HOUSE FINANCE COMMITTEE April 3, 1996 2:30 P.M. TAPE HFC 96-103, Side 1, #000 - end. TAPE HFC 96-103, Side 2, #000 - end. TAPE HFC 96-104, Side 1, #000 - 529. CALL TO ORDER Co-Chair Mark Hanley called the House Finance Committee meeting to order at 2:30 P.M. PRESENT Co-Chair Hanley Representative Kohring Co-Chair Foster Representative Martin Representative Brown Representative Mulder Representative Grussendorf Representative Therriault Representative Kelly Representatives Navarre and Parnell were absent from the meeting. ALSO PRESENT Representative Alan Austerman; Representative Scott Ogan; Mark Johnston, Department of Health & Social Services; Ron King, Chief, Air Quality Improvement, Department of Environmental Conservation; Tom Williams, Staff, Senator Frank; Juanita Hensley, Chief Driver Services, Division of Motor Vehicles, Department of Public Safety; Dave Gray, Staff, Representative Mackie; Ken Rigalsky, Department of Environmental Conservation; Steven Borell, Alaska Miners Association; David Lappi, Lap Resources Inc.; Jim Hansen, Department of Natural Resources; Jim Hanes, Department of Natural Resources; Dave Johnston, Alaska Oil and Gas Conservation Council; Tuckerman Babcock, Alaska Oil and Gas Conservation Council; Earl Ausman, Anchorage; Meera Kohler, General Manager, Naknek Electric Association. SUMMARY HB 366 An Act relating to marine safety training and education programs. CSHB 366 (FIN) was reported out of Committee with a "do pass" recommendation and with a fiscal impact note by the House Finance Committee for the Department of Community and Regional Affairs and with a zero fiscal note by the Department of 1 Revenue. HB 394 An Act authorizing a program of natural gas and coal bed methane development licensing and leasing; relating to regulation of certain natural gas exploration facilities and coal bed methane exploration facilities for purposes of preparation of discharge prevention and contingency plans and compliance with financial responsibility requirements; amending the duties of the Alaska Oil and Gas Conservation Commission as they relate to natural gas exploration activities and coal bed methane exploration activities; and amending the exemption from obtaining a waste disposal permit for disposal of waste produced from coal bed methane drilling. HB 394 was HELD in Committee for further consideration. SB 226 An Act relating to biennial registration of motor vehicles; imposing biennial registration fees on motor vehicles and authorizing a scheduled biennial municipal tax on motor vehicles; relating to fees for motor vehicle emissions control programs; and providing for an effective date. SB 226 was HELD in Committee for further consideration. SENATE BILL NO. 226 "An Act relating to biennial registration of motor vehicles; imposing biennial registration fees on motor vehicles and authorizing a scheduled biennial municipal tax on motor vehicles; relating to fees for motor vehicle emissions control programs; and providing for an effective date." TOM WILLIAMS, STAFF, SENATOR FRANK noted that Amendments 6, 7 and 8 were not been addressed during the House Finance Committee meeting on 3/29/93. Representative Mulder WITHDREW Amendment 6, 9-LS1452\K.8 (copy on file). Mr. Williams noted that Senator Frank is neutral in regards to Amendment 7, 9-LS1452\K.6 (copy on file). JUANITA HENSLEY, CHIEF DRIVER SERVICES, DIVISION OF MOTOR VEHICLES, DEPARTMENT OF PUBLIC SAFETY stated that the 2 Department is not opposed to Amendment 7. She noted that the amendment cites AS 28.15.081(d) but relates to vehicle registration under AS 21.10. She maintained that the Division has the authority to issues contracts under AS 28.15. The Division currently issues contracts under AS 28.10. There is nothing in the statutes that provides that the Division can or cannot issue contracts under AS 28.15. She acknowledged that contract agents' revenues have been reduce due to the $10 dollar fee for walk-in transactions. The city of Craig collected $5,025 dollars in $10 dollar fees paid by persons that did not mail in their registration. Commissioned agents also receive 50 percent of driver's license fees and 15 percent of vehicle fees that they collect. The Division only contracts with police departments. In 1995, the city of Craig received $27.0 thousand dollars. This amount has increased by approximately $2.0 thousand dollars a year. Co-Chair Hanley questioned if the statutory reference should be changed. DAVE GRAY, STAFF, REPRESENTATIVE MACKIE spoke in support of Amendment 7. He emphasized that the drafter felt there would not be a problem with the citation to AS 28.15. He asserted that the $10 fee was added to alleviate traffic to urban offices of the Division of Motor Vehicles. He stressed that contract officers provide the same services to rural areas that are offered in urban areas. He observed that small communities must rely on contract agents. Co-Chair Hanley questioned if the statutory reference should be changed. Ms. Hensley stated that the Division has been contracting since before statehood. She did not think the statute reference would create a problem. Co-Chair Hanley noted that the amendment states that the $10 dollar fee for vehicle license registrations shall be waived under AS 28.15. He pointed out that AS 