MINUTES SENATE FINANCE COMMITTEE February 24, 1994 9:20 a.m. TAPES SFC-94, #18, Side 1 (000-end) SFC-94, #18, Side 2 (575-end) SFC-94, #20, Side 1 (000-028) CALL TO ORDER Co-chair Drue Pearce convened the meeting at approximately 9:20 a.m. PRESENT In addition to Co-chairs Pearce and Frank, Senators Rieger and Jacko were present. Senators Sharp and Kerttula arrived as the meeting was in progress. Senator Kelly did not attend. ALSO ATTENDING: Senator Mike Miller; Former Representative Walt Furnace, General Manager, Alaska Support Industry Alliance; Harry A. Noah, Commissioner, Dept. of Natural Resources; Paul Fuhs, Commissioner, Dept. of Commerce and Economic Development; James Eason, Director, Division of Oil and Gas, Dept. of Natural Resources; Russell Heath, Alaska Environmental Lobby; Mike Greany, Director, Legislative Finance Division; and aides to committee members and other members of the legislature. ALSO PARTICIPATING VIA TELECONFERENCE: Barbara Fullmer, Assistant Attorney General - Anchorage Douglas Yates, P.O. Box 221, Ester, Alaska - Fairbanks Tom Lohman, North Slope Borough - Barrow Larry Smith, Research Institute - Homer Alice Ruby, Chair, Bristol Bay CRSA Bd. - Dillingham Theo Matthews, United Cook Inlet Drift Assoc.- Kenai Loren Flagg, Kenai Peninsula Fishermen - Soldotna Gary Hinkle - Soldotna Anthony Whitworth - Fairbanks Tom Armour, City Administrator - Pelican SUMMARY INFORMATION SB 240 - MUNICIPAL TAX CREDIT/HABITAT PROTECTION Brief testimony was presented by Theo Matthews and Gary Hinkle. Amendment No. 1 was proposed by Senator Rieger and adopted. It was then incorporated into CSSB 240 (Fin) which was REPORTED OUT of committee with a "do pass" recommendation and zero fiscal notes from the Dept. of Natural Resources and Dept. of Fish and Game. SB 308 - ADMIN ACTION RE LAND/RESOURCES/PROPERTY Testimony was presented by Jim Eason and individuals at the above-listed teleconference sites. The bill was subsequently HELD in committee for further hearing, Monday, February 28, 1994. SB 322 - DELAYS OF OIL AND GAS LEASE SALES Testimony was presented in conjunction with SB 308 (see above.) SB 240 - MUNICIPAL TAX CREDIT/HABITAT PROTECTION Co-chair Pearce directed that SB 240 be brought on for discussion. She explained that it would provide for an optional municipal tax credit for certain river habitat protection improvements. It pertains to the Kenai River and will allow local governments to provide a habitat protection credit that could offset a portion of property taxes if an improvement has been constructed that aids in fish habitat along the river. The Co-chair pointed to the Senate Resources Committee Substitute for the bill, accompanying zero fiscal notes, Dept. of Fish and Game position paper in support, Kenai Borough statement in support, a resolution from the Kenai River Special Management Area Advisory Board, and correspondence from the Alaska Sportfishing Association in support of the bill. Senator Rieger directed attention to page 1, line 5, of CSSB 240 (Res) and asked if Co-chair Pearce would object to addition of Unless prohibited by municipal charter, before language in subsection (a). Co-chair Pearce noted that the legislation is limited to local governments on the Kenai. She added that, to her knowledge, none of the local charters would prohibit the credit. Senator Rieger stressed that, as a general rule, the legislature should not pass state laws that override local charters. Co-chair Pearce said she had no objection to the amendment. Senator Rieger then MOVED for adoption of the new language. No objection having been raised, the language was ADOPTED for incorporation within a draft Senate Finance Committee Substitute for the bill. Co-chair Pearce called for additional testimony on the bill. None was forthcoming. Senator Jacko MOVED that CSSB 240 (Fin) pass from committee with individual recommendations. (At this point in the meeting the teleconference monitor advised of an individual in Soldotna who wished to testify.) Senator Jacko WITHDREW his motion for passage of CSSB 240 (Fin). THEO MATTHEWS, administrative assistant, United Cook Inlet Drift Association, testified via teleconference from Kenai. He said that the Association supports habitat protection in all state rivers. He expressed concern, however, that the proposed bill does not provide a tax credit for those "who do the best for habitat protection, and that is to not develop their land and stay off of it." The Kenai Borough recently formed a task force to discuss these issues. Many land owners are requesting consideration for doing the best thing and not developing their land. Those issues will be discussed on the Kenai at the local level. Mr. Matthews acknowledged that he did not know whether this issue would fit within the proposed legislation. In his