SENATE JUDICIARY COMMITTEE April 1, 1996 1:30 p.m. MEMBERS PRESENT Senator Robin Taylor, Chairman Senator Lyda Green, Vice-Chairman Senator Mike Miller Senator Al Adams Senator Johnny Ellis MEMBERS ABSENT None COMMITTEE CALENDAR SENATE JOINT RESOLUTION NO. 40 Relating to extension of the United States Forest Service timber sale contract with the Ketchikan Pulp Company. PREVIOUS SENATE COMMITTEE ACTION SJR 40 - No previous Senate committee action. WITNESS REGISTER Ralph Lewis, President Ketchikan Pulp Company P.O. Box 6600 Ketchikan, AK 99901 POSITION STATEMENT: Supports SJR 40 Diane Mayer Division of Governmental Coordination Office of the Governor P.O. Box 110030 Juneau, AK 99811-0030 POSITION STATEMENT: John Sandor 3311 Foster Ave. Juneau, Alaska 99801 POSITION STATEMENT: Commented on SJR 40 Bill Moran, Jr. First National Bank 646 W 4th Ave. Anchorage, AK POSITION STATEMENT: Supports SJR 40 Jack Phelps Alaska Forest Association 111 Stedman, Suite 200 Ketchikan, AK 99901 POSITION STATEMENT: Supports SJR 40 Bill Brock McDowell Group 416 Harris St. Juneau, AK 99801 POSITION STATEMENT: Discussed the results of a research study he conducted on the forest products industry. John Antonin Southeast Regional Resource Center 210 Ferry Way, Suite 200 Juneau, AK 99801 POSITION STATEMENT: Discussed the results of a survey of timber impacted schools and communities in Southeast Alaska. Mayor Doug Roberts City of Wrangell 205 Brueger St. Wrangell, Alaska POSITION STATEMENT: Supports SJR 40 Sol Atkinson Metlakatla Indian Community Metlakatla, AK POSITION STATEMENT: Supports SJR 40 Mayor Carlton Ketchikan Gateway Borough 344 Front Street Ketchikan, Alaska 99901 POSITION STATEMENT: Supports SJR 40 Wayne Weihing, President Tongass Conservation Society P.O. Box 3377 Ketchikan, AK 99901 POSITION STATEMENT: Opposed to SJR 40 Steve Kallick Alaska Rainforest Campaign 1016 W. 6th Ave., Suite 200 Anchorage, AK 99501 POSITION STATEMENT: Opposed to SJR 40 John Sisk Alaska Environmental Lobby 419 6th Street Juneau, Alaska 99801 POSITION STATEMENT: Opposed to SJR 40 Tina Lindgren Alaska Visitors Association 3201 C Street, #403 Anchorage, AK 99501 POSITION STATEMENT: No position taken on SJR 40 Kate Tesar for Mayor Stanton Alaska Services Group P.O. Bx 22754 Juneau, Alaska 99802 POSITION STATEMENT: Supports SJR 40 ACTION NARRATIVE TAPE 96-31, SIDE A Number 001 CHAIRMAN ROBIN TAYLOR called the Judiciary Committee meeting to order at 1:32 p.m. Also present were Senators Adams, Green, and Miller. The matter before the committee was SJR 40. SJR 40 EXTENSION OF KETCHIKAN PULP CO. CONTRACT  RALPH LEWIS, President of the Ketchikan Pulp Company (KPC), introduced Ernesta Ballard, former EPA Region X Administrator and current consultant to KPC, and Kent Nicholson, timber specialist for KPC. MR. LEWIS discussed his 30 year background with KPC and KPC's history. KPC has been in operation for 41 years, and began with the 1946 Tongass legislation that enabled the U.S. Forest Service to provide 50 year timber sales. In 1948, Puget Sound Pulp and Paper bid on the timber contract, which was accepted, formed a partnership with American Viscose, and built KPC. The first pulp was produced in 1954. KPC was then purchased by Georgia Pacific, and is now owned by Louisiana Pacific. When the contract volume has been met, up to 1,000 people have been employed and up to 1,500 people had direct contact with the timber. The people of Ketchikan have supported, and still support, KPC since its inception. KPC leases the land that houses the Annette sawmill. That lease expires in 1999 but contains three 15 year extension options. KPC provides the only year-round employment in Metlakatla. The Ketchikan sawmill shut down in 1983 but because the harvested logs were smaller, a new sawmill was constructed as the smaller logs were more valuable as sawed logs than pulp. Approximately 15 percent of those logs are exported to Japan, the rest are used for domestic products, primarily as building materials. Rapid fluctuations in the domestic market and a six-week delivery schedule to the lower 48 make that market less attractive than the export market which is better able to absorb their own market fluctuations. The capacity of the pulp mill is 540 tons: KPC averages 500 tons. The product is exported to approximately 20 countries each year and is used to manufacture up to 50 different products. KPC sells to a lot of small rayon mills worldwide. In 41 years of operation, KPC has only experienced a total of six months of market downtime. The mill is in operation seven days per week, 24 hours per day. Number 179 CHAIRMAN TAYLOR asked what percentage of the harvested forest is only fit for pulp production. MR. LEWIS replied it depends on the amount of cedar, but estimated the amount to be between 33 and 50 percent. CHAIRMAN TAYLOR questioned whether there is any higher value that can be added to the low-grade timber. MR. LEWIS stated KPC handles, including chips and the rest of the byproduct, the equivalent of 150 million board feet (MBF), which would otherwise go to waste. It could be exported as chips, or MDF, but MDF would only employ about one-third of the 600 workers who work with the byproduct. CHAIRMAN TAYLOR asked Mr. Lewis why KPC needs the extension that is the subject of SJR 40. MR. LEWIS replied there are eight years left under the existing contract, and the inclination of the Forest Service and some in Washington, D.C. is to cancel the contract; in 1988 the U.S. House actually passed a bill to cancel the contract. KPC needs the assurance that the federal government wants the industry to continue past the year 2004. KPC needs that assurance to make required investments. CHAIRMAN TAYLOR questioned what types of investments KPC is required to make over the next few years. MR. LEWIS answered KPC signed a consent decree that requires up to about $20 million in expenditures of which approximately $10 million has already been spent. That amount does not include going to ECF, or its final goal of TCF. TCF has nothing to do with the consent decree and includes the outfall, secondary treatment plant, and other things. All of the environmental expenditures are not required as part of the consent decree. CHAIRMAN TAYLOR asked what ECF is. MR. LEWIS responded it stands for Elementary Chlorine Free. KPC is currently working with an Austrian outfit named Lensing. Lensing is producing dissolving pulp in its own rayon mill in a much smaller quantity. At present, Lensing is been unable to get a steady quality. In between going to TCF, KPC is going to ECF, or oxygen reliquification, which will remove about 80 percent of the chlorine from the process. CHAIRMAN TAYLOR asked what other expenditures KPC expects to make in the next few years. MR. LEWIS estimated KPC needs to spend a total of $150 to $200 million in the next three to 7 years because the mill is 41 years old and the powerhouse needs to be upgraded to be able to burn different fuels. The powerhouse upgrade will cost between $40 and $50 million. CHAIRMAN TAYLOR questioned how KPC will amortize those investments if the contract is not extended. MR. LEWIS responded KPC could not amortize, and would have to cut back on expenditures and do only those repairs and improvements required by law. KPC could not be a leader in the industry. Investors will not be willing to invest in KPC. In summary, MR. LEWIS said he does not want to be a part of watching something die, which is what will happen if KPC does not get an extended contract. In 1990, when the Tongass Timber