28.15 does not cover vehicle licensing. He asked if the citation would give the Division the authority to waive fees for license plate registration. He questioned the Division's statutory authorization. Ms. Hensley acknowledged that there is no specific language allowing the Division to contract for vehicle registration under AS 28.15. She stressed that the Division can waive fees to commissioned agents under current regulations. Mr. Gray noted that commissioned agents are currently performing title work, vehicle registration and other tasks. In response to comments by Representative Martin, Ms. 3 Hensley noted that there is only enough work in the city of Craig for a half-time position. Commissioned agents receive 50 percent of driver licensing fees. Representative Brown summarized that the income of contract agents was reduced. Mr. Gray agreed that the $10 dollar walk-in fee has reduced contract agent services. In response to a question by Co-Chair Hanley, Ms. Hensley clarified that there is no additional fee for driver's licenses. She noted that driver's licensing fees were recently increased. Commissioned agents also receive 50 percent of all the commercial driver's licenses. Representative Brown questioned the fiscal impact to the State. Ms. Hensley stated that there would be a negative fiscal impact to the State. She could not estimate the loss of revenues. She observed amounts collected by commissioned agents. Co-Chair Hanley summarized that the State would lose 85 percent of the $31.0 thousand dollars collected by contract agents. Representative Brown noted that the intent of the amendment is to encourage individuals to register their vehicles in person. Co-Chair Hanley noted that under current law if 5 individuals registered in person they would each pay a $10 fee for a total of $50 dollars. Fifteen percent of the fee would go to the contract officer and the rest would go to the State. The amendment would waive the fee. The State would have to pay 15 percent of the amount paid to contract agents. Ms. Hensley added that the State paid contract agents $128.0 thousand dollars in FY 90 and $174.0 thousand dollars in FY 95. She pointed out that the Division still has to administer the paper work involved. Mr. Gray emphasized that state services can only go to small communities through similar contract arrangements. He stressed the need to maintain these services. He acknowledged the cost to the State. In response to a question by Co-Chair Hanley, Ms. Hensley noted that emissions testing centers do not charge the State for the services they render. In addition, they perform the paper work and data entry involved. Only 5 of the 13 paid contract agents register vehicles. Representative Therriault noted that emissions center provided services in order to attract business. They normally charge the customer a $10 fee. 4 Co-Chair Hanley reiterated concerns that the Division does not have statutory authority for contract agents. SB 226 was HELD in Committee for further consideration. HOUSE BILL NO. 366 "An Act relating to marine safety training and education programs." Co-Chair Hanley noted that the Alaska Marine Safety Training and Education Association (AMSEA) has been federally funded. The federal funds for this program were cut. A designated grant in the operating budget was not allowed. He stressed that the program should be funded through legislation. REPRESENTATIVE ALAN AUSTERMAN, sponsor of HB 366, spoke in support of the legislation. He noted that AMSEA was created as a response to federal funding and pressure from the United States Coast Guard. He observed that the accompanying fiscal note for $150.0 thousand dollars is needed to fund the program. The legislation would allow application of 50 percent of the earnings of the Fishermen's Fund. The Fishermen's Fund is a dedicated fund. The interest earnings go directly into the General Fund. The legislation requests that half of the earned interest, approximately $155.0 thousand dollars a year, be appropriated to the program. He emphasized that the program saves lives. He noted participation of high school students. Representative Martin expressed concern that the Fishermen's Fund would be eroded by the legislation. Representative Austerman pointed out that the legislation would not affect the Fund. The interest earnings do not go back into the Fund. MARK JOHNSON, CHIEF, SECTION OF COMMUNITY HEALTH AND EMERGENCY MEDICAL SERVICES, DEPARTMENT OF HEALTH AND SOCIAL SERVICES spoke in support of HB 366. He noted that AMSEA is a broad based, statewide coalition that includes federal, state, local and private agencies. Members of the Board represent the Coast Guard, University of Alaska, emergency medical services agencies, non-profit Native corporations and other groups. It has been in operation for 10 years. Mr. Johnson noted that Alaska's rate for drownings was 10 times the national average from 1988 - 1992. He noted that commercial fishing drowning rates have been steadily decreasing. He stressed that the statistics demonstrate that the program has saved lives. There is no other statewide comprehensive program addressing the problem. The 5 program began in the commercial fishing industry, but has been expanded to include all groups, including children. Co-Chair