HOUSE RESOURCES STANDING COMMITTEE February 15, 1994 3:00 p.m. MEMBERS PRESENT Representative Bill Williams, Chairman Representative Bill Hudson, Vice Chairman Representative Con Bunde Representative Pat Carney Representative Joe Green MEMBERS ABSENT Representative John Davies Representative David Finkelstein Representative Jeannette James Representative Eldon Mulder COMMITTEE CALENDAR Meeting with officials from federal Minerals Management Service for presentation and discussion regarding development of regulations under the Oil Pollution Act of 1990 (OPA '90). WITNESS REGISTER JEFF ZIPPEN, Chief Inspection, Compliance, and Training Division Minerals Management Service United States Department of the Interior Washington, D.C. 20240 Phone: (703) 787-1576 POSITION STATEMENT: Gave briefing and update on Oil Pollution Act 1990 regulations MEAD TREADWELL, Deputy Commissioner Department of Environmental Conservation 410 Willoughby Avenue, Suite 105 Juneau, Alaska 99801 Phone: 465-5050 POSITION STATEMENT: Discussed DEC's position on OPA `90 ACTION NARRATIVE TAPE 94-15, SIDE A Number 000 The House Resources Committee was called to order by Chairman Bill Williams at 3:20 p.m. Members present at the call to order were Representatives Williams, Hudson, Carney and Green. Members absent were Representatives Bunde, Davies, Finkelstein, James and Mulder. CHAIRMAN WILLIAMS noted the legislature has been considering HJR 49, and SJR 40 over the past few weeks, relating to efforts by the Minerals Management Service (MMS) to draft regulations implementing the financial responsibility section of the Oil Pollution Act of 1990 (OPA `90). While discussing the resolutions, legislators became increasingly concerned about potential impacts of the regulations on many sectors of the Alaskan economy. Although the MMS had scheduled a hearing in Anchorage for February 16, most legislators would not have the opportunity to participate, because of session. Therefore, the House Resources Committee decided to ask the MMS to send a representative to Juneau to discuss OPA `90 regulations and the issues and concerns surrounding them. CHAIRMAN WILLIAMS stated Jeff Zippen agreed to make the trip from Washington, D.C., to meet with the committee. He added that two representatives from the Anchorage MMS office were also present at the meeting: Brunhilda O'Brien, a regulatory analyst and Tom Murrell, a supervisory petroleum engineer. Chairman Williams advised those present that the meeting would be informal. The goal is to get a better understanding of OPA `90 and the regulatory process the MMS has underway, and for the MMS to get a better understanding of committee members' concerns about potential effects of OPA `90 implementation. Number 050 JEFF ZIPPEN, CHIEF, INSPECTION, COMPLIANCE, AND TRAINING DIVISION, MINERALS MANAGEMENT SERVICE, explained that MMS is the agency which has responsibility for leasing and regulation on the outer continental shelf of the United States. Another MMS responsibility is collecting mineral royalties from all federal lands. Under the OPA `90, MMS has two primary responsibilities; one is for oil spill prevention and contingency planning, and the other is for offshore financial responsibility. MR. ZIPPEN thanked the committee for the two resolutions which have been passed, and felt they will be of great benefit to MMS as they continue the rulemaking process on OPA `90. He stressed that what MMS currently has out is an advanced notice of proposed rulemaking, not a proposal. It is a step which precedes a proposal in the rulemaking process, and is a way for MMS to get information out to the public. Included in the document are preliminary interpretations of the financial responsibility section. He said MMS has taken a very broad view so that all the potentially affected people might understand how they are affected and can comment to MMS on that. Number 081 MR. ZIPPEN stated after MMS began work on the advanced notice, they wanted to have meetings in different parts of the country and the first two places they came to were Anchorage and Juneau. They learned ways that OPA `90 could affect Alaska. MR. ZIPPEN referring to slides, stated OPA `90 is a new responsibility for MMS. When MMS saw the Act, they realized how broad and encompassing it might be and instead of going out with proposed rules, they decided there was a need to have an advanced notice of proposed rulemaking. There have been meetings, workshops, etc., around the country and they are still seeking comments and recommendations on OPA `90, on MMS preliminary interpretations, how rules should be structured, what kind of economic impacts there will be, etc. It is important that MMS get the perspective of the regulated