closing remarks, Mr. Matthews applauded the effort to improve habitat on the Kenai. Co-chair Pearce referenced the "no development option" and explained that under present statutes, conservation easements are allowed to local municipalities. She then voiced her understanding that the task force would examine whether opportunity for the easements should be provided at the local level. For that reason, the option was not added to the current bill. Senator Jacko again MOVED for passage of CSSB 240 (Fin) and requested unanimous consent. No objection having been raised, CSSB 240 (Fin) was REPORTED OUT of committee with zero fiscal notes from the Dept. of Natural Resources and the Dept. of Fish and Game. All members present signed the committee report with a "do pass" recommendation. Senators Kerttula and Kelly were not in attendance and did not sign the report. Later in the meeting, GARY HINKLE testified in support of the bill via teleconference from Kenai. He noted that there would be no cost to the state. Granting of the credit is at the discretion of the borough and cities involved. Net gain to habitat through this effort will far exceed any risk of the bill being pro development. SB 308 - ADMIN ACTION RE LAND/RESOURCES/PROPERTY Co-chair Pearce directed that SB 308 be brought on for discussion and noted that it was introduced by the Senate Resources Committee at the request of the administration. JIM EASON, Director, Oil and Gas Division, Dept. of Natural Resources, came before committee and provided an overview of CSSB 308 (Res). He explained that changes are intended to respond to concerns raised by public and agency review of the original bill. As background information, Mr. Eason said that the legislation is intended to respond to "a string of court cases." He pointed to the recent supreme court order which declined to accept review of the state's appeal of the "sale 78 injunction." The injunction thus stands and sale 78 will not proceed. Based on sale 50 and 55 litigation, it will be four to six years before the state knows whether it can lease sale 78 tracts in Cook Inlet. Every sale on the schedule today is in similar jeopardy. The proposed bill is designed to attempt to accomplish something the court has been unwilling to allow. It would apply common sense to standards to which the department will be held in making best- interest findings for disposals or lease sales. The courts, through a sequence of decisions, have told the department that in order to have a best- interest finding in a coastal zone consistency determination upheld for a lease sale, the department must be able to demonstrate what events are going to happen following the sale. That is impossible. Events may range from no activity to multiple activities resulting in discovery of many oil fields. The department does not know where conflict may occur until a proposal with a specific location is made. The department has, in the past, in best-interest findings and consistency determinations, attempted to recognize common sense human limitations but also provide protections so that future activities are properly conditioned. The only known at the time of issue of a lease is that nothing will happen until a permit is issued. And a permit will not be issued until agencies and the public have an opportunity to review the permit proposal. The department also has the ability to further condition the permit to make it consistent with the Coastal Zone Management Act. That is the only way the state lease program can work. The proposed legislation is designed to achieve that end. Mr. Eason next advised of the following, significant provisions of the legislation: Page 2 amendments to AS 38.05.035(e) require that written findings be subject to certain conditions. The department, in making a written finding, will have the discretion to establish the scope of the administrative review on which the determination is to be based. Courts have indicated that the department must consider all future events. The subject amendments require consideration only of what can reasonably be foreseen. Review and best interest findings must address "only the reasonably foreseeable, significant and direct effects of the sale . . . ." Use of "reasonably foreseeable, significant and direct" is a change from the original bill in reaction to prior use of "non- speculative." The new language is lifted from federal regulations dealing with Coastal Zone Management Act consistency determinations. Amending language also allows the department discretion in sorting through all matters brought forward, in order to focus on facts that are material to decision making. (Senator Sharp arrived at this time.) Further, the department should only be held responsible for "those things we know" or issues that are "made known