Hanley noted that members were provided with Amendment 1, 9-LS133\F.1 (Attachment 1). Insert "up to" and "interest" on page 1, line 8. The amendment would clarify that legislative appropriation would still be needed and that the legislature can appropriate up to 50 percent of the Fund's earnings. In response to a question by Representative Brown, Co-Chair Hanley acknowledged that there are no designated funds. He explained that the funds would be earmarked as available to legislators. Funds would only be identified. Legislative appropriation would still be required. (Tape Change, HFC 96-103, Side 2) Co-Chair Hanley stressed that the money would be deposited in the General Fund. Co-Chair Foster MOVED to adopt Amendment 1. Representative Austerman noted that he had no objections to the amendment. There being NO OBJECTION, it was so ordered. Representative Grussendorf observed that the legislation provides statutory authorization to appropriate up to fifty percent of the interest from the Fishermen's Fund to AMSEA. Co-Chair Hanley clarified that a fiscal note for $150.0 thousand dollars would fund the program if adopted. Representative Martin questioned the constitutionality of the legislation. Co-Chair Hanley stressed that the legislation would not alter or impair the present dedication of certain revenues to the Fishermen's Fund. He pointed out that the legislature cannot dedicate any funds for any purpose. The legislation states that the legislature "may" appropriate. In response to comments by Representative Martin, Co-Chair Hanley reiterated that the bill does not alter or impair the current dedication of commercial fishing license fees to the Fund or the use of those funds to provide benefits to injured fishermen. He restated that the interest will still go into the General Fund. The legislature would have to appropriate the funds. Co-Chair Foster MOVED to report CSHB 366 (FIN) out of Committee with individual recommendations and with the accompanying fiscal notes. Representative Kohring questioned why this item was not included in the operating 6 budget. He stated that the small amount of $150.0 thousand dollars would be well spent if one life is saved as a result of the training. There being NO OBJECTION, CSHB 366 (FIN) was reported out of Committee. CSHB 366 (FIN) was reported out of Committee with a "do pass" recommendation and with a fiscal impact note by the House Finance Committee for the Department of Community and Regional Affairs and with a zero fiscal note by the Department of Revenue. HOUSE BILL NO. 394 An Act authorizing a program of natural gas and coal bed methane development licensing and leasing; relating to regulation of certain natural gas exploration facilities and coal bed methane exploration facilities for purposes of preparation of discharge prevention and contingency plans and compliance with financial responsibility requirements; amending the duties of the Alaska Oil and Gas Conservation Commission as they relate to natural gas exploration activities and coal bed methane exploration activities; and amending the exemption from obtaining a waste disposal permit for disposal of waste produced from coal bed methane drilling. REPRESENTATIVE SCOTT OGAN, sponsor of HB 394, spoke in support of the legislation. He noted that the legislation creates a lease program that will enable independent energy companies to develop natural gas reserves within 3,000 feet of the surface. He emphasized that the legislation will benefit rural Alaska. Co-Chair Foster MOVED to adopt Committee Substitute, 9- LS1463\R, dated 4/2/96 (copy on file). There being NO OBJECTION, it was so ordered. In response to a question by Representative Brown, Representative Ogan noted that members were provided with an analysis showing changes from the previous version (Attachment 1). There being NO OBJECTION, Committee Substitute, 9-LS1463\R, dated 4/2/96 was adopted. DAVID LAPPI, LAP RESOURCES INC., ANCHORAGE testified via the teleconference network. He spoke in support of CSHB 394 (FIN). He emphasized the benefit to rural Alaska. 7 STEVE BORREL, EXECUTIVE DIRECTOR, ALASKA MINERS' ASSOCIATION, ANCHORAGE testified via the teleconference network. He spoke in support of CSHB 394 (FIN). He stated that the safe removal of methane gases is one of the primary safety concerns of underground mining. Productivity in underground mining is dependent on getting rid of methane gas. If coal production is too high it is difficult to get enough air through the entries to flush the gas. He noted that the technology that was developed to accommodate the use of methane gas was developed with safety issues in mind. He emphasized that the legislation provides an incentive for mining companies to utilize the gas resource. EARL AUSMAN, ANCHORAGE testified via the teleconference network. He spoke in support of CSHB 394 (FIN). He stated that the legislation provides small communities with the opportunity to become self reliant. MEERA KOHLER, GENERAL MANAGER, NAKNEK ELECTRIC ASSOCIATION testified via the teleconference network. She spoke in support of CSHB 394 (FIN). Ms. Kohler's provided the Committee with written testimony (Attachment 2). She noted that the Naknek Electric Association uses 1.4 million gallons of diesel fuel annually. She observed that