JOINT SPECIAL COMMITTEE ON MERGERS Anchorage, Alaska July 28, 1999 1:30 p.m. MEMBERS PRESENT Senator Rick Halford, Chair Representative Brian Porter Representative Beth Kerttula Representative Jim Whitaker MEMBERS ABSENT Senator Drue Pearce Senator Johnny Ellis Representative Joe Green, Vice-Chair COMMITTEE CALENDAR British Petroleum-ARCO Merger WITNESS REGISTER WILLIAM BAER, Director Bureau of Competition Federal Trade Commission GUS FLIAKOS, Retired Energy Analyst Merrill Lynch BILL BRITT, Pipeline Coordinator Department of Natural Resources 411 West 4th Avenue, Suite 2C Anchorage, Alaska 99501-2343 FLOYD HEIMBUCH 240 Saratoga Avenue Anchorage, Alaska 99517 CHRISTY McGRAW, Director BACKBONE-Standing Up for Alaska's Future 5412 West Dimond #4 Anchorage, AK 99515 STEVE CONN, Executive Director Alaska Public Interest Research Group PO Box 101093 Anchorage, AK 99503 HAROLD HEINZE, 30 year Alaskan resident 1336 Saubbach Circle Anchorage, Alaska 99508 VIC FISCHER Anchorage, Alaska BARBARA WILLIAMS, Alaska Injured Workers Alliance 603 West 18th Anchorage, Alaska 99503 RICHARD FINEBERG PO Box 416 Ester, AK 99725 TOM LAKOSH PO Box 100648 Anchorage, Alaska 99510 ACTION NARRATIVE TAPE 99-3, SIDE A Number 001 CHAIRMAN HALFORD called the Joint Special Committee on Mergers meeting to order at 1:30 p.m. WILLIAM BAER, Director, Bureau of Competition, Federal Trade Commission (FTC), specified that the views he will provide today are his own and are not necessarily the views of the FTC or any individual commissioner. He also noted that the FTC is under strict confidentiality constraints as law enforcement officials. He explained that the law does not allow him to disclose the details of the information of the investigation, the information being gathered, and the individuals spoken to. Mr. Baer acknowledged the help this investigation has received from the joint committee and the staff from the Governor's task force. He noted the various meetings he has attended regarding this merger. MR. BAER explained the process followed by the FTC when investigating a merger such as the BP-Amoco ARCO merger. Under the Pre-Merger Notification Act (Hart Scott Rodino), parties such as BP and ARCO are required to file a detailed pre-merger filing with the FTC and the Justice Department. The filing explains the deal and provides basic background into areas in which both companies compete. Annually, about 4,800 such filings are received. According to statute, parties must wait at least 30 days before consummating the transaction. If the FTC determines there are serious competitive issues, the FTC is allowed to authorize a second request. The second request demands documents and information enabling the FTC staff to determine whether a particular transaction is problematic. After the companies comply with the second request, the FTC has 20 days to determine whether to go to court to block the merger. If the FTC does not decide to go to court, the companies would, after the expiration of the 20 days, be free to close on the transaction. With regard to the question of when the FTC will make such decisions, that is better asked to the parties who are in the position to announce when they will provide the FTC with the information requested. MR. BAER informed the committee that, in any merger investigation, the FTC spends considerable time gathering information, data, documents, and speaking to interested parties. Company documents are reviewed for competitive concerns. He noted that in issuing a second request, the FTC identifies the specific areas where it is thought that the merger may raise antitrust issues. Depositions and investigational hearings often occur. As the joint committee and the Attorney General did, the FTC hires experts in the industry in order to work through the areas of concern. When the parties have complied with the information sought, the investigating staff makes a recommendation to the commission, who then makes the judgement regarding what to do. Mr. Baer pointed out that the recommendation can take various forms such as to move to court to block a transaction entirely, which only occurs in one or two out of 100 investigations. More often, when antitrust concerns are identified, a dialogue ensues with the parties in an attempt to arrive at a settlement agreement. If the staff reaches agreement with the companies, the staff would recommend that the commission accept the settlement agreement. He noted that a settlement scenario often occurs when the deal itself is not fundamentally flawed, but there are some discreet markets which can be fixed through a divestiture arrangement. There are also cases in which no problems are found. MR. BAER commented that the FTC has spent many years investigating oil mergers. The last wave of mergers was in the early 1980s during which the FTC was involved in investigating mergers involving Chevron and Gulf, Sinclair and Mobile Marathon, Sun Atlantic and Pacific Resources. More recently, there has been a second major wave of mergers involving Shell and Texaco, as well as BP and Amoco. Both of those two mergers resulted in consent agreements requiring some substantial