Reform Act (TTRA) was enacted, the industry pleaded with the government to provide a long term contract. Without such a contract, it is likely KPC would not be operating today, because it is not likely it would have provided enough timber for KPC, or any other pulp mill, to operate. The Forest Service is required to meet the current contract, and although it is only meeting about two-thirds to three-quarters of the requirement, it is trying. KPC was down 90 days in 1993, and when APC shut down, KPC bought its wood. If APC hadn't sold its wood or would have operated another three to four months, KPC would have been down 130 days. The federal government needs to make a recommitment to the industry which will allow KPC to finish its ECF project and be a leader in the industry. The ECF project is not part of the consent decree, KPC has taken it on voluntarily. That project will cost KPC $35 million, and is expected to be completed by next fall. CHAIRMAN TAYLOR asked why KPC cannot receive adequate timber by purchasing from independent sales. MR. LEWIS responded there is not enough volume. At present, the independent sales program is broke. MR. NICHOLSON added the independent sales for this year will total 97 mbf. The Forest Service has projected independent sales of 200 mbf in 2002, 172 million in 2003, and 207 million in 2004. That volume will not sustain the industry. The Forest Service has no long term sale scheduled for the year 2002. MR. LEWIS explained right now, if KPC could get 192 mbf, it would still need to purchase 40 to 50 mbf. Those logs can be purchased from independents or from Native Corporations. Private land contractors can export logs. Alaska is in a unique position because primary manufacturing must occur in Alaska. Wood from federal lands in Oregon can go to Idaho or anywhere else in the United States. The reason that primary manufacturing was required in Alaska was to help create an infrastructure in the state. Six mills existed in this area at one time. Number 348 SENATOR ELLIS referred to line 22, page 2, of SJR 40 which states the KPC extension is critical to the environmental well being of the Tongass National Forest timber workers. He asked for an explanation of that statement, and to explain KPC's felony conviction for Ward Cove and its EPA ranking among other polluters. MR. LEWIS clarified that statement means in harvesting the Tongass, all fiber, including the lower quality material, will be processed. If that material was used for a chipping operation, that type of operation could be shut down temporarily whenever the market is down. That type of operation does not provide stable employment. Number 373 SENATOR ELLIS noted KPC has a documented track record of environmental violation. He asked if KPC was promising to dramatically improve its track record on environmental issues if it gets a contract extension and to stop commiting violations. MR. LEWIS replied KPC has no excuse for those violations. KPC did not purposely set out to do anything wrong, but it got caught. During the 1980s the amount of capital slowed down, the possibility of employee ownership was being discussed, and other things were going on. Representative Miller from California had a bill that passed the House to cancel the contract and shut KPC down. Living under that kind of terrorism was difficult. KPC kept up with changes in the laws in the 1970s, but the changes moved faster in the 1980s. New laws were passed rapidly, therefore most companies waited until regulations were set in stone, then sat down with EPA to establish a consent decree to determine what environmental requirements needed to be met. KPC is now trying to be a leader, and is not waiting for a consent decree. MR. LEWIS discussed the felony conviction. Ward Cove is stressed, but to what degree no on knows. The sea life has not been affected. In the first 20 years of operation, most of the material went directly into Ward Cove. In the last 20 years, most of that material goes through secondary treatment and has very little impact on Ward Cove. When the secondary treatment plant has to be drained and cleaned, the effluent is put back through the system to try to recover as much of the solid material as possible. The remainder is sent out through the outfall and is tested and measured. According to the permit the effluent was considered a collected solid, and once something is termed as "collected" it cannot be discharged to the bay. KPC misinterpreted the permit, which provides no excuse. The misdemeanor offenses pertained to an upset in the mixing chamber, which was affected by high tides, and overflowed. CHAIRMAN TAYLOR asked Mr. Lewis to explain an upset. MR. LEWIS clarified a process upset can occur when there is a mechanical failure during manufacturing and cannot be corrected until the machinery can be turned off. During the process upset at KPC, the quantity that was discharged was not enough to do damage, but any discharge is illegal. KPC viewed the situation as non-damaging so took no action. KPC no longer addresses such situations that way, because common sense doesn't rule, laws and regulations do. Number 445 SENATOR ELLIS inquired whether Mr. Lewis meant to imply that an industry would not exist at all if the long term contract is not approved. MR. LEWIS replied any pulp mill that has a high capital investment has a wood supply. On the East Coast, many of the wood supply companies have tree farms on private lands but in the West, the amount of land in private hands is not enough to sustain the industry. If the Forest Service is not required to meet a certain volume, it is not likely to do so. It does not make for an attractive proposal for investors and makes competition difficult. CHAIRMAN TAYLOR questioned why, if the free market system works so well, other businesses have not sprung up when the APC contract in Sitka ended three years ago. Number 479 DIANE MAYER, Director of the Division of Governmental Coordination in the Office of the Governor, testified. She read the following letter stating the Administration's position on SJR 40. The Knowles Administration recognizes the important role the Ketchikan Pulp Company plays in the timber industry, including employment in Ketchikan and Southeast Alaska. The responsibility and statutory authority to extend the KPC contract lies with the U.S. Department of Agriculture and Congress. Our Administration is promoting sustainable, responsible economic development of Alaska's natural resources in Alaska. We can do it right. As KPC develops its business plan to present to the U.S. Department of Agriculture for a contract extension, Alaskans will be interested in KPC's commitment to fully address the following: long term jobs for Alaskans; the use of Alaska businesses, both in harvesting and value added processing; provision of a solid tax base for Ketchikan and other Southeast communities; responsible environmental management; participation in and support of the Tongass Land Management planning process that assures sustainable uses of our forest; and consideration of other forest users, including those dependent on timber production, tourism, commercial and sport fishing, seafood processing, mining, subsistence, and personal use. We hope the legislature will address these important matters in its deliberations. We look forward to the Department of Agriculture providing Alaskans the opportunity to review proposals regarding the contract extension. We stand ready to work with Alaskans and KPC to achieve these goals. Number 