community. Number 140 MR. ZIPPEN said the key purposes of the OPA `90 were to increase the liability for spills, ensure there is someone to pay if a spill occurs and improve oil spill prevention, clean up and response mechanisms which now exist. MR. ZIPPEN explained in regard to offshore facilities liability, under OPA `90, the liability is unlimited for clean up costs, regardless of what the costs are, and costs must be paid by the polluter. Damages can be paid up to $75 million, although it is an adjustable limit which MMS can make recommendations on to Congress. If a spill results from negligence or a violation, there is unlimited liability. He pointed out that even though there are no regulations in place for offshore facility financial responsibility currently, the liability created in OPA `90 became effective when the Act was passed. Number 156 MR. ZIPPEN stated the purposes of financial responsibility include ensuring there is money available to pay for an oil spill when it occurs. He stressed it is an important concern for the MMS. Their traditional constituency is the offshore oil and gas community. There is an increasing number of companies leaving the U.S. and more smaller, independent operators moving onto the outer continental shelf. Many are not as well capitalized as the majors are. The financial responsibility requirement guarantees there will be money available to pay for the cleanup process. MR. ZIPPEN explained another purpose of financial responsibility is to provide direct access to any guarantors, including bondsmen, insurance companies, protection and indemnity clubs. This means that anyone who has a claim against the spiller can go directly to the third parties and collect. MR. ZIPPEN said the final purpose of financial responsibility is as a fiscal deterrent to oil spills. If an entity is responsible for a spill, they have a tremendous liability and will do a better job ensuring spills do not happen. Number 177 MR. ZIPPEN noted a few of the key dates of MMS include: August 18, 1990, the statute was enacted; October 18, 1991, an Executive Order was issued by the Department of Interior for offshore facilities, which was then redelegated to the MMS on January 30, 1992; October 1, 1992, an existing program from the Coast Guard was transferred to MMS. He said under the Outer Continental Shelf Lands Act, there is a financial responsibility requirement for facilities on the outer continental shelf. It is an ongoing program and was allowed to continue under OPA `90 until new regulations are written. On April 16, 1993, MMS gave notice to their lessees that MMS was now administering the existing program (formerly with the Coast Guard); August 25, 1993, MMS published the advanced notice. He mentioned originally the notice was out for a sixty day comment period and has been extended twice, with the comment period closing date now on February 28, 1994. The target date for the proposed notice of rulemaking is sometime during 1994, but added that he is not sure that deadline can be met. Hopefully, there will be a final rule one year from that date. MR. ZIPPEN explained the definition of "facility" in OPA `90 means any structure, group of structures, equipment, or device (other than a vessel) which is used for one or more of the following purposes: exploring for, drilling for, producing, storing, handling, transferring, processing, or transporting oil. This term includes any motor vehicle, rolling stock, or pipeline used for one or more of these purposes. MR. ZIPPEN stated the definition of "offshore facility" means any facility of any kind located in, on, or under any of the navigable waters of the United States, and any facility of any kind which is subject to the jurisdiction of the U.S. and is located in, on, or under any other waters, other than a vessel or public vessel. He said basically if it is wet and it meets the facility definition, it is an offshore facility. He emphasized he is familiar with the fact that the navigable waters issue is important to the state because of the wetlands in Alaska. He advised MMS has been asked if there is any flexibility in defining navigable waters differently under OPA `90 and according to their attorneys, the navigable waters definition is referencing the Federal Water Pollution Control Act which set up the 404 requirements originally. Another confining statement in the definition is "under any other waters" as MMS is not sure what other waters means. Number 244 MR. ZIPPEN explained "onshore facility" means any facility (including, but not limited to, motor vehicles and rolling stock) of any kind located in, on, or under, any land within the U.S. other than submerged land. He said in the conference committee report, managers