended to move HB 178 from committee, but there are some questions that need addressing. Co-Chairman Harris announced that HB 178 would be held to next Tuesday. CO-CHAIRMAN HALCRO offered to chair a subcommittee in order to work on this issue and provide the committee with recommendations. REPRESENTATIVE KOOKESH indicated the need for a position on HB 178 from the AML as well as a legal analysis from the Department of Law regarding the anti-trust issue. He further suggested that a position from the administration would be helpful. CO-CHAIRMAN HARRIS appointed Representative Joule to be on the subcommittee with Co-Chairman Halcro. REPRESENTATIVE KOTT informed the committee that HB 178 has two additional referrals. He reiterated that the Senate has legislation calling for complete deregulation. Representative Kott stated that many of the small operators that testified today do not seem to understand the consequence of the Senate legislation. Under the Senate legislation, the Municipality of Anchorage could lose its operation. This legislation, HB 178, provides some local control. As mentioned, AML has not taken a position on HB 178. The AML representative in Juneau indicated that AML would likely not take a position on HB 178. Representative Kott commented that HB 178 may receive an additional committee of referral to address a legal issue. Number 1132 CO-CHAIRMAN HALCRO stated that the House Community & Regional Affairs Standing Committee is entrusted with community and regional affairs. This legislation, HB 178, would have an impact on communities throughout the state therefore before HB 178 leaves this committee, all of the community concerns need to be addressed. REPRESENTATIVE KOTT pointed out that the committee had not heard from any consumer or municipality besides Anchorage that was opposed to HB 178. The communities have not been bolting forward in opposition to HB 178. Representative Kott stated that he has contacted AML and Ms. Hughes regarding the introduction of HB 178. He commented that if he were one of the assembly members who had sent a letter of support and had subsequently received new information, he would have sent a letter withdrawing that support until clarification of the issues. Representative Kott said that he had not received any such letter, in fact one additional letter of support has been received. CO-CHAIRMAN HARRIS stated that if this committee could address some of the issues that have been discussed, the process could be expedited for the House Labor & Commerce Standing Committee. ADJOURNMENT There being no further business before the committee, the House Community & Regional Affairs Standing Committee meeting was adjourned at 10:04 a.m.