479 CHAIRMAN TAYLOR asked Ms. Mayer if she supports SJR 40. MS. MAYER responded the position clearly lays out the terms for deliberation that the Administration is looking for consideration of. SENATOR GREEN asked for clarification. MS. MAYER noted the state position lays out terms for consideration by the legislature in developing and passing SJR 40. The Administration looks forward to those types of discussions to bring closure to this important question of contract extension. Number 515 CHAIRMAN TAYLOR questioned whether the Governor's Office will support the resolution contingent upon the six conditions being met. MS. MAYER answered when dialogue occurs to satisfy the terms addressed in the letter, and to consider the other forest users, responsible environmental management, and support of the TLMP in the process, the result could be support of SJR 40. CHAIRMAN TAYLOR stated Congress will be looking both to the Legislature and the Governor as representatives of the people of the state on the very simple question of whether the state supports the extension of the contract and believed an appropriate reply to be yes or no. MS. MAYER believed the distinguishing factor to be the simplicity of the question versus the complexity of the question. The conditions touch upon the complexity of the question. Number 530 JOHN SANDOR, former regional forester, discussed his background as a Forest Service employee and Department of Environmental Conservation Commissioner. He gave the following testimony on his own behalf. SJR 40 does more than extend KPC's contract: it focusses on the need for community stability in Southeast Alaska. There are serious unemployment and dislocation problems throughout Southeast Alaska. SJR 40 requires an investment of $155 million in capital to meet changing environmental quality standards and other associated operating needs. It is reasonable to extend the KPC contract termination date to the extent necessary to amortize this investment. He addressed the conditions that have changed since the long term contracts were awarded in the 1950s. World markets for the dissolving pulp produced by the two pulp mills have dramatically changed. Cellophane and nylon replaced rayon in many manufactured products. Environmental controls have changed to meet higher water and air quality standards. It has long been recognized that it may be desirable to modify or replace one or both long term manufacturing products to produce a more competitive product that could better meet higher environmental quality standards. The possibility of developing some type of fiber product at the Sitka Pulp Mill seemed promising when that mill was facing closure. He was disappointed that opportunity was not more fully explored and open for public discussion. The pulp mills, although antiquated, did achieve the objectives of their time by strengthening the economies of many Southeast communities. They allowed the development of a highway infrastructure on Prince of Wales Island and benefitted the hunting and fishing opportunities. MR. SANDOR made the following recommendations to assure community stability in Southeast Alaska. It is essential that the Legislature, Administration, and communities themselves be partners with the Forest Service in all decision making processes. Community based industries must be sustained by the national forest; its original purpose. Forest planning and project planning must be better coordinated to reduce appeals and lawsuits and the need for perpetual planning. The Department of Agriculture's plan to centralize accountability and decision making in Washington, D.C., must be watched to ensure decision making by the Forest Service is done at the field level. The Forest Service should jointly work with Alaskan communities to meet specific needs of fish and wildlife, and the Forest Service must recognize that the Alaska Department of Fish and Game has that authority. The small business timber sector must have a sustainable level: 100 mbf is reasonable. Incentives should be developed to encourage secondary and value added manufacturing of forest products in Southeast. Congress should consider establishing a task force that would develop recommendations to sustain communities in Southeast Alaska. TAPE 96-31, SIDE B Number 050 MR. SANDOR stated in summary, the proposed extension to amortize the investments is reasonable, but it is absolutely essential that other steps be taken to ensure that all Southeast communities benefit from the Tongass National Forest. BILL MORAN JR., First National Bank, testified from Ketchikan. First National Bank is the only commercial bank headquartered in Southeast Alaska, and only operates in Southeast Alaska. It has about $85 million worth of direct loans in its loan portfolio and services an additional $85 million in real estate loans for secondary markets; Alaska Housing Finance being one. First National has been rated as one of the two top banks in the state for small business lending and received an outstanding rating from the FDIC. He provided that information to demonstrate the bank's knowledge of the Southeast Alaska market, and its responsible corporate citizenship. The bank was incorporated in 1924, and is knowledgeable about the impacts of closing mills in Southeast Alaska. Number 526 CHAIRMAN TAYLOR asked if bankers find it prudent to make loans to KPC if it must rely on the Forest Service's independent timber sale program to supply its timber needs. MR. MORAN responded not only would banks be reluctant to lend in that situation, but businesses would be reluctant to borrow if they cannot plan an investment. He likened the depressing effect it has on the economy to Juneau's experience with the uncertainty of the capitol move. Private residential construction virtually stops, and a good portion of the commercial activity hibernates, waiting to see what will happen. If it was certain that the mill was going to close after the contract ended in 2004, the economy would be even more seriously depressed. CHAIRMAN TAYLOR referred to the closure of the Wrangell mill two years ago, and questioned whether many loan requests have been made to start up small operations, such as saw mills. MR. MORAN replied the bank has not had many requests, and consequently has taken a pro-active step by sponsoring a variety of programs in an attempt to get independent development going, but has not been successful. Wrangell needs a primary employer with access to outside capital and development. CHAIRMAN TAYLOR asked Mr. Moran if he supports the contract extension for KPC. MR. MORAN said he did. He added he believes, in his personal and professional experience, that KPC has been a responsible environmental citizen. Number 491 JACK PHELPS, Alaska Forest Association, introduced Brian Brown, Chief Logging Engineer for Silver Bay Logging, a member company, and gave the following testimony. SJR 40 deals with the type of issue the Alaska Forest Association would not normally take a position on, because it does not get involved in the contract matters of member companies. He directed his testimony to the economic and technical issues as to why it is important for KPC to remain a viable forest products company. This industry, due to government policies and environmental extremism, has lost 42 percent of its workforce since 1990. Two years ago Alaska had two pulp mills to process the huge volume of utility logs available in the Tongass National Forest; today there is only one such mill. The importance of KPC to