MINUTES JOINT SENATE AND HOUSE FINANCE COMMITTEE March 30, 1994 9:07 a.m. TAPES The Cambridge presentation is on: SFC-94, #57, Side 1 (000-end) SFC-94, #57, Side 2 (end-350) SB 190 is on the following: SFC-94, #55, Side 2 (345-000) SFC-94, #59, Side 1 (000-250) CALL TO ORDER Senator Drue Pearce, Co-chair, convened the meeting at approximately 9:07 a.m. PRESENT The following Senate and House Finance members were present: Co-chair Pearce Co-chair Larson Co-chair Frank Representative Martin Senator Kelly Representative Grussendorf Senator Kerttula Representative Kay Brown Senator Jacko Senator Rieger Senator Sharp (Representatives MacLean, Foster, Hanley, Hoffman, Parnell and Therriault did not attend.) ALSO ATTENDING: Representatives Joe Green, Cliff Davidson and Ed Willis; Darrel J. Rexwinkel, Commissioner, Department of Revenue; Dr. Charles Logsdon, Chief Petroleum Economist, Oil and Gas Audit Division, Department of Revenue; Terry Lauterbach, Legislative Legal Counsel, Division of Legal Services, Legislative Affairs Agency; Chris Christensen, Staff Counsel, Administration, Alaska Court System; Susan Miller, Manager, Special Projects, Alaska Court System, Alaska Court System; Laraine L. Derr, Deputy Commissioner, Treasury, Department of Revenue; Donna Page, Senior Hearing Officer, Department of Revenue; Jetta Whittaker, fiscal analyst, and Mike Greany, Director, Legislative Finance Division; representatives of the media, aides to committee members and other members of the legislature. VIA TELECONFERENCE: Kevin Lindemer and Jim Placke, Cambridge Energy Research Associates, Inc., gave their presentation via teleconference from Cambridge, Massachusetts. SUMMARY INFORMATION CAMBRIDGE ENERGY RESEARCH ASSOCIATES, INC. Oil Price and Forecast & Other Market Predictions CSSB 190(JUD): An Act relating to income withholding and other methods of enforcement for orders of support; and providing for an effective date. CSSB 190(FIN) work draft "U" was ADOPTED. Terry Lauterbach, Legislative Legal Counsel, Division of Legal Services, Legislative Affairs Agency, read from her memo outlining changes from CSSB 190(JUD) to CSSB 190(FIN) version "U". Discussion was had by Senators Rieger, Sharp, Kelly and Co-chair Pearce regarding Sec. 26, employer penalties, and the accompanying fiscal note. The bill was HELD in committee. CAMBRIDGE ENERGY RESEARCH ASSOCIATES, INC. Oil Price and Forecast & Other Market Predictions Co-chair Pearce invited Kevin Lindemer and Jim Placke, Cambridge Energy Research Associates, Inc., to speak to the committee. KEVIN LINDEMER referred the committee to the booklets provided (see Attachment A, copy on file in the committee minute book). He said he would speak to the short term fundamentals of the oil market and their expectation of the price. Also, he would speak to oil politics including the largest uncertainty looming in the oil market - Iraq. At their recent meeting, OPEC faced three options. Judging by the drop in oil prices last Monday, it seemed the outcome was somewhat of a surprise. OPEC was in a difficult position. It could have managed a cut in barrels but in the long run, if the cut had not been maintained, the market would have suffered even lower prices. He felt OPEC took the most logical course and held to a volume reality of 24.5-24.7 million barrels per day. This was the agreed number, as it was last year, based on the production requirements by the individual countries. If OPEC adhered to this quota throughout the year, it had the potential for changing the price dynamic in the oil market. In the second quarter, the production level of 24.5-24.7 would be greater than the demand for OPEC oil. He expected some weakness in price over the second quarter. He saw the new game plan for OPEC as basically straight line production. It kept the market constant and allowed the market to absorb the risk in price. In the third quarter, he expected demand to be close to production if the quota was held, resulting in some firming of the price. If it was held into the fourth quarter, the price again was expected to firm. This would shift the burden of meeting consumer demand onto consumer inventories. Mr. Lindemer said that one of the factors to watch was the psychology of the market. He asked the members to turn to page 27 of Attachment A. He noted the quick drop of oil prices after the OPEC meeting and felt that was due to the vacating of the market by those that thought OPEC was going to cut production. So he felt the psychological fundamentals had been relatively discounted into the marketplace. Iraq was a major factor both as a physical and psychological reality. He felt that Iraq had already been somewhat discounted into the market. OPEC's behavior would be the key to the market over the next three quarters. He said that if OPEC's production moved above the 24.5-24.7 range, a dollar weakness in price was expected. If OPEC managed to stay below that range, there could be another $1 on the high side of the expected range which he would address later. Physical fundamentals were relatively minor at this time. A couple of unknowns were how much oil would get into the market due to low oil prices. He felt that would not be more than 200 barrels a day. The Russians remained a question mark. Russian supplies seemed lower than expected but no one knew if Russia had been stockpiling oil. This might not effect the absolute price of oil