Naknek Electric Association has been interested in developing a natural gas supply. She stated that the possibility of natural gas in their area is high. She emphasized that development costs have been high and discouraging. New technology makes development more feasible. She stressed the need for state support. In response to a question by Representative Brown, Ms. Kohler noted that the gas reserve would be economically viable as far as 25 to 30 miles away. Representative Brown noted that the legislation would lease the gas at half of the normal royalty rate. She asked if the difference in the royalty cost is enough to make a project economic. Ms. Kohler stated that the Company's preference would be to not pay more than the bare minimal in royalties. She stated that the project would be economically viable at a slightly higher rate depending on the distance of delivery. Representative Brown asked if the State would be asked to subsidize construction of the transmission line. Ms. Kohler stated that it is not the intent of the Company to request additional subsides. She clarified that no specific reserve has been identified. Representative Brown noted that there are prohibitions on gas and oil development on Bristol Bay tidelands. Ms. 8 Kohler stated that they were not contemplating development of tidelands. Representative Ogan stated that the Director of the Division of Oil and Gas would have enough discretion to follow existing oil and gas laws. Representative Brown requested an analysis of the potential cost demonstrating that the royalty reduction would allow the project to be viable. Ms. Kohler stressed that it is difficult to develop costs without a specific gas source. In response to a question by Representative Brown, Ms. Kohler explained that the goal of Naknek Electric Association is to own the resource. Naknek Electric Association would either form a partnership with or retain a firm to drill and develop the project. The project would be managed by the Naknek Electric Association. Representative Ogan asked how much was paid to the Naknek Electric Association for power cost equalization. Ms. Kohler replied that they receive approximately $330.0 thousand dollars annually. TUCKERMAN BABCOCK, ALASKA OIL AND GAS CONSERVATION COUNCIL (AOGCC) testified via the teleconference network. In response to a question by Representative Brown, Mr. Babcock clarified that permits would be classified along the lines as an exploratory, development, or service well. He stated that the legislation would not reduce the standards for safety that are currently applied to permits to drill. Representative Ogan stated that with the exception of the North Slope there are no known reserves of oil above 3,000 feet. The pressures associated with methane gas are low. He emphasized that it is extremely unlikely that oil would come to the surface. He maintained that gas can be vented or flared Mr. Babcock stated that there is a danger of drilling into a gas pocket in any well. JIM HANSEN, DIVISION OF OIL AND GAS, DEPARTMENT OF NATURAL RESOURCES testified via the teleconference network. He observed that drilling could be done with slim hole rigs. It would be a smaller operation and easier to contain. He stated that CSHB 394 (FIN) incorporates changes suggested by the Department. The Department's main concern is to assure that leasing under the legislation does not interfere with other oil and gas leasing. Representative Therriault asked if one well would provide enough gas or if a number of wells would radiate out from a central area. He asked how coal mining could occur if pipes 9 were generating out into the coal seam. Mr. Lappi explained that a small village could be serviced by one well drilled in the appropriate coal seam. Gas would be removed before mining operations would begin. He noted that underground coal mining is unlikely due to the cost. Vertical wells would be drilled to intersect the coal seam. Representative Therriault noted that there is no provision for the Department to charge for lease processing. Mr. Lappi emphasized that the legislation was developed to reduce the regulatory cost. He noted that the application fee for a large exploration license is $500.0 thousand dollars. (Tape Change, HFC 96-104, Side 1) KEN RIGALSKY, DEPARTMENT OF ENVIRONMENTAL CONSERVATION testified via the teleconference network. He stated that the Department is neutral regarding CSHB 394 (FIN). He stated that there is minimal risk involved. He did not think contingency plans would be warranted. Representative Brown asked the likelihood of finding gas deposits not associated with coal bed methane in areas above 3,000 feet. DAVE JOHNSTON, ALASKA OIL AND GAS CONSERVATION COUNCIL testified via the teleconference network. He stressed that the presence of gas hydrates on the North Slope must be considered. Gas hydrates are found within 3,000 feet of the surface. Representative Brown asked if the legislation applies to the North Slope. Mr. Hansen noted that the legislation excludes any land included in an oil and gas leasing program. Representative Brown pointed out that this exclusion could be waived by the commissioner of the Department of Natural Resources. Mr. Hansen stressed that it is not the intent to offer shallow gas leases in areas of existing