Southeast Alaska's economy, and to the forest industry in this state, cannot be overemphasized. The need for a stable, year-round employment base in Southeast Alaska was recognized after WWII and lead to the establishment of the long term contracts in the 1950s. KPC is Southeast Alaska's largest industrial employer. KPC's presence in the market helps support the smaller mills in the region by building and maintaining infrastructure, by purchasing power and other utilities, and by creating downstream employment in the wood products industry and service industry. The pulp mill provides local, value added employment, based on the use of a local, renewable, natural resource. KPC provides 1,000 jobs which are not only important for the families that depend upon them, but for the entire economy of the region. In sustaining a forest industry in any forest, it is always easy to sell the high end logs: finding a market for the low end timber and byproducts is another matter. The pulp mill provides the opportunity to utilize those products here. In summary, the Tongass National Forest is more than capable of sustaining the last remaining pulp mill in Alaska. Furthermore, the forest industry, as a whole, needs that mill to operate at capacity. In a healthy forest industry, two or more mills could be sustained. Number 441 CHAIRMAN TAYLOR asked if he and Mr. Brown supported SJR 40. They replied affirmatively. BILL BROCK, analyst for the McDowell Group, discussed the results of a research study he conducted on the forest products industry over the past 18 months. The following information indicates what has happened in Southeast Alaska due to declines in timber harvesting. Between 1990 and 1994 the U.S. Forest Service data indicates a 40 percent decrease in Tongass timber industry employment which equates to 1700 jobs. To determine the impact of that decrease, Southeast was divided into three separate economies: Juneau; other urban, which includes Sitka, Wrangell, Ketchikan, Petersburg, and Haines; and the rural economies. Juneau's economy has experienced a seven percent annual increase between 1990 and 1994 and has gained over 1,000 jobs over the last four years in primarily the retail and service sectors. Southeast Alaska's other urban economy has experienced a four percent decline in employment since 1990 for a net loss of 640 jobs. Collectively they have experienced a 10 percent decline in real payroll since 1990 which equates to $40 million. The mill's closure in Sitka cost 400 jobs and $19 million in payroll. In Sitka in 1994, employment averaged about 3,875 jobs, an approximate 10 percent decline from 1993. Income in the community between 1993 and 1994 fell from $115 million to $100 million. Wrangell has also been hit hard by the Tongass timber harvest decline. The closure of APC's mills cost the community 225 jobs which equated to 20 percent of the entire Wrangell work force. The saw mill was the community's largest employer and largest contributor to property tax revenue. Approximately 20 percent of city revenues came from the mill. Rural Southeast Alaska has possibly been the hardest hit. There has been a four percent decline in employment since 1990. Real payroll has declined by 15 percent, almost $20 million. Personal income has declined by four percent, and transfer payments have increased by 16 percent between 1990 and 1993. MR. BROCK described what is at stake if Tongass timber harvesting decline continues. If timber declines were to force the closure of KPC, it would cost the community of Ketchikan 700 jobs and $45 million in annual payroll, one-fifth of Ketchikan's economic base. A total of 1,000 jobs throughout the region, including 700 in Sitka, and 700 indirect jobs, could be lost if the mill was closed. Other sawmills in Klawock, Metlakatla and Ketchikan would likely be adversely impacted, as well as logging companies. In addition, other long term economic impacts would occur. Fishing and tourism would become the region's primary employer: both industries are seasonal. While there has been some overall job growth in the region, most are part-time and lower paying jobs in the service sector industries. Continued declines in the timber harvest will likely continue the economic fallout that the region has been experiencing since 1990. JOHN ANTONIN, Executive Director of the Southeast Regional Resource Center, discussed a survey conducted by SERRC of timber impacted schools and communities in Southeast Alaska. The survey was completed at the request of a number of Southeast school districts and had two purposes: to determine the impact of the reduced timber harvest and mill closures on children and families in Southeast Alaska; and to recommend educational programs and services necessary to remediate the impacts. The recommendations were taken to Alaska's congressional delegation, but have not been acted upon to date. The Southeast REAA completely removed facilities when logging camps moved out which was a direct cost to the school district. The reduction in jobs in Wrangell and Prince of Wales has had a direct effect on the number of children on the subsidized lunch program, receiving Aid to Dependent Children funds, and other social conditions. When a community loses an economic base, children, communities, and schools suffer. As the state reduces school funding, school districts will have to look to local communities to pick up the costs. Those communities need a strong industry. CHAIRMAN TAYLOR asked Mr. Antonin to give Ms. Mayer a copy of the report to be delivered to the Governor, because families, children, and schools were omitted from the six conditions. Number 320 DOUG ROBERTS, Mayor of Wrangell, testified that Wrangell's unemployment rate is about 30 percent. Wrangell was proud to be a city that manufactured goods: timber and fish products. It no longer manufactures very much timber. He supports KPC and small businesses that will provide jobs. He could not speak to the contract extension, but stated his support of the industry. Wrangell has changed from a fishing town to a timber town to a government town. The most dramatic change is in the manufacturing and government sectors of the economic base. In 1994 manufacturing jobs comprised 29 percent of the available jobs, today that number is 11.4 percent. Likewise, government jobs comprise 47.4 of the economic base compared to 32 percent two years ago. Wrangell was proud to be the timber capital of Alaska; now it cannot provide 25,000 board feet to operate. The state was aware Wrangell needed that much timber last year. The timber is out there, however Wrangell does not seem to get any of it and sawmills are closing. Former specialized mill workers are being retrained to be computer technicians, barbers, etc. Southeast Alaska needs mining, timber, and fisheries. Wrangell has tried to attract small businesses but is isolated so has been unsuccessful. CHAIRMAN TAYLOR asked what happened to the 19 jobs at the downtown restaurant in Wrangell. MAYOR ROBERTS answered the restaurant closed yesterday and 20 jobs were lost. Those 20 restaurant workers will have to be retrained and leave Wrangell. Many need GEDs. Number 221 SOL ATKINSON testified on behalf of the Metlakatla Indian Community in support of SJR 40 as follows. It is time the Legislature and Governor's Office recognized that something must be done for the timber dependent communities in Southeast Alaska that are being ignored in the rush to save the environment. Metlakatla supports sound environmental policy but also supports