but could effect the difference between the Alaska price and the OPEC basket price. Russian oil was more similar in quality to Alaskan oil than to OPEC oil. Individual country production levels were another uncertainty over the next few months. It was doubtful that Iran would be able to maintain its quota level of 3.6 million barrels a day. It was also unlikely that Nigeria was going to keep producing over its quota. Those two factors would add strength and credibility to the OPEC production of 24.5-24.7 over the next few months. Overall, the view of the market was positive. He expected strength in the market and possibly a rise of $1-$2.5 a barrel but, still, the main unknown was Iraq. Mr. Lindemer asked the committees to turn to pages 28 and 29 of Attachment A which illustrated the outlook for OPEC and Alaska prices. There was a summary of the Alaska prices by fiscal year, and the various prices were outlined in the graphs on page 30. JIM PLACKE reiterated Mr. Lindemer's statement regarding OPEC's meeting and the decisions made there. He mentioned that Saudi Arabia stood firm and said it would continue to produce at 8 million barrels a day. Saudi Arabia did not believe that OPEC could effectively cut its production and was not willing to see any of its own production lost. OPEC production stood at what was called volume reality. He defined volume reality as a number for each OPEC producer that reflected its production capacity, its financial situation, and any domestic or political factors. At this point, the volume reality for OPEC was 24.5-24.7 barrels/day. He identified the major disruptive factor in oil prices to be Iraq and gave two reasons. It could have a physiological impact as early as the fourth quarter of 1994 which could spoil the favorable outlook. There had been an on-going contest between Iraq and the U.S. that Iraq did not resume oil exporting as long as Sadam Hussein was in power because of the trouble it would cause if it had hold of oil revenues. This fundamental policy had not changed in the U.S. The Iraq objective had not changed either as it continued to try to get out from under the oil embargo. In the sanctions review committee in March, the council considered Iraq's behavior and continued sanctions. On page 7, three possibilities were outlined regarding Iraq. About six months ago, he felt that Iraq had moved to the middle graph. Iraq was determined to push through the U.S. requirements to lift the embargo. Several other countries, France, Russia and China, had deserted the U.S. philosophy to hold the line on sanctions. There was a consensus among the members that if Iraq could meet the requirements, in six months there would be the possibility of Iraq coming on line. This would certainly have a physiological impact on the market and tension would increase with that scenario. He estimated Iraq's export capacity at about 1-1/2M barrels a day which it would achieve as quickly as it could. REPRESENTATIVE MARTIN said his concern was that there was too much emphasis on Iraq and OPEC and not enough on the other players. Secondly, when Iraq did come on line, why would anyone buy Alaskan oil when it could be gotten cheaper from other sources available. Mr. Lindemer said that by the middle of this year there would be 1 million more barrels a day from the North Sea than in the beginning of 1993. This was the exact problem OPEC faced and one of the short term goals was to maintain market share. He turned the members' attention to page 10 and 11 of Attachment A. He pointed out that the U.S. was continuing to find new sources of oil. In response to Representative Martin's second statement, he said that Alaskan oil had a transportation advantage to California but not to the U.S. Gulf Coast. On page 12 and 13, graphs showed Alaskan production was expected to decline, and when it declined, the volume competing head to head would be low. He asked Mr. Placke to comment on the FSU and how it might be a bigger problem on the crude balance than Iraq. Mr. Placke said that supplies out of Russia was one of the burdens the oil market had to bear over the past two years. Russian production was expected to continue to decline in 1994 at a much lower rate. Russian oil production dropped a million barrels a day in 1993. In 1994, it should slow to about half or 500,000 barrels a day, not much of a factor in the market. Senator Rieger asked if the graph on page 5 actually showed growth in aggregate demand between 1993 and 1995 of around 4 or 5 million barrels a day. Mr. Lindemer said what was expected in total world oil demand in 1995 was around 68 million barrels a day, and the 1992 average was around 66 million barrels a day. He said that not much growth was expected in 1994. He reminded the members that this included the FSU. If the FSU was taken out, the demand was growing at a much stronger rate, and most taking place in developing countries and the far east. Senator Rieger compared the graph on page 5 to the one on page 10. Mr. Placke agreed that essentially the growth would be seen in Saudi Arabia. He said there was about 750,000 barrels a day of unused capacity outside of Saudi Arabia. The sustainable capacity of Saudi Arabia was estimated to be 9.7 million barrels a day, and they could surge well above that amount. At present, they were producing 8 million barrels a day and by the middle of this year, it would have risen to 10 million