divestitures where competitive problems were identified. MR. BAER turned to the BP-Amoco ARCO merger. He said that one level of concern is likely to be the impact a major oil company merger would have on exploration and production. He identified the following as concerns which warrant review. Firstly, a merger may lessen competition or raise the price for the crude oil. With regard to this merger, the question is whether the Alaska North Slope (ANS) crude is fully in competition worldwide. If the crude is competitive worldwide, the risk that the merger would result in higher crude oil prices which would result in higher gasoline prices at the pump would be slight. If ANS crude seems somewhat uniquely valuable, then there is the possibility that an antitrust issue would need to be addressed. He identified the second concern; competition may be lessened in the bidding for the leases to develop new fields. If a significant bidder is eliminated from the bid process, it can diminish the revenue to the owner of the property. In this case, the federal government and the state are in the business of leasing lands for development. A reduction in bidding competition, potentially, can raise an antitrust issue worth review. MR. BAER informed the committee that he was aware that, in Alaska, an elaborate infrastructure is necessary in order to engage in exploration and production. A loss of competition among exploration and development companies could result in higher prices or reduced service and may adversely affect decisions of smaller firms who may need to rely on those present on the North Slope in order to develop reserves. He also acknowledged that there are many service companies which deal with exploration and production companies. Service companies may deal with a single purchaser of the service which would result in those service companies not receiving a competitive or fair price for their service. In such a case, the concern would be that competitive firms would be driven from the market and competition would be reduced. Mr. Baer noted that, in the past, the FTC has expressed concern with undue concentration and anti-competitive effects involving transportation of crude oil, refined product, and gasoline. A number of cases with such problems have been brought forward in the past. The question of ownership of the Trans-Alaska Pipeline and whether one company having a significant percentage of ownership would adversely affect the ability of those without an ownership interest to ship product at competitive rates is an antitrust issue that would need to be reviewed. The case would be the same for those with some interest, but with excess supply who need to turn to others for excess capacity to ship. Mr. Baer recognized that there are not a large number of firms engaged in the transportation of crude oil from Valdez to refineries on the West Coast. That would also be an antitrust issue that would need to be addressed. Mr. Baer noted the question of existing competition to develop technology in order to bring to market gas from the North Slope. Whether the merger would eliminate that competition to make that product commercially attractive is also an area that would need to be investigated. MR. BAER stated that the FTC has the following mission: "To focus on the issues of competition. Will consumers of a particular product or service be worse off if a merger goes through?" He acknowledged that some of the issues that may concern Alaskans may be broader relating to revenues, environmental issues, and jobs. Although those are legitimate public policy issues for the legislature and the Governor to review, they are not necessarily antitrust issues and the FTC's authority does not extend to those. In conclusion, Mr. Baer said he was aware that this merger uniquely affects Alaskans and is therefore, of utmost importance to the legislature. Furthermore, committee members and members of the executive branch and Alaskans are uniquely knowledgeable about some of the competitive issues likely to affect Alaska and the issues requiring investigation. Number 166 CHAIRMAN HALFORD asked if the existence of a second request is something that can be asked and responded to. MR. BAER said such could be asked, but he could not disclose whether there has been a pre-merger notification. He stated that he could disclose that an investigation is occurring. The parties involved could answer such questions. REPRESENTATIVE COWDERY inquired as to the time frame, from the start to approval, of past mergers such as the Shell merger and the BP-Amoco merger. MR. BAER replied that the Shell merger was under investigation for about six to eight months. The BP-Amoco merger was on a faster time frame as the deal was announced around September 1998 and the FTC review was concluded by the beginning of the next year. In the BP-Amoco transaction, the parties were anxious to close and the competitive concerns of the FTC were identified and an agreement was made. Mr. Baer noted that the Exxon-Mobile merger was announced earlier this year and remains under investigation. Those parties have indicated that they are hopeful that some agreement would