jobs, people, and families, and applauds this effort to move Congress to do something to bring some stability to the economy. Metlakatla is a federally recognized Indian tribe with a population of about 2,000 people. It is a timber dependent community with an unemployment rate of over 50 percent. A stable timber supply is essential to its welfare. In the last few years, in an effort to improve its economic situation, Metlakatla successfully established a Small Business Administration timber sale purchase program and started a small sawmill to provide jobs and revenues. The mill has operated profitably for about three years and provides between 20 to 40 jobs. Metlakatla also depends on the lease of its big mill to KPC, for 100 jobs plus the lease revenues. Metlakatla has become a timber dependent community; its new economic program is now threatened by lack of timber, which is why it supports SJR 40. Under ordinary circumstances, Metlakatla would not support a system that singles out one business for the benefit of the public's forest. It would rather encourage the free market system so that all timber-related businesses could compete for timber and seek the markets for logs and timber products that would be most economically beneficial. It does not see any alternative but to encourage the extension of the long term contract for KPC. It has made the capital investments that justify an assurance that it will have a timber supply. It provides jobs and other timber operators with markets for logs. In a perfect world, all timber operators would compete for a steady and reasonable supply of timber from the vast resources of the Tongass National Forest. Natural market forces would separate the good operators from the bad, and a stable, reliable, timber dependent economy would evolve. Operators could plan for appropriate capital investments or planned improvements and marketing expenses. Reasonable environmental protections would be a cost of doing business. Under the present conditions however, with environmental preservationists protesting the harvest of every tree and with a Forest Service unwilling or unable to overcome legal bureaucratic inertia, few alternatives are left. MR. ATKINSON continued. A few weeks ago, the head of the Forest Service said a stable timber supply from the forests of Southeast Alaska is impossible. One thing is certain, small independent operators cannot count on any supply and without that fundamental variable in the marketing equation, they must support extraordinary measures that are essential to their survival. The extension of the long term contract for KPC is one of those measures. The rest of us who would like to be able to compete for timber, if it were available, simply cannot risk losing the last strong economic force in our industry. If the long term contract for KPC is not extended, the last years of the timber industry in Southeast are in sight. Metlakatla's economic history is rooted in the seafood industry, but it does not provide the revenue Metlakatla formerly enjoyed. Its cannery stopped production on pinks before last season because it is no longer economical. The potential for tourism exists, but Metlakatla has not benefitted at this time, and needs something to depend on year-round. Metlakatla believes Southeast can sustain the timber supply without permanent harm to the environment and holds the most potential for long term economic stability. Number 111 MAYOR CARLTON, Ketchikan Gateway Borough, testified in support of SJR 40. He represents 15,078 people, and asked committee members to consider the proportional amount of people in opposition to SJR 40. On March 14 the Assembly approved a letter he sent to Governor Knowles asking for: support of the amendment sponsored by Senator Stevens to resolve the AWARTA lawsuit; protection of the compromise timber base established by the TTRA in 1990; and, most importantly, support of a 15 year plus extension of a revised KPC contract. To date, he has not received a reply. The Assembly also passed a resolution in support of Representative Young's HB 2413, turning the Tongass over to the State. On March 20 and 21, five people from Ketchikan travelled to Washington, D.C. to talk with Alaska's congressional delegation, John Katz, and Dave Unger, the Associate Chief of the U.S. Forest Service about the concerns he addressed to Governor Knowles. A shutdown of KPC will have statewide impact. Spouse abuse and alcohol consumption will increase, as it has in Sitka and Wrangell, and taxes will increase. Stumpage fees help the boroughs throughout the state. With less stumpage fees, the Legislature will have to either raise taxes or dip into the Permanent Fund. The Southeast Conference has a contract study on the timber impact of all Southeast communities, which should be completed soon. Recently the Ketchikan Gateway Borough had a timber contract with Sealaska. The contract contained a caveat of the $200 per thousand feet discount if any of the timber was locally processed. Ketchikan needs help from the Governor and Legislature on this issue. He hoped the issue does not become a political one. TAPE 96-32, SIDE A Number 000 KATE TESAR read the following statement for Mayor Stanton of Ketchikan. I wholeheartedly support the resolution, and as you know, Mr. Chairman, my personal life has been very much determined by the establishment of this, the first year-round industry within the State of Alaska. My husband and I moved to Ketchikan 42 years ago because of his employment as a chemical engineer with the Ketchikan Pulp Company. We raised our family in Ketchikan, supported by one stable, well paying job. We brought property and built a house. My husband was promoted and our kids graduated from Ketchikan High School, went away to college, earned their college money by working at Ketchikan Pulp Company each summer. Our family's story, and many like it, would not have been possible in Ketchikan without the long term contract between KPC and the U.S. Forest Service. The early capital investment by Puget Sound Pulp and Timber Company and FMC would not have been made unless they had the security promised within the contract. Year-round jobs and the stability, which is necessary for families and communities to survive, is as necessary today as it was when the strategy was first developed in the 1950's, and long term stability is as important now for KPC as it ever was. If KPC is going to upgrade its facilities to ensure that it is a better neighbor and to remain competitive in a world pulp market then it needs to know that a stable timber supply will be available in the future. The community of Ketchikan has been involved in intensive economic development studies and discussion during the last three years. The 2004 information was developed with wide representation from the community. The statistical and consensus information is readily available from the city, the borough, or the University of Alaska Southeast. Our conclusions were, and are, that the loss of a fully operating pulp mill at Ward Cove, and its inter-related sawmills and wood operations in Southeast Alaska would cause severe economic impacts and would probably cause devastating social consequences as well. We are already seeing evidence of these impacts within the community, due to the fact that there are fewer jobs now and there is considerably less money circulating than there was just four to five years ago. Finally Mr. Chairman, I believe we should send copies of the adopted resolution to all the members