barrels a day. The world was becoming more dependent upon Saudi Arabia, and how Saudi Arabia behaved increasingly influenced the oil market. Mr. Lindemer referred to page 15 and 16 which showed the OPEC cushion in terms of surplus capacity available and the ratio of OPEC to non-OPEC production. There had been a rise toward parody and it was expected to continue. If all development for crude oil production expansion would go as planned, OPEC could still be at 100 percent capacity by 2010. He felt that showed a need for development programs to sustain a cushion. REPRESENTATIVE LARSON asked the projected average price for Alaskan oil in FY95. Mr. Lindemer asked the committee to turn to page 32 and said the price might be understated a few cents. SENATOR SHARP asked where the actual potential of barrels per day for Iraq was shown. Mr. Placke said that was not included in Attachment A but they felt Iraq's oil production capacity today to be a little above 2-2.2 million barrels a day. A combination of domestic demand, and currently, limited exports to Jordan plus a certain amount of smuggling across the Turkish borders were a little less than another 100,000 barrels a day. When Iraq resumed exporting, it could export approximately 1.5-1.6 barrels a day of crude using two outlets, the pipeline from Iraq across Turkey to the Mediterranean (a capacity of 1.6 million barrels a day), even though they will only be able to deliver 1.1 barrels a day, and their off-shore sea island terminal at the head of the Gulf. Iraq claimed that the terminal had been repaired but he did not believe that statement. The terminal might be able to handle 400,000 barrels a day. Clearly, Iraq would do everything it could to increase production and export capacity as soon as possible but it would take time and money. Senator Rieger asked if Saudi Arabia was increasing production on their own volition or if they were being pressured from the west. Secondly, he wanted to know why the market was not more bullish. End SFC-93 #57, Side 1 Begin SFC-93 #57, Side 2 Mr. Placke said that Saudi Arabia had been on a campaign to increase its market share. It had made a statement that it would increase its production to 10 million barrels a day by 1995. The Gulf War hastened this forecast somewhat and now it was expected to be at 10.2 million barrels a day by 1995. Saudi Arabia's capacity served two functions; to provide revenue, and more importantly, to maintain its place as the dominant force in OPEC. It instilled a degree of discipline within that unruly group (OPEC) only as long as it had a credible threat to upset the market. It was the only country that had the capacity to put another 1 million barrels a day on the market on very short notice. In answer to Co-chair Pearce, Mr. Lindemer said he did not have an opinion on who would be the new secretary general to OPEC. Mr. Lindemer, in answer to Senator Rieger's second question, said that Mr. Placke had outlined Saudi Arabia's approach to the market and that was one of the determining factors that would keep the price from rising too fast. Another important issue, referencing page 16, was the difference between average OPEC production capacity and the call on OPEC to widen in 1995. Longer term, however (on page 15), it became increasingly apparent that into the late 90s, a stronger rate of growth in price seemed to be in order as utilization rates within OPEC rose closer and closer to the capacity level. In answer to Representative Martin, returning attention to page 33, Mr. Lindemer said the price of $12.66 should be a few cents higher. Representative Martin stated he was not that optimistic. Mr. Lindemer said this forecast was based on three factors - that economic growth would continue to be strong, Iraq would stay out of the market, and that OPEC would behave itself. In another answer to Representative Martin, Mr. Lindemer said he felt that the low oil price's effect on increasing economic growth had about run its course. He asked him to keep in mind that the oil prices had dropped several dollars per barrel but the consumer price had fallen to a $1.50 and some prices had not dropped at all. He saw the major triggers in the economy as consumer confidence, interest rates, and, in the developing world, population growth. In answer to Co-chair Pearce's earlier question, Mr. Placke said there were some rumors that Euridio Pera of Venezuela would be selected for the new secretary general. It would be decided in June but his election was likely. His competitor, Iranian minister of oil, did not seem able to gain enough support. Co-chair Pearce thanked Mr. Placke and Mr. Lindemer of the Cambridge Energy Research Associates, Inc. for speaking to the committees. Co-chair Pearce invited Darrel J. Rexwinkel, Commissioner, Department of Revenue, and Dr. Charles Logsdon, Chief Petroleum Economist, Oil and Gas Audit Division, Department of Revenue, to join the members at the table. COMMISSIONER DARREL REXWINKEL said that the revenue forecast would be published by Monday, April 3, 1994. Representative Larson stressed the fact that not having the revenue forecast numbers at this time was making it difficult to work on the budget. Mr. Rexwinkel said he was aware of that but the department had wanted to take into consideration the effect of the OPEC meeting in regard to the forecast. In answer to Senator Rieger, Mr. Rexwinkel said the suggested