be reached with the FTC by September 1999. REPRESENTATIVE COWDERY inquired as to the criteria that would have to be found in order to block a merger. MR. BAER explained that mergers that have been challenged in the past have included retail mergers such as the proposed merger of Staples and Office Depot. The FTC found that 70 or 80 percent of the deal involved serious antitrust concerns. Therefore, there was not a negotiated solution from the parties' standpoint. There were two mergers involving the four largest pharmaceutical wholesale companies which were investigated and litigated last year. Again, the FTC did not see a divestiture that worked. Mr. Baer clarified that it really comes down to how many concerns the FTC has, the nature and extent of those concerns, and then engaging in a dialogue identifying the findings and requirements to avoid going to court. Number 214 REPRESENTATIVE PORTER asked if Alaska's unique situation of state ownership and Alaskans interested in receiving a maximized return would make Alaskans consumers or would the consumer be the person at the pump. MR. BAER said he believed that the FTC has, in the past, challenged transactions in which there was a lessening of competition in a bidding market. The state and the federal government are entitled to have a competitive process. However, there is potential for tension between the state's interests and consumer interest elsewhere. He explained that the state's revenue, including royalty and taxes, are a function of the delivered price, the net price, of ANS crude. Therefore, the state's interest on one level may be best served by higher crude prices, while consumers in this state and in the Lower 48 may be best served by competitive, lower prices. REPRESENTATIVE KERTTULA inquired as to the effort the FTC would put forth in Alaska with an investigation; would the FTC hold hearings in Alaska or meet with individuals? MR. BAER explained that the process would not be public, and therefore, public hearings would not be held. He commented that it is even unusual for staff to appear in this sort of forum. However, the request seemed reasonable due to the importance of this merger to the state. He noted that his staff had been in the state speaking with interested parties. Since the FTC has investigated the oil industry thoroughly over the past two or three years, the FTC already has much information relating to general issues about exploration and production. Therefore, more detailed information would be necessary. Mr. Baer informed the committee that the FTC has subpoena authority, as he understood this committee to have as well. Often, statements of company officials are taken under oath. Mr. Baer commented that much time is spent reviewing company documents to ensure that arguments regarding how a market works or does not work are consistent with the view of the businessmen in the privacy of their offices. He said that he and staff would continue to meet with people. REPRESENTATIVE KERTTULA asked what is the easiest way for people to directly contact Mr. Baer and staff. MR. BAER informed everyone that the easiest contact is via e-mail, wbaer@ftc.com, or through a phone call. Any inquiries received would be forwarded to staff working on the matter. He stressed that any information received is kept confidential. REPRESENTATIVE KERTTULA inquired as to the access members of Congress have to the documents filed with the FTC. MR. BAER stated that, generally, members of Congress do not have access at all. A statute provides that a committee with oversight authority may seek a confidential briefing on matters pending before the agency. Generally, documents are not shared with Congress. Mr. Baer pointed out that the pre-merger review process works fairly well because highly confidential information has been protected which allows the agency to obtain necessary information without much difficulty. Number 298 CHAIRMAN HALFORD asked what companies can do with assets during the time after the Hart Scott Rodino filing, but before there is approval of a merger. For example, Alaska has a law limiting the amount of leases that can be held by a company. Can companies buy, sell, or transfer assets? Could the companies sell leases to a third party; could partial ownership of the pipeline be transferred? Chairman Halford inquired as to the limitations of the merging companies during the FTC's period of review. MR. BAER specified that the companies cannot sell assets to each other until the period of review is over. There is no barrier to selling acreage or rights to develop acreage, except the pre-merger notification rules. Therefore, a transaction with a third party of significant size, $15 million or more, would require the filing of a separate merger filing or acquisition report with the FTC. CHAIRMAN HALFORD asked if that separate process was the same type of process. If a company wanted to sell 300,000 acres of leases to a third party with no other current interest in Alaska or sell a proportion of ownership of the pipeline to a third party. What would such a situation trigger? MR. BAER explained that the parties would have to file, but