to us." The department should consider everything that is raised and address it in writing as long as it is raised during the period when it is timely to do so. Paragraph (C) contains explicit acknowledgment of legislative intent that the department have the ability to approve lease sales as parts of phased projects in the future. Page 3 contains housekeeping changes as a result of the preceding substantive amendments. Page 4 incorporates substantive amendments of AS 38.05.035(g). That statute provides for additional considerations that must be thought through and rationalized in a written best-interest finding for an oil and gas lease sale, that are not required of other disposals and findings. Amending language would tie these considerations to facts known to the department at the time of preparation and material issues raised during the period of public comment. Inclusion of these material facts places a higher burden on the department in that it must comply with the existing statutory check list as well as these additional material issues. Replacement of the word "in" with "within" at page 4, line 21, is in response to statutory language requiring consideration of fiscal impacts "in and adjacent" to the area. That indicates a broader consideration of habitat impacts. Mr. Eason further elaborated on challenges surrounding lease of sales 55 and 57. The last amendment relates to Title 46 provisions of the Coastal Zone Management Act. It is designed to parallel best-interest amendments in Title 38. Mr. Eason pointed specifically to subsection (a) language relating to phased development. He stressed that the department will not allow actual development to occur without appropriate permits that are requested, reviewed, conditioned and approved. Senator Rieger directed attention to page 2, subparagraph (C), and requested an explanation. Mr. Eason said that the intent is to ensure that the department may "consider and do findings on phased projects" for which the first action is the lease sale conditioned by proper stipulations and terms making clear that the successful bidder has no right to proceed with any action without first obtaining a permit for that specific activity. That is intended to ensure that each activity is in compliance with the Coastal Zone Management Act. Mr. Eason briefly spoke to what he described as the ultimate condition of a lease--the state's ability to disallow all activity following a lease sale if an extraordinary environmental conflict arises. (Senator Kerttula arrived at this time.) Senator Rieger next asked that Mr. Eason reconcile language at page 4, lines 11 through 16, with new language at page 2, line 9. Mr. Eason said that at the time the final finding is made in writing, the department will consider and discuss facts that are material to issues raised during the public comment period. In most cases that will include periods up to four years. There are numerous opportunities for people to comment during that process. The most heavily focused upon are comment periods following issuance of preliminary findings and consistency determinations. The department will consider comments as long as they are within the scope of the administrative review established in the written finding. The scope of that review will follow statutory requirements plus other relevant issues that are reasonably foreseeable and direct and significant. The intent is that all public comments be addressed. Further discussion followed between Senator Rieger and Mr. Eason regarding the scope of written findings. Mr. Eason stressed that under the proposed bill, the department will have to acknowledge "any suggested indirect effects or any that are brought to our attention." The focus, however, will be upon reasonably foreseeable, direct and significant effects. The department is not attempting to avoid consideration of issues. It is attempting to avoid litigation over issues regarding direct and indirect effects. Discussion followed between Senator Rieger and Mr. Eason concerning the difference between a direct and indirect effect. Mr. Eason stressed that his authority is "much greater to provide protections." He acknowledged that the line between direct and indirect effects may often be blurred. Additional discussion followed concerning division review of its policies in light of court decisions. End, SFC-94, #18, Side 1 Begin, SFC-94, #18, Side 2 Senator Jacko attested to concern from constituents that the propose bill might circumvent the Coastal Zone Management process. Mr. Eason said it would not. Projects proposed after a lease sale would generally require two or more permits prior to proceeding. The division of governmental coordination would be the coordinator on the permitting process and the decision maker on the consistency determination. The