forecast had been $15.04 or $15.17 per barrel. Representative Martin said that if he was asked to give a forecast, it would be $13.40 a barrel at its highest. In answer to Representative Martin, DR. CHARLES LOGSDON said that production was expected at 1.65 for FY95. Co-chair Pearce announced this would end the joint meeting of the Finance Committees. She called for a recess. End SFC-93 #57, Side 2 Begin SFC-93 #55, Side 2 Recess 10:00am Reconvene 10:22am CS FOR SENATE BILL NO. 190(JUD): An Act relating to income withholding and other methods of enforcement for orders of support; and providing for an effective date. Co-chair Pearce announced that SB 190 was before the committee in the form of version "U". Co-chair Frank MOVED for adoption of CSSB 190(FIN) version "U". No objection being heard, it was ADOPTED. Co-chair Pearce invited Susan Miller, Manager, Special Projects, Alaska Court System, Alaska Court System; Laraine L. Derr, Deputy Commissioner, Treasury, Department of Revenue; and Terry Lauterbach, Legislative Legal Counsel, Division of Legal Services, Legislative Affairs Agency, to join the members at the table. TERRY LAUTERBACH proceeded to read her memo dated March 29, 1994 which made a comparison between CSSB 190(FIN) version "U" with CSSB 190(JUD) (see Attachment B, copy on file in the committee minute book). Senator Rieger asked for an explanation of Section 26. Discussion was had by Senators Rieger, Kelly, and Ms. Lauterbach regarding orders for withholding child support and how an employer could be sure the order was valid. SUSAN MILLER said the court would first serve the child support withholding order by first class mail, and, if withholding was not begun, then it would be served to the employer by certified mail. Co-chair Pearce asked about penalties toward employers if the withholding was not initiated. Ms. Miller said that existing law contained penalties for employers. End SFC-94 #55, Side 2 Begin SFC-94 #, Side 1 Co-chair Pearce said that if an employer would make a mistake the penalty seemed onerous. Ms. Miller said the employer must be liable to either the state or the obligee. Ms. Miller said it was outlined in the federal statutes and she had written for federal clarification. Ms. Lauterbach said that part of the question was whether this liability was in the nature of a fine for not obeying a law (in which the state would collect it), or whether it was the nature of a liability of the party that should have been paid money (which means it would be up to the obligee). Senator Sharp asked if an order specified pay periods or read "until further notice." Ms. Lauterbach said the law required an employer to honor the notice to withhold until they received a notice that the incoming withholding was terminated which should happen when the child support order was satisfied. Senator Sharp said he had knowledge of employers that continued to deduct child support because the agency had failed to notify the employer the order was satisfied. Ms. Lauterbach said there was a section in the statutes (it did not appear in this bill because it remained unchanged) that required the agency to return money that was overpaid. Senator Sharp commented that sometimes the agency took a long time to do that. He went on to lament the fact that the employer would be involved in withholding which added costs to the employer. Discussion continued by Senator Sharp and Ms. Lauterbach regarding the fiscal note and fees charged by the employer and the state. Ms. Lauterbach said she could not explain the fiscal note but there was nothing in the bill that authorized a $10 fee by the state. Co-chair Pearce read from the fiscal note that said the agency would charge a fee. Ms. Lauterbach assumed that the fee would be against the obligee. Co-chair Pearce agreed that to allow the employer to charge $1 fee, and the state $10, seemed inequitable. In answer to Senator Kelly, Ms. Miller said the bill did not authorize a fee but the agency would put it into regulations. One unidentified woman from the agency said she believed there was no existing state regulation but a federal regulation said the agency could effect a fee in non-4D cases. She believed the fee would be contemplated being collected from those people that would use the agency for a bookkeeping, pass-through service for child support payments. Co-chair Pearce asked if the fee was set or could it be changed, and reiterated her concern regarding the employer charging $1 and the agency $10. Senator Sharp said he would like to see an amendment to make the fees the same. Co-chair Pearce said the child should be considered and a cap set on the amount of the fee, since the money was coming directly out of child support money. Ms. Lauterbach said that the agency authority to charge fees was found in AS 25.27.100, and she quoted "the agency may by regulation impose a fee for services provided under this chapter." She said it sounded like the fiscal note was referring to the agency providing the service of sending income withholding orders for which they could impose a fee on the obligee. The agency evidently was considering $10 a month, and whether this was appropriate was subject to legislative discretion. Co-chair Pearce announced that CSSB 190(FIN) version "U" would be HELD in committee in order to pursue answers to these questions. ADJOURNMENT The meeting was adjourned at approximately 11:10 a.m.