if no competitive issue was raised by the proposed transaction alone, the FTC would likely raise no objection and allow the transaction to move forward. There would be no basis to go to court to block that transaction. Therefore, companies can engage in self-help to avoid competitive issues. However, that does not typically occur because a package deal with the FTC is desired so as to resolve all concerns. He explained that often companies wait to receive a sense of the FTC's concerns and incorporate sales to third parties into the consent agreement. Still, the company has the right to sell off assets to third parties. REPRESENTATIVE WHITAKER inquired as to whether there is linkage between the proposed Exxon Mobile merger and this merger. MR. BAER stated that there is no formal linkage. He indicated the need to review the impact each merger has on the other. Although there is no formal linkage between the Exxon Mobile merger and the BP-Amoco merger, there are obviously common issues related to exploration, production, and ownership. Therefore, it is fair to assume that the FTC needs to be sensitive to the impact of one investigation on others. Number 368 REPRESENTATIVE WHITAKER asked if there is a relationship between the state's position, with regard to FTC issues, and the FTC's position on those issues. MR. BAER said that the state would have to make an independent determination as to what is necessary to discharge its duties, as will the FTC. However, the FTC is quite sensitive in dealing with matters that have a unique impact in one state, especially with something this significant. The practice is to closely work with the antitrust investigation conducted by any attorney general, as is being conducted by Attorney General Botelho. The hope is to, by working closely with the attorney general, arrive at a common endpoint or at least clearly understand the differences. Again, each agency or branch of government will make an independent decision at the end of the process. REPRESENTATIVE WHITAKER expressed curiosity as to the approach to a market that is so vertically integrated that it is difficult to discern the relationship between the downstream and upstream. MR. BAER reiterated that the FTC has investigated the oil industry at length in the past few years and is sensitive to special antitrust issues that arise from vertical integration. CHAIRMAN HALFORD pointed out that proponents of the merger cite increased efficiency which will increase benefits to everyone in the chain, including the state and the consumer, as a reason to support the merger. However, efficiency is often the argument against competition; yet historically, competition has been seen as the way to enforce efficiency. Chairman Halford assumed that the FTC is biased toward competition. How will the efficiency argument fare in the arena that this regulatory system works? MR. BAER informed the committee that the merger guidelines, jointly promulgated by the FTC and the Antitrust Division, were amended in 1996 to speak to the efficiency question. The guidelines say that efficiencies are a legitimate factor in mergers that otherwise might pose anti-competitive problems. To a large extent, efficiencies must be reviewed with regard to where they originate. Once the significance of the efficiencies are assessed, those efficiencies are weighed against the anti-competitive risks associated with the transaction. "Those guidelines say that mergers to monopoly or near monopoly rarely will be justified by any kind of efficiency savings because the commission does believe, ..., that competition is the best way of disciplining the marketplace and ensuring that not only we get present day goods and services at competitive prices, but that the competition to improve product, to exploit resources will continue." Number 465 CHAIRMAN HALFORD inquired as to the trigger requiring the Hart Scott Rodino filing. MR. BAER specified that a statute was passed in 1976 which outlines the procedure. Essentially, if one company has assets of $100 million or more and another company has assets of $10 million or more and there is a voting securities or asset transaction involving $15 million or more, filing is required. Although he did not know the exact figures in the BP-Amoco ARCO merger, he believed that the figures may slightly exceed that threshold. CHAIRMAN HALFORD inquired as to the allowance of pre-merger activities intended to position for a merger. For instance, would actions clearing the market three years in advance of a merger in order to avoid anti-competitive issues be allowed. MR. BAER said that certain activities are not allowed. Such activities would be those in which the two companies act as one before the merger is approved or before the Hart Scott Rodino period expires. For example, it would be in violation of antitrust laws for the companies to jointly set prices, market, or bid. With regard to the subtleties that could occur, Mr. Baer believed it would depend upon the facts. REPRESENTATIVE COWDERY posed a situation in which ARCO was prepared to sell gas prior to the merger. Perhaps, the merger, with BP's ownership, would create more