input process for permits would continue as it exists today. The intent is not to diminish public participation. The bill focuses on the lease sale stage. Senator Jacko voiced his understanding that Coastal Zone Management laws result from federal guidelines. He then asked if the proposed bill would usurp that authority. Mr. Eason expressed his belief that the legislation would not. Senator Rieger asked if a material effect includes a material risk. Mr. Eason responded that a material risk would be different from a material effect. Teleconference discussion followed between Senator Kerttula and BARBARA FULLMER, Assistant Attorney General, Dept. of Law, concerning the total number of lease sales and the number challenged in court. Ms. Fullmer noted that the courts have never invalidated a lease sale. They have found fault with DNR best interest findings. The current risk is the stay presently in place regarding lease sale 78. The supreme court has declined to review the state's petition to lift the stay. Mr. Eason added that for sale 78, the court found that the best-interest finding was likely to prevail a challenge but that the Coastal Zone consistency determination was inadequate. That was not DNR's determination alone. While DNR is the agency that issues the documentation, the documentation is reviewed and concurred in by the division of governmental coordination, Dept. of Fish, and Dept. of Environmental Conservation. It is also compared with the local plan and passed by all review entities for compliance with laws and regulations. Responding to a question from Senator Kerttula, Mr. Eason advised of six sales that were the subject of litigation since the 1979 joint state-federal sale. In answer to a question by Senator Sharp, Mr. Eason said that the consistency report was available for review for substantial periods of time in both preliminary and final form. Issuance of the final consistency determination starts a 30-day time period during which appeal may be made. Litigants did not appeal the determination for more than two months. While appeal was made more than 30 days after the time limit had run, the courts nonetheless allowed plaintiffs to raise issues. Co-chair Pearce called for public testimony on the bill. TELECONFERENCE - FAIRBANKS: DOUGLAS YATES spoke in opposition to the bill. He termed amendments to Title 38 a "nasty assault on the future of Alaska's public interest and disposition of its natural resources." He suggested that alteration of Title 38 will cost Alaska time, money, and loss of faith in its leaders. It will not resolve competency problems at DNR. It will push development policy from the legislature and place more of Alaska's future in the hands of attorneys and the courts. The bill is moving too quickly. It should be returned to Senate Resources and adequately addressed. BARROW: TOM LOHMAN, North Slope Borough, spoke in opposition to the bill, saying that the state would be more rather than less likely to end up in court under the proposed legislation. Litigation is filed when citizens become frustrated, feel uninformed, or become distrustful of the process. DNR failed to consult the state's coastal management program working group prior to introduction of the bill. And, following introduction, it failed to notify working group members, the coastal districts, or state policy council members in order to allow them to participate in the process. Many individuals in the districts, state agencies, and industry have a good working knowledge of ACMP implementations. Mr. Lohman attested to need for better coordination of efforts. He referenced the federal offshore leasing agency and advised that it has taken a different approach in engaging in consensus building. Mr. Lohman next directed attention to mischaracterization of concerns expressed in sale 50, specifically in terms of impact on caribou and bowhead whales. Bill provisions at page 4, lines 20 through 21, would prevent citizens and organizations from raising those kinds of issues. Mr. Lohman questioned the urgency of moving the proposed bill at this time. He urged that it be held in committee and suggested that DNR be encouraged to become more involved in the working group and to communicate with those in the districts who will be implementing the program. HOMER LARRY SMITH, Kachemak Resource Institute, next spoke via teleconference from Homer. He explained that he and others on the Kenai worked together for ten years to establish a coastal district. Implementation has occurred only in the last several years. He suggested that the issue is likely to be moved from state to federal court and become an inherent problem with all the intricacies of subsistence. He voiced his belief that offshore development, in some places, is incompatible with the economic