are saying that any portions of a facility which are located in navigable waters such as pipelines, marinas, etc., if connected to an onshore facility or is a part of the onshore facility, in accordance with the Federal Water Pollution Control Act, are subject to the financial requirement. MMS attorneys have reviewed the Federal Water Pollution Control Act, have talked to both the Environmental Conservation Agency and the Coast Guard, and have determined there is no differentiation between onshore and offshore. All references are between transportation related and nontransportation related facilities. While it appears there was Congressional intent given, the reference which was given may not be able to be supported. Number 268 MR. ZIPPEN stated the existing requirements under the Outer Continental Shelf Lands Act (OCSLA) apply only to the outer continental shelf. The existing evidence requirement is $35 million and the civil penalty provision is $10,000 per incident. OPA `90 will replace that scheme and increase financial responsibility to $150 million. He said people have asked where the $150 million figure comes from and no one seems to know. Another change is the types and classes of facilities, which then creates a jurisdictional issue. What is an offshore facility? The OPA `90 also expands the jurisdiction to territorial sea, inland waters and wetlands. Finally, the Act provides a civil penalty up to $25,000 per day. Number 303 MR. ZIPPEN remarked under the OCSLA, existing companies can self-insure for $35 million and an asset test is performed. They can either have insurance or they can use surety bonds. Also, in existing law, insurance must provide for direct access to any guarantor. MR. ZIPPEN pointed out that OPA `90 gave flexibility to look at potentially innovative ways to show financial responsibility, which many times posed problems. Liquid asset pools have been looked at, including the protection and indemnity clubs (P&I clubs) which have been used by the tanker industry. MMS has also talked to people from the United Kingdom who are involved in marine insurance. They are looking at possibly setting up a P & I club which would deal with offshore facilities. However, there are tax implications for where they might be located. The places they want to locate the P & I clubs to get the best tax advantages are places which the U.S. Government has no access to, if there is a claim. MR. ZIPPEN continued that insurance as an asset, is where an entity does not have to provide direct action but can have a policy which protects them from pollution up to $150 million, and that entity wants the policy to be considered as an asset. There is concern that insurance as an asset might contravene the direct access provision which was written in the statute. With surety bonds and letters of credit, there can be two problems at the $150 million level. Some states have restrictive rules which prohibit it and in most cases, the bonds or letters of credit must be fully collateralized. Number 339 MR. ZIPPEN stated with the advanced notice, MMS has identified a number of major issues. What are the types and locations of "offshore facilities"? What methods are available to evidence financial responsibility? Another issue is protections/defenses for responsible parties and guarantors. Very important also is the economic impact on people, companies, and local economies. He said there is an Executive Order which requires that all rulemaking have an economic impact analysis prepared, and a lot of the information people have provided MMS through the advanced notice process will be used if a proposed rule is prepared. Finally, interaction with states and territories is an issue. OPA `90 allows states to administer OPA `90 financial requirements in state waters and it is not clear what that means. Number 370 MR. ZIPPEN reviewed MMS activities. MMS has continued to issue certificates of financial responsibility at $35 million covering the outer shelf only. MMS decided to go with an advanced notice of proposed rulemaking rather than a notice of proposed rulemaking. MMS has had meetings with a number of different groups and communities and has held numerous public workshops. MMS has compiled and made available the public record which exists on OPA `90 and back in October, the Director of MMS testified before a Congressional hearing. MR. ZIPPEN said thus far, the issues which have been identified to MMS include the offshore definition; geographic jurisdiction, including the determination of navigable water; people not being able to get insurance and insurers not accepting the direct access provision; limited insurance capacity; the $150 million limit does not take risk into effect; and