competitive gas closer to the market. Would that be of concern with the FTC? MR. BAER said that it could be problematic for two competing companies to decide, before the completion of the merger review process, how marketing would occur or that one company would not compete as aggressively in order that the buying or selling company was more successful. That would be reviewed seriously. He explained that the desire is to preserve the competition that exists until the state's review and the FTC's review is complete. CHAIRMAN HALFORD took a short at-ease. Number 556 GUS FLIAKOS, Retired Energy Analyst, Merrill Lynch, testified via teleconference. Mr. Fliakos announced that he would provide the committee with an overview of oil prices and then take questions regarding the merger. He said the best way to approach the oil business is to identify two perspectives to oil as a commodity. He explained that one perspective is that oil as a commodity has long term, underlying trends which are influenced by broad demographic factors, technological developments, and broad underlying variables. Mr. Fliakos believed that the long-term trend in the oil business is positive, the underlying dynamics are good, and oil prices will go up. He noted the need to compare his outlook with the experience of the 1980s during which oil was clearly declining. During that time, oil demand was weak, there was a low supply and there was much surplus capacity. Looking ahead, he believed oil demand will be good and surplus capacity limited. Furthermore, one must recognize that much oil is supplied from areas that are politically unstable. MR. FLIAKOS turned to another perspective which views oil as a commodity that can have a powerful inventory cycle and can experience much volatility influenced by temporary events affecting supply and demand. Such influential events could be an economic recession, weather patterns, and political developments. In the past four years, there has been a powerful inventory cycle and enormous volatility. TAPE 99-3, SIDE B MR. FLIAKOS pointed out that oil levels were reduced to historically low levels in 1996 due to good growth in oil demand worldwide. That growth was caused by good economic conditions and a very cold winter in 1995-1996. Furthermore, supplies were limited because Iraqi oil exports were not in the system. Also the oil companies had reduced inventories to very low levels as part of their "just in time" inventory management and wish to improve financial performance. Therefore, inventories were reduced to historically low levels which resulted in a strong oil price in 1996. At the beginning of 1997, the price of oil recovered to $25+ per barrel. In 1997, inventories began to build due to the unusually mild winter of 1996-1997, the flow of Iraqi exports, and the surfacing of economic problems in the Far East in late 1997 which lowered oil demand there. At the end of 1997, OPEC raised production in the face of ominous signs. As an analyst, Mr. Fliakos did not doubt that the price of oil would collapse to the mid teens, which occurred. OPEC responded by lowering production, but the reduction was not enough to alleviate the surplus situation which was caused by weaker oil demand than most expected, himself included. Earlier this year, OPEC responded to lower prices by lowering production, which coincided with a better tone in economic demand due to improved economic conditions in the Far East. OPEC's response also coincided with lower production from non-OPEC sources. Low oil prices shut in on economic production and the oil industry significantly reduced spending which began to impact supplies. MR. FLIAKOS explained that as 1999 began, there was a convergence of the following positive developments: a better tone to oil demand, lowering of OPEC production, and lower non-OPEC supplies. He informed the committee that early this year his prediction was that the correction would be too severe and result in the other extreme. Once again, inventories would be lowered significantly and the price of oil would recover by more than expected. He did not believe it unlikely to expect the price of oil to, perhaps, reach $25 per barrel. Already, the price has recovered to $20.50 per barrel which is much higher than most expected. Mr. Fliakos still believed there to be a good chance that the price of oil would increase because inventories will continue to decline due to the positive developments mentioned earlier. However, the high oil price will not be sustained because a corrective adjustment will occur. He foresaw the following corrective adjustments: recovery in non-OPEC supplies, return of some economic production, and an increase in spending by the oil industry. At the same time, he predicted erosion in OPEC's discipline and eventual raising of production in order to prevent an extreme price. Mr. Fliakos feared that the adjustments may be too severe and may occur too late. Therefore, the price of oil may fall much lower than expected. Unfortunately, volatility is inescapable in the oil business and will continue due to the adjustment processes which are inherently destablizing. He stressed the