of the U.S. Congress, not just the leadership and our own delegation. Many members of Congress and people in the other 49 states may not be aware that there is little other timber available here except that in the National Forest. I would also stress that Ketchikan Pulp is a value-added product. KPC and its related enterprises not only utilize the whole log, but also the trash and scraps that otherwise just rot or burn. This is a very efficient use of a renewable resource. Thank you very much for allowing me to represent the citizens of Ketchikan in voicing our support of this resolution which sets out how essential the operation of KPC is to the continuing economic and social wellbeing of our families and community. Number 078 WAYNE WEIHING, President of Tongass Conservation Society, a Southeast Alaska Conservation Council board member, a 28 year resident of Ketchikan, and a 21 year former employee of KPC, spoke in opposition to a 15 year extension. In 1976 and 1977 the same tactic of threatening a mill shutdown was used, but to a different audience. KPC is promoting economic fear and insecurity in Ketchikan which is unfounded. He gave the following examples of KPC's earlier attempts to promote fear. In 1973, following the first attempts to implement basic environmental impact statement requirements, C.L. Cloudy of the Alaska Loggers warned that requirements would cause complete mill shutdowns and shutdowns of the remaining sawmills in Southeast Alaska (Ketchikan Daily News, April 19, 1973). On May 4, 1976, the Ketchikan Daily News headline screamed KPC will close July 1, 1977. As the paper explained the next day, the announcement wasn't news, it was part of a publicity stunt. The paper then criticized the pulpmill for issuing false alarms one week before EPA hearings, and shortly before employee negotiations were to start. One editorial concluded that KPC was crying wolf and playing with the faith of thousands of people. In 1984, the comptroller, then later president, Martin Peele claimed if the Forest Service didn't reduce the price of timber in larger clearcuts, they were going to pack it up and leave (Juneau Empire, March 29, 1984). In 1992, EPA proposed much tighter controls on pollution for KPC's pulpmill. KPC's president, Martin Peele, claimed the new pollution controls would seriously threaten the survival of the mill, or any mill, anywhere (Ketchikan Daily News, April 17, 1992). On June 26, 1995, the Ketchikan Daily News announced that KPC would close its Ward Cove sawmill for an indefinite period, starting Friday, because it was running out of timber sold by the U.S. Forest Service. On the same day, the Ketchikan Daily News contained an ad paid for by KPC which offered to sell approximately 3,000 board feet of red cedar, and 2,000 board feet of yellow cedar, during their third quarter of '95. The decision to close the mill was a business decision driven by pulp prices that had more than doubled in 1994 and were then near the highest price ever. While pulp prices were exploding, the average market for sawed timber was down about 33 percent. MR. WEIHING discussed worker and labor issues. In 1984, KPC terminated the labor agreement with the pulp workers and implemented an offer that included huge wage cuts. Today the pulp workers still don't have a contract, and are working for less wages than they made in 1984. The workers have suffered a huge economic hardship, while KPC made large profits. The workers' paychecks have a direct impact on the economy, as those people live and work in the community, and buy groceries and houses for their families. In 1984, before the huge pay cuts were taken, a journeyman was earning $20.05 per hour. After the six month shutdown, the workers were offered $12 per hour. Today, after 12 years, those workers are still not earning the $20.05 they earned in 1984. KPC has a history of noncompliance with air and water standards, and continues to operate in violation of their permits. KPC has a history of corporate greed and not being responsible to the community or the workers in the community. KPC should not be granted a 50 year timber contracted, it is a scare tactic and economic blackmail. KPC has used this tactic in the past and is doing it again today. People are buying into a panic situation that was not justified in the past, and is not justified now. Number 171 CHAIRMAN TAYLOR asked Mr. Weihing if he believed the mill would continue to operate in the future. MR. WEIHING replied he hopes so and is very concerned about Ketchikan's economy, but believes the mill needs to comply with pollution controls and provide better contracts with its workers. As the union representative, he found KPC would not give the workers contracts; it would bargain, but not in good faith. CHAIRMAN TAYLOR asked Mr. Weihing if he believed the mill could continue to operate after there is no longer a 50 year contract. MR. WEIHLING responded he believes it can. He suggested re-logging some of the second growth areas. He expressed his concern about the fear, and doom and gloom tactic being used to promote an extended contract. CHAIRMAN TAYLOR commented part of that concern is generated by the fact that Sitka's mill closed over two years ago. That mill was more modern than KPC. He questioned why no one is operating that mill now if pulp prices are high. He noted brand new pulp mills are being built in other countries and are operating at a profit. Without a commitment of volume, there is no guarantee that economy can be sustained. No one is concerned about a doom and gloom economy over the next five or six years if a commitment is made by the Forest Service to provide timber to sustain that economy. Number 222 MR. WEIHING agreed it is necessary to look now at the long term, but it is important to not be mislead by a gloom and doom scenario. STEVE KALLICK, director of the Alaska Rainforest Campaign, a coalition of Alaska and national conservation organizations, stated his organization does not oppose all logging, or clearcutting on national Forest Service lands, but supports balanced multiple use of public lands and is looking for locally based solutions for resource management challenges. SJR 40 is based on incorrect assumptions which lead to an incorrect conclusion. The first assumption is that the Forest Service has failed to make adequate timber available to give KPC security under the current contract, therefore the extension is necessary. If the current contract is inadequate to provide a timber supply, how can the extension, which takes effect in eight years, provide any more security? If the contract itself is inadequate, the extension itself would also be inadequate. To verify whether the terms of the contract are being met, he called the Forest Service and was told KPC has, on hand, approximately 175 mbf of timber at this time, which is nearly a one year supply. KPC may want more than that, but cannot say the contract terms are not being met. A second assumption is that economic common sense dictates that Louisiana Pacific cannot make this level of investment for mill improvements without a contract extension. Essentially this extension asks the citizens to trust the company and the government to work out a fair deal for us in secret. A proposal to do this with other industries would be highly criticized and rightly so. The same standards of disclosure and public scrutiny here need to be applied to this case. We know that Louisiana Pacific had over $3 billion is sales in 1994 and profits of $350 million. According