finally the economic impacts. He emphasized in closing that this is not a proposal and MMS does not have an official administration position yet. Number 480 REPRESENTATIVE BILL HUDSON stated Alaska is unique because of the vast distances between the isolated and small communities. Any extreme interpretation may cause the delivery, storage, or handling of petroleum to be life threatening. He said Alaska is very different and he hoped that MMS will analyze that fact and react accordingly. He stressed the definition of navigable waters is a serious problem, particularly if it includes wetlands, inland waters, territorial sea, etc. He urged MMS to draw upon the expertise of the Coast Guard when trying to differentiate between different watercraft, things that navigate on navigable waters, etc. Number 520 REPRESENTATIVE JOE GREEN said one of the reasons the two resolutions referred to earlier got unanimous backing is an indication that the broadest possible interpretation will be made, and that incensed most Alaskans. Many of Alaska's coastal communities are small, yet they have diesel storage for generating power and unless they are going to violate OPA `90, they will be in violation because they cannot possibly show $150 million financial responsibility. He said the legislature feels like Alaska has been looked upon as the conscience of the lower 48. With almost everything that happens, it is to an extreme and affects Alaska. He urged MMS to use discretion. Number 590 REPRESENTATIVE PAT CARNEY asked if MMS will be going back to Congress with recommendations to amend OPA `90. MR. ZIPPEN responded that if MMS is asked by Congress what is needed to fix OPA `90, they will be happy to make recommendations. He said the Administration has not made a decision on whether it will propose its own technical fix to the Act itself. Once the comment period closes and information is compiled, deliberations will move up within the department for consideration. REPRESENTATIVE CARNEY wondered if there is any way to implement regulations which will make OPA `90 a workable Act. MR. ZIPPEN said he could conceive of what they would be. The difficulty is whether the Solicitors General office will approve them, as they may not meet the test of the law. Number 630 CHAIRMAN WILLIAMS remarked that Congress intended to have a definition of onshore and offshore facilities. He asked Mr. Zippen to again review and expand on the definitions. MR. ZIPPEN responded that a marina, or a pipeline which runs from a refinery across a creek, etc., may be subject to the financial requirement, as it can carry oil and is located in water. In the conference manager's report, there is language which refers to "any of pertinence" (pipelines, piers, etc.,) which are directly connected to onshore facilities, and saying they should be considered part of the onshore facility. It goes on to say the difference between onshore and offshore facility is contained in the Federal Water Pollution Control Act. The concern is, while it seems to be straightforward in its intent, in going back to the Federal Water Pollution Control Act, there is no reference or split between onshore and offshore. The split is only between transportation related facilities and nontransportation related facilities. Number 688 REPRESENTATIVE HUDSON asked where MMS will acquire the interpretation for "other waters." MR. ZIPPEN responded the Department of Solicitors General is looking at existing statute to make interpretations. REPRESENTATIVE HUDSON stressed the committee will be available to assist as a resource in the deliberating process. When the process is completed, the committee wants to make sure the state is protected. TAPE #94-15, SIDE B Number 000 REPRESENTATIVE GREEN gave a hypothetical situation and asked if each of the entities mentioned would have to show $150 million worth of financial responsibility. He felt the requirement will shut down everything in the state except one or two major oil companies. He said legislators keep looking for what was intended by Congress and no one seems to know. Representative Green asked if it is the intent of Congress to have so many lawbreakers in the country. He felt it will be worthwhile to go back to Congress and take another look at OPA `90. MR. ZIPPEN agreed, and said the scope of the issue is very large. He said MMS has Congressional staff members who have been talking with members of Congress and committees. He noted that the facilities definition proceeded through six different committees of jurisdiction, three in the House and three in the Senate. In some cases, committees were considering language which said an offshore facility is a facility which is on the outer continental shelf and produces oil