leases. He stated that the exclusion would allow flexibility if something changes in the future. Representative Brown asked for an explanation of gas hydrates. Mr. Johnston explained that gas hydrates are pockets of gas associated with permafrost areas. The gas is locked in an ice matrix. He observed that there is interest in developing gas hydrates on the North Slope. Mr. Hansen observed that little is known about the subsurface geology of areas of the State. He noted that 10 there are areas of high tectonic activity. It is possible that shallow gas not associated with coal could be found in any area. He stressed that drilling is the best way to determine if the resource exists. In response to a question by Representative Brown, Mr. Lappi stated that wells could be drilled for under $100.0 thousand dollars each with the aid of special equipment. The exploratory well would become the production well. Representative Brown noted that page 6, lines 15 and 16, states that the applicant "may" conduct a title search. "Shall" was changed to "may". She expressed concern that individuals could stake over other interests. She acknowledged that there will be public notice. Mr. Hansen observed that the State normally does a title search, but does not guarantee title in the lease. On the North Slope, a title search will be done after the lease is issued. He emphasized that the legislation would clarify that the title search would not have to be done prior to the lease. He maintained that existing statutes require that a title search must be completed prior to drilling. Representative Brown stressed the importance of assuring that existing rights are maintained. Mr. Hansen stated that the subsurface state is dominate. The federal transfer of land to the State requires that the State retain the subsurface rights and that they be made leasable according to the wishes of the legislature. AS 38.05.125 addresses this issue. Representative Ogan noted that most of the methane leases will be associated with rural areas and will be close to the village that will be served. He emphasized that there will be a public process. Representative Brown reiterated concerns that the rights of surface owners be protected. She noted the lack of staff support in the Department of Natural Resources. Mr. Hansen noted that there are bond provisions under AS 38.05.130. The Director of Oil and Gas can require a bond to cover potential damages. In response to a question by Representative Brown, Mr. Hansen stated that the general stipulation that no person may engage in mineral exploration activity without a good faith effort to resolve differences with the surface owner would apply. Representative Brown asked if the bill would apply to offshore leases. Mr. Hansen stated that the legislation is not designed for offshore leases. He acknowledged that the 11 legislation does not prohibit offshore drilling. Representative Brown asked how the Bristol Bay exclusion under AS 38.05.140(f) would be interpreted. Mr. Hansen reiterated that leases would not be issued in any area that has been set aside, such as Bristol Bay or Kachemak Bay. Representative Ogan stated that he did not anticipate any offshore activity under the legislation. Representative Brown noted that the major oil companies have expressed interest in offshore leasing in the Bristol Bay area. Representative Brown asked what would happen if a reserve crossed the 3,000 feet mark. Mr. Hansen stated that the Department of Natural Resources shares this concern. Mr. Babcock observed that page 6, subsection (j) references an onshore well. Co-Chair Hanley pointed out that if an onshore well drilling for natural gas penetrates a formation capable of producing gas below 3,000 feet then the owner must notify the Department and the Alaska Oil and Gas Conservation Council and may not conduct further operations until the facility complies with all applicable laws and regulations relating to oil and gas production. Representative Brown maintained that production cannot occur above 3,000 feet without affecting the area below 3,000 feet. Co-Chair Hanley interpreted the legislation to state that operations cannot occur until they have complied with all the laws and regulations governing oil and gas. Representative Ogan pointed out that subsection (j) states that: "A lease does not give the lessee the right to produce gas from sources that are not within 3,000 feet of the surface." He emphasized that the legislation is primarily pointed toward production of methane gas. He added that the intent is not to exclude other shallow sources of gas. The legislation is not intended as an exploration tool to allow larger oil companies to find gas. Mr. Babcock noted that the AOGCC will be appointed to protect the rights of the owner of the resource which is below 3,000 feet. Representative Brown stressed that it will be difficult to protect the State's ownership below 3,000 feet. Mr. Babcock reiterated that AOGCC will protect the State's ownership of the resource below 3,000 feet. Representative Brown questioned the effect on Native lands. She noted that the low state royalty would under cut development on Native lands. There was no answer to Representative Brown's question. 12 ADJOURNMENT The meeting adjourned at 4:30 p.m. 13