to the Ketchikan Daily News, Louisiana Pacific is currently building 5 new timber mills in Venezuela and without long term contracts, Louisiana Pacific has converted mills in British Columbia and California to a chlorine free, environmentally preferable process. The company clearly has resources to invest without a long term contract extension. While we have the value of the investments LP seeks to amortize in Ketchikan, which is $155 million, we don't know what they make on the existing contract each year, nor do we know the value of the contract's remaining eight years, and we also don't know the value of the contract extension on the open market which could be as high as several billion dollars. It's hard to know because it is so unique. We need to know the pros and cons of this proposal before the cost of the investment versus the remaining eight years of the contract or the extension can be evaluated. Before going any further with SJR 40, we should ask LP to open their books for the Ketchikan mill and show us some hard numbers. Finally, the entire onslaught of the Tongass timber bill that Congress has before it is embodied in the assumption that the only way to maintain timber jobs in Southeast is to maintain the existing industry and to increase the timber supply. We all know the industry and the economy are not static and you cannot succeed by trying to stop progress and maintain the existing industry. The only way to maintain jobs in any industry is to modernize and innovate, but that cannot be done if all efforts go into the protection of the status quo. Value added products are a great improvement. Everyone in Southeast realizes we have to make new products and add value to the timber we cut. The key to stability will not be provided by mandating or forcing a timber supply from the Tongass if it's not economically, environmentally, or politically sustainable. The current bills in Congress that attempt to do that have run into opposition, both nationally and in Alaska. This proposal will make it worse, unless it is handled right and many other variables are considered. You just can't vanquish the opposition on either side. The Sierra Club can't dominate the industry and vice versa. Stability can only be achieved by a local consensus. Alaskans all have to work together to establish the level of logging and the land use that we can all support and live with. He agreed with many of Mr. Sandor's points and believes we need to take the time over the next eight years to consider all of the resource needs and consider what kind of product and plants we can have in Southeast Alaska, and to find solutions that work for all of us so that we won't have political winds shifting and creating instability. Number 310 CHAIRMAN TAYLOR asked if the Alaska Rainforest Campaign sent out fundraising letters requesting money from people and claiming the organization did everything it could to cause the cancellation of the APC long term contract in Sitka. MR. KALLICK answered the Alaska Rainforest Campaign did not, and believed Senator Taylor may have been referring to a fundraising appeal by the Sierra Club Legal Defense Fund. He did not agree with Senator Taylor's characterization of the letter. JOHN SISK discussed his background, and endorsed the positions of the Southeast Alaska Conservation Council and the Alaska Environmental Lobby with regard to SJR 40. He shared the following personal concerns and recommendations with regard to the contract, economy and the Tongass National Forest. Alaska conservationists care deeply about the people, communities and forests of Southeast. SJR 40 is the wrong move for the Legislature to make; this is the wrong time for the Legislature to make this kind of endorsement to any aspect of our timber industry. We have eight years to look at the KPC situation and need more specific information before committing the Tongass to KPC or to anybody else through the year 2019. KPC's parent company is in the midst of a major management change. It has had some real problems with leadership and performance during the last few years, and it is taking action to address those. It would be wise for Alaskans to follow LP's lead and do our part of the job by looking down the road to determine what kind of timber industry is most desirable in Ketchikan and in Southeast, and then determine how to get there. To move forward and extend the contract now would be to put the cart in front of the horse. He suggested completing the revision of the Tongass Land Management Plan. In May of 1996 there will be new information and a whole round of local community round tables addressing these very topics, among others. There will be a serious attempt to figure out how a long term timber supply is going to balance out with our other industries; other uses of the forest. It might be helpful to identify a modest but significant timber supply level that most interests can either live with or can support. That might become a base timber supply that an investor could bank on. Beyond that level, there may be less than consensus and increasing risk, but the base level would be reliable. Unfortunately the Hickel Administration advocated the 580 mbf cut levels which polarized everyone, and tended to engender opposition to the entire Tongass timber program, making almost every sale uncertain and challenged, even when there might be some supply level that folks could live with. Second, we need to clarify the landless Natives issue and get a ballpark idea of how much Tongass land, if any, is likely to be transferred to private Native corporation ownership because this could become a significant component of regional timber supply, and if it happens, will affect the sustainable cut from the Tongass. We need to take the time to look at what criteria should apply to our long term sustainable timber industry. Value added will work, we can saw a much larger proportion of our Tongass wood than we've ever been able to as a result of technology changes, market changes, and labor cost differentials. Over the long haul, we need to determine: whether we need as big a fiber plant as we have now; whether it should be dissolving pulp; how to capture the value; how to saw as much wood as possible, even if it has to be re-manufactured; and come up with a sound strategy of what to do with the cull and residual wood. That is likely to be very different in the 21st century. We need to be market driven and to look at an integrated set of sources of saw log supply. The Tongass can't provide all of this. There will be private lands, state lands, the whole Gulf coast is out there. Unfortunately logs go back and forth in Dixon Entrance between here and British Columbia; that situation needs to be ironed out. If stumpage prices were not subsidized on national forest land, there would be more incentive for private logs to go into sawmills and fiber and other kinds of manufacturing. One basic criteria that conservationists feel strongly about is that we should avoid sudden changes that are going to displace workers and hurt communities. That's in nobody's interest: not the environment, not the community, not the workers. Where changes are desirable, or if it turns out that some are unavoidable due to market conditions or resource constraints, we need to develop sound transition plans that support the communities. There are a lot of questions about what the supply level should be. He agrees with Mr. Sandor's statement that there are obligations from the national forest that have