and gas, all the way to the facility definition presented, which has the potential to be very far reaching. Given what passed in OPA `90, it is clear that some people in Congress did not think that is what the facility definition should be, because their committees did not report that definition out. Some members of Congress have said the language is not what they intended, and MMS is still struggling with the language, seeking Congressional assistance in making interpretations. Number 060 CHAIRMAN WILLIAMS said many of the villages throughout Alaska will be very hard pressed to be able to live up to the standards proposed. MR. ZIPPEN reiterated that what MMS has done so far is not a proposal and they are not saying this is what the regulations should be. After reading the law, MMS has said this is what the regulations could be and based on that, they want to hear comments from people. They want to have something that is fair, equitable, does not pose an unreasonable burden for the risk at stake, is supportable and carries out the intent of Congress. CHAIRMAN WILLIAMS asked how likely it is that Congress will agree to open OPA `90 for amending it. MR. ZIPPEN replied he did not know what the willingness of Congress will be to open the Act in its entirety. He said there has already been one technical correction made in the form of a rider attached to the Act. Number 117 CHAIRMAN WILLIAMS asked what type of reaction is being received from other states. MR. ZIPPEN responded there is incredulousness at what is being suggested. He said MMS has dealt mostly with coastal states, and those who have ongoing oil and gas operations are the states who will immediately be affected. Many people are concerned and are asking MMS to very carefully consider what is done when proposing regulations. CHAIRMAN WILLIAMS asked Mr. Zippen if he is aware of the laws which the state of Alaska has in effect. MR. ZIPPEN stated that MMS had met with the Department of Government Coordination and the Department of Environmental Conservation (DEC) and compared requirements. Number 147 REPRESENTATIVE HUDSON said MMS is going through what Alaska did when they established financial responsibility a few years ago. The world market does not have that type of insurance and it surely does not have it for many of the small communities and facilities which will be affected. Any insurance information and options which MMS receives will also be helpful to Alaska. MR. ZIPPEN stated MMS is working with DEC on a letter of agreement on the spill response contingency planning and the spill response planning portion of OPA `90. REPRESENTATIVE HUDSON remarked that typically when Congress passes an act, there are provisions where states can assume responsibility. One of the comments Mr. Zippen made earlier is that states may administer the financial responsibility, providing they can come to a common understanding. He felt it will be better for all of the people dealing with petroleum products of any sort to have one place to go to try to satisfy financial and response elements. Number 188 CHAIRMAN WILLIAMS noted that Alaska does have very stringent rules and regulations in the oil industry and encouraged MMS to look at the state's rules and regulations and follow those. MR. ZIPPEN agreed that MMS can learn from the state's experience and its ongoing program. MEAD TREADWELL, DEPUTY COMMISSIONER, DEPARTMENT OF ENVIRONMENTAL CONSERVATION, stated the department's position is that the $150 million financial requirement will not work and is not necessary. The legislature has given DEC a set of financial responsibility laws to enforce. He said it is the one law in the state that DEC is in 100 percent compliance. He stressed it is one of the best run programs and added it is run by one person. He stated DEC is interested in working with MMS as they pattern their regulations. If MMS can delegate authority to the state, so the person having to go through the process only has one stop to shop, DEC will be happy to look at it. MR. ZIPPEN stated he is especially interested in the comment that the $150 million financial requirement is excessive. MMS has tried to gather information on spill history and cleanup costs and asked that if DEC has information on costs of spill clean up in Alaska, they will be interested in seeing the information. CHAIRMAN WILLIAMS thanked everyone for participating. He hoped that OPA `90 can be amended, at least up to Alaska's standards. ANNOUNCEMENTS CHAIRMAN WILLIAMS announced the committee will meet on Wednesday, February 16 at 8:15 a.m. to hear SB 77 and SJR 13. ADJOURNMENT There being no further business to come before the House Resources Committee, Chairman Williams adjourned the meeting at 3:20 p.m.