activities upon which residents depend. DILLINGHAM ALICE RUBY, Chairperson, Bristol Bay CRSA Board, Councilperson, City of Dillingham, and alternate representative, Alaska Coastal Policy Council, next testified. She explained that the City of Dillingham has developed a good relationship with DNR over the years and hopes to foster that relationship by continuing to work with the state to help develop policy and support for legislation that solves real problems. Speaking directly to SB 308, Ms. Ruby acknowledged need for certainty in the oil and gas leasing process. Having the courts make decisions for the state is a major problem. Amendments in CSSB 308 (Res) appear to address some of the concerns raised at early hearings. They are, however, confusing since the basis for some substitute language is unclear. As a result, the fiscal implications of the bill could be great. CSSB 308 (Res) limits the scope of review under Title 38 and the ACMP to reasonably foreseeable significant direct effects. The substitution of "significant" for "non-speculative" is a step in the right direction and appears to be an attempt to meet the congressional mandate under the federal Coastal Management Act. The mandate is likewise reflected in definitions for direct and significant impact in the Alaska Coastal Management Program. It is, however, unclear whether the term "significant" encompasses the broader intent and whether it will meet federal guidelines. Part of the problem is that there is no sectional analysis for SB 308 to clarify the intent of changes. Unless the intent of proposed changes is made explicit in the bill and through a detailed sectional analysis, the state will find itself once again facing lawsuits over interpretation of statutory changes. The bill is moving at a "lightening fast pace." In the interest of addressing problems with the leasing process and public concerns regarding the bill, immediate action should be delayed to allow time for better resolution of problems. KENAI THEO MATTHEWS, United Cook Inlet Drift Association, next testified from Kenai, voicing opposition to CSSB 308 (Res). Changes therein do not address public concerns. Of primary concern is the attempt to insulate DNR from any and all public comment and concern at the lease sale stage. That turns the process into a paper transaction that does not address or attempt to resolve even the most obvious potential conflicts. That will place the state in financially untenable buy-back situations regarding these leases. CSSB 308 (Res) turns the public interest finding into an "industry interest finding." Leases will proceed without resolution of potential conflicts. The bill contains a radical change in public policy. Under its provisions, the public may voice all the comments it cares to at the lease sale stage, but they will not be germane to the leasing decision. Mr. Matthews voiced his belief that the bill is "totally fiscally irresponsible" since it essentially institutionalizes buy-backs for leases similar to those in Kachemak Bay. Mr. Matthews said that nothing could fine-tune the legislation. He reiterated that the public would be allowed to express concerns, but those concerns would not be considered at the lease sale stage. The sale will become the paper transaction DNR desires. Mr. Matthews next quoted from Judge Cranston's decision on the Cook Inlet lease sale and noted that once a lease is issued, the state is under tremendous pressure to let the lease proceed to exploration and extraction. Directing attention to statements on the DNR public relations sheet, Mr. Matthews reiterated that the proposed bill will lead to need for partial or full buy-backs at major costs. He voiced his objection to the zero fiscal note accompanying the bill. Buy-back was the issue of concern expressed by commercial fishermen in Cook Inlet regarding lease sale 78. Mr. Matthews next attested to six recommendations for improvement of the bill and advised that he would fax the material to committee. Senator Kerttula asked why the drift association opposed the lease sale. Mr. Matthews said that the association did not oppose the sale. It asked that a mitigation term be included in the sale document disallowing permanent production platforms in front of tanker docks and in intensively used waters south of Kasilof. Concerns covered approximately 25% of the tracts in the lease. Senator Kerttula asked that the foregoing statement be provided in writing. LOREN FLAGG, Executive Director, Kenai Peninsula Fishermen's Association, voiced opposition to CSSB 308 (Res), terming it "bad legislation, from a state planning and public policy standpoint." At a time when the Coast Zone Management Council and Senator Little are working toward improved public notification and involvement in coastal planning, the