importance of recognizing that this volatility occurs around a long-term trend which he believed to be positive. One must also recognize the difference between the inventory extremes caused by temporary factors and the underlying trends. MR. FLIAKOS turned to the subject of mergers and consolidations in the oil industry. He believed the basic driver for mergers and consolidations in the oil industry has been the tremendous attitude changes in the managements of the major oil companies. This is a characteristic of corporate America in general. In the 1990s the management of oil companies has become more shareholder friendly and financially oriented. The desire to improve financial performance has, initially, led to very dramatic cost cutting. Additionally, the oil companies have sold under-performing assets which was not enough and led to the beginnings of joint ventures which initially occurred in marketing. Then mergers of specific business, not entire companies, occurred. Then the environment turned sour last year due to low oil prices and the desire to improve performance became more challenging. Therefore, consolidation of entire companies began. He commented that it should not be a surprise that Amoco was the first major company to succumb. Although Amoco was a strong company, it experienced many years of under performance and Amoco was not able to deliver on the promises made to shareholders. In the case of ARCO, Mr. Fliakos disagreed with the timing but recognized that it is very difficult for ARCO to perform well when oil prices are weak. He pointed out that ARCO has two strengths, Alaska production and the West Coast refinery marketing business which is very volatile. ARCO's performance through the years has not been particularly good and last year was disastrous. That resulted in ARCO seeking a merger partner. MR. FLIAKOS predicted, "As long as the managements are driven by the desire to improve financial performance and to reward shareholders, consolidation will continue unless the oil environment remains so robust that it can perform well even without consolidating. Number 161 CHAIRMAN HALFORD inquired as to what Mr. Fliakos would predict the West Texas Intermediate (WTI) to be if he were to review an average value over a five year period. MR. FLIAKOS predicted it would be at a minimum, $20 per barrel, and perhaps higher. The risks in the years ahead are being confronted with limited productive capacity in an industry very susceptible to political shocks. With regard to oil in the ground that can be tapped, Mr. Fliakos said that the surplus capacity is no more than 7 or 8 percent of global demand. Although that may seem high, he noted that OPEC shaves a lot of production and oil demand has been particularly weak in the Far East. He reminded the committee that in the mid 1980s when the price of oil crashed, the surplus capacity was 25 percent of demand. The amount of surplus capacity today is very limited. If the price of oil does not rise very quickly, he predicted a supply crisis. CHAIRMAN HALFORD commented that the marginal production capacity of the Mid East seems to have many incentives to manipulate the long term non-OPEC capacity in high cost areas. Chairman Halford said, "I'm not sure just listening to your presentation, that it doesn't make a lot of sense if I were a hereditary monarch sitting on a hundred year supply of oil, and I had two ways to keep marginal production out. One being to hold the price at $12 a barrel, the other being let the price go to $10 a barrel for six months every three or four years. I couldn't achieve the same result in terms of keeping the bankers out of the oil industry and get more money in the process." MR. FLIAKOS agreed, except as a dictator one would run the risk of social upheaval and dislocations. The Economist published an article in February which suggested that there was a dramatic change in Saudi policy and the desire to keep the price of oil low in order to back out the high production cost. Only three weeks later, the Saudis got together with the Iranians and decided to lower production in order to raise the price of oil. Mr. Fliakos specified that he disagreed with that article because the Saudis were hurting, which leaves one to wonder what is happening in other countries. It is difficult to manipulate the market in that way. However, if the price of oil climbs too high, then they are locked. There is no evidence that any foreign producing country would throw cost reserves in a manipulative way. Number 257 BILL BRITT, Pipeline Coordinator, Department of Natural Resources, informed the committee that the charge of the Pipeline Coordinator's office is the administration of the Right-of-way Leasing Act which is codified in AS 38.35. He noted that his office works within the Joint Pipeline Office(JPO) which is a consortium of 11 federal and state agencies. He provided the committee with copies of the JPO's latest annual report and two comprehensive monitoring program reports. MR. BRITT explained that the state right-of-way lease for the Trans-Alaska Pipeline(TAPS) was signed on May 3, 1974 for a 30 year term. The federal grant had