to be met: multiple use, sustained yield, protection of fish and wildlife, etc. It is too early to tell whether an extended contract is going to be in the best interest of the region, or whether it is going to be something KPC or LP ultimately decides it wants to do. The resolution is premature. TINA LUNDGREN, Alaska Visitors Association, stated she was not testifying to suggest that the specific contract for KPC should be extended, but to point out that tourism and the timber industry are not mutually exclusive. The AVA has long recognized that Alaska's economy is supported by a multitude of industries from petroleum to mining, fishing, timber, and tourism. AVA recognizes that Alaska needs a diversified economy and healthy basic industries upon which so many of the supporting jobs rely. AVA endorses multiple use of the forest. Timber harvesting and tourism have, and can, co-exist within the large and diversified rich resources of the forest. In some cases, access and visitor activities use roads, docks and other facilities initially constructed for the timber industry. The AVA knows timber is required for hotels and other construction, but at the same time AVA requires wild spaces with no development, so it is extremely aware of the need of both uses. AVA is working with the Forest Service to identify areas where potential conflicts may exist. AVA shares some common concerns with SJR 40. Number one is the need for businesses to be able to plan ahead in order to justify capital investments. Most businesses have this problem and it's particularly true of businesses in the Tongass. Access to public lands is the second concern as there is tremendous pressure to further restrict access to public lands for commercial tourism as well as for other commercial uses of all types. AVA realizes that both tourism and the forest products industry in Alaska are renewable, sustainable, regulated, and compatible with the potential of the environment, if conducted in a responsible manner. AVA looks forward to working with the timber industry, Legislature and congressional delegation, as well as the Forest Service, to help alleviate the uncertainties that the businesses that rely on the forest are facing. DICK KOOSE, Chairperson of the Ketchikan Chamber of Commerce Timber Issues Committee, testified. The Ketchikan Chamber of Commerce consists of approximately 400 businesses and individual members representing over 4,000 jobs. Its members represent the three primary industries in Ketchikan: timber, fishing and tourism. There is no single issue of greater importance to its members than a strong economy, and there is no greater threat to its economy than a reduction of the timber industry in Ketchikan and Southeast Alaska. Each year it polls members to determine where to focus its efforts. Its number one issue continues to be to maintain a strong timber industry. The Greater Ketchikan Chamber of Commerce supports a 15 year extension of the KPC timber sale contract. KPC has initiated a $200 million investment program to operate facilities to remain competitive in the world pulp market and to meet new and ever-changing environmental requirements. For any business to commit to an investment of this size, it must be reasonably assured the raw material supply will be available. The long term timber sales contract provides that assurance. KPC's assessed value equals 8.6 percent of the Ketchikan Borough assessed value for 1995 or $78.9 million. KPC property taxes to the Ketchikan Borough for 1995 amounted to $675,000. KPC's payroll, with benefits, for 1995 was $53.6 million. KPC's total employees in March of 1995 was 670. For each employee for a major industry like KPC there are three additional jobs in the service and supply sectors and the income for the indirect jobs is four times the payroll. If KPC ceases operations in Ketchikan, other businesses will have to close; about one-third of the jobs in the community will disappear. KPC has been, and will continue to be, a responsible citizen in the community. Harvesting enough timber from the national forest lands to sustain the timber industry in Southeast Alaska is not an environmental, conservation, or scientific issue; it is an issue of personal philosophy and politics. The Ketchikan Chamber of Commerce has initiated a petition to Governor Knowles requesting his support of the KPC contract extension. Over 1600 names have been collected in three and one-half days of effort in Ketchikan. The Ketchikan Chamber of Commerce supports and urges the committee's approval of SJR 40. CHAIRMAN TAYLOR asked if there were any other witnesses signed up to testify. There were none. SENATOR MILLER moved the proposed committee substitute. SENATOR ELLIS objected and asked for an explanation of the proposed committee substitute. CHAIRMAN TAYLOR clarified the proposed committee substitute goes into specific detail concerning the U.S. Forest Service and the long-term commitments made under TTRA. It actually sets a 420 mbf cut requirement, approved by the Forest Service as Alternative P in 1992, after 12 years of TLMP hearings. SENATOR ELLIS noted the proposed committee substitute looked like a fax, and did not appear to be in the format used by legislative drafters. CHAIRMAN TAYLOR explained it is not in typical legislative drafting format because of insufficient time. SENATOR ELLIS asked where the proposed committee substitute originated. CHAIRMAN TAYLOR answered it was not drafted by Legal Services, it was drafted, in part, by staff and others who have been circulating various ideas for some time on this issue. SENATOR ELLIS asked who it was faxed to. CHUCK ACHBERGER, committee aide, replied it was faxed to him this morning from Jim Clark, an attorney. CHAIRMAN TAYLOR asked if there was further objection to the motion to adopt the proposed committee substitute for SJR 40. There being no further objection, the motion carried. SENATOR ELLIS stated he understood that testimony taken today was by invitation only, but the committee would provide another opportunity to take additional testimony from those not invited. CHAIRMAN TAYLOR commented he started it off to get the first series out of the way with invitation only testimony. He assumed anyone who wanted to testify would show up and do so. He added the House is scheduled to hold two days of hearings beginning tomorrow. SENATOR ELLIS pointed out he was under the impression that today was an invitation only hearing, and the normal course of public testimony would occur at a different time. CHAIRMAN TAYLOR responded he had planned to take all of the testimony he could today and move SJR 40 on. SENATOR ELLIS asked if today's public hearing in the Senate Judiciary Committee was advertised as invitation only testimony. CHAIRMAN TAYLOR said it was. SENATOR ELLIS felt that discouraged anyone else from attending who was not on the invitation list. MR. ACHBERGER added it was explained in the invitation that public testimony would be taken beginning tomorrow for two days, in the House. SENATOR ELLIS asked how people were notified, and whether it was posted in the Journal. MR. ACHBERGER answered he notified people who asked to testify or called for information on the bill. He noted the House has published its hearing schedule. SENATOR MILLER moved SJR 40 as amended out of committee with individual recommendations. SENATOR ELLIS objected. The motion carried with Senators Green, Taylor, and Miller voting "yea," and Senator Ellis voting "nay." CHAIRMAN TAYLOR adjourned the meeting at 3:44 p.m.