administration has introduced legislation that would limit public and local government input. State planning for oil lease sales should be conducted up front. At the time of lease, the state must address potential problems and impact of activities that could result from the lease. Failure to do so will invite more court action rather than less. The general public and the industry need to know and understand the rules at the lease sale stage. Mr. Flagg pointed to property rights gained by the successful lessee and costs to the state associated with mitigation or buy-back of those rights. There are substantial legal issues inherent in SB 308. Full review by the Dept. of Law should be undertaken before the bill is advanced. Mr. Flagg took exception to earlier comments by Mr. Eason and said that issues and conflicts in the most heavily used commercial fishing ground and recreational area were timely raised. They are not spurious issues. Obvious conflicts must be addressed. They were totally ignored by DNR. There was no detail in the final findings that addressed those issues. That is the reason the sale is in court. DNR did not do an adequate job of preparing the sale. The department ignored the advice of the Dept. of Fish and Game, commercial fishermen, native groups, and recreational fishermen. The problem is not with the law but with the department. JUNEAU WALT FURNACE, General Manager, Alaska Support Industry Alliance, came before committee in support of the bill. He explained that the Alliance has a membership of 320 individuals and companies throughout the state. The Kenai chapter has been extremely active in supporting the state oil and gas lease program and provided positive testimony on past lease sales. Mr. Furnace stressed need to maximize return on natural resources for state citizens. The legislature thus enacted statutes and regulations supporting positive resource development. The oil and gas lease program on the Kenai and in Cook Inlet has progressed well. Although the state has followed applicable statutes and regulations, the courts, in some cases, have indicated that is not enough. The administration thus developed legislation to clarify the responsibility of the commissioner of the Dept. of Natural Resources. Mr. Furnace acknowledged that problems surrounding lease sale 78 relate to the fact that many fishermen were out fishing when notices were issued. He further acknowledged conflicts between industry and fishermen on the Kenai, but he stressed that Mr. Eason and Commissioner Noah have made every effort to duly record concerns of the fishing community. Mr. Furnace voiced need to "look at the consistency determination" and "tighten up the public interest findings" to put the program back on target. Mr. Furnace next referenced timber industry impact on local economies in Sitka and Ketchikan. He cautioned that delay in bringing new oil and gas leases on line would seriously impact the economy on the Kenai since developed oil and gas resources are 50% depleted. Delay will also impact state revenues from the petroleum industry. He urged passage of the bill to address concerns identified by recent court decisions. FAIRBANKS ANTHONY WHITWORTH, spoke in opposition to CSSB 308 (Res). He attested to poor quality, almost unreadable faxed copies of the bill available in LIOs and suggested that it has progressed too fast. Mr. Whitworth said that the present version of the bill goes too far in placing "all of the cards" in DNR directors while leaving nothing to state voters. Division directors should not be placed in positions where they determine which issues and criteria are important to the public. Public input is one of the checks and balances that makes the system work. Successful resource allocations must be arrived at through collaborative effort of all stakeholders. Contrary to recent supreme court decisions that DNR must consider the probable cumulative impact of all activities, the bill unreasonably narrows the scope of the best interest finding. Mr. Whitworth urged that the bill not progress. PELICAN TOM ARMOUR, City Administrator, Pelican, Alaska, voiced concern over the rapid progress of the bill. He expressed a preference for CSSB 308 (Res) over the original bill but concurred with earlier comments regarding need for thorough review by the Dept. of Law. End, SFC-94, #18, Side 2 Begin, SFC-94, #20, Side 1 Co-chair Pearce announced that teleconference discussion of SB 308 would continue at the February 28, 1994, meeting. She encouraged those participating or wishing to participate by teleconference to fax written testimony and proposed amendments to committee for inclusion in members' files. Senator Jacko requested a detailed sectional analysis of CSSB 308 (Res). ADJOURNMENT The meeting was adjourned at approximately 11:00 a.m.