been signed some months prior for a 30 year term as well. Both expire in the year 2004. There have been indications from owner companies that an application will be forthcoming. However, the timing is unknown. Currently, the state administers about half of the right-of-way, about 402 miles, of which 145 miles are administered through the federal grant because federal lands were transferred to the state along with the federal right-of-way. The state was charged with the administration of the federal right-of-way. MR. BRITT stated that the renewal will be based on the following: the federal grant, the state lease, the Trans-Alaska Authorization Act, and the Right-of-way Leasing Act. He explained that the lease renewal can occur if the pipeline remains in commercial operation and is in compliance with state law. The Right-of-way Leasing Act also mentions compliance with the lease itself. The grant says that the renewal is subject to the Trans-Alaska Pipeline Authorization Act(TAPA) which requires renewal based on the useful life of the facility. Mr. Britt explained that, at some point, an application will be received which will be publicly noticed. Furthermore, a commissioner's analysis and proposed decision is prepared for new applications as well as renewals. He informed the committee that, recently, new applications have been received from Badami and Alpine. The commissioner's report on Northstar is currently out for public review. He anticipated the commissioner's analysis to address lease compliance, compliance with state and federal laws, the useful life analysis, and a draft lease is attached for public review. The commissioner's analysis is publicly noticed and there is a comment period. Then there is finalization of the decision and execution of the decision. The federal process is similar in that a TAPA analysis, similar to a commissioner's analysis, is done. There have been indications that there will be a draft grant which would be equivalent to the state's draft lease. Both the federal government and the state's office have indicated to each other the need to coordinate the process. However, there are unanswered questions such as how the federal government will address National Environmental Policy Act (NEPA) when an application is received. The federal government could choose not to address it at all under a categorical exclusion or require an environmental impact statement. The federal government's choice will be a large force behind how this moves forward. Furthermore, the timing of the application is unknown and the material needed from the owners at the time of application has not defined. Also, Alyeska's role has yet to be specified. MR. BRITT, in response to Chairman Halford, said that one application would be received from the seven owner companies. Currently, David DeGruyter (ph), former president of BP Transportation Alaska, has been charged by the owner companies as the project manager for this process. In further response, Mr. Britt believed that the original application was a consolidated application. Number 357 REPRESENTATIVE PORTER inquired as to the percentage of the line that has stayed federal. MR. BRITT said that it is fairly close to 50-50. The private ownership constitutes less than 10 percent. The private land ownership is covered by the federal grant. In response to Representative Whitaker, Mr. Britt explained NEPA. When the federal government receives an application for an action or activity that would affect the human environment, a certain process is required. First, an environmental assessment (EA) is required in order to establish a threshold determining whether an environmental impact statement (EIS) is required or not. If an EIS is not required, a Finding of No Significant Impact (FONSI) is produced. If an EIS is required, it is done. He noted that for a variety of reasons the EA can be skipped and an EIS can be done. Recently, the EIS has been completed for the Northstar project. The EIS for the Liberty project is just beginning. Mr. Britt pointed out that the basis of the litigation of the Alpine project against the Corps of Engineers was that the Corps of Engineers decided not to prepare an EIS. CHAIRMAN HALFORD inquired as to the method of enforcement. MR. BRITT specified that the office does land law which basically says that if noncompliance is found with the lease, the office is required to inform the tenant of the deficiencies. The tenant is given a reasonable amount of time to correct the deficiencies. Although the commissioner's orders have not been utilized, it is in the office's power. In a worst case scenario, the lease allows the state and federal government to do the work and send the bill to the lessees. In further response to Chairman Halford, Mr. Britt informed the committee that in 1993, a series of audits of Alyeska resulted in the identification of some 5,000 deficiencies. Those deficiencies were formalized as audit action items. Of those, five remain from 1993 and are expected to close at the end of the year. These five involve long-term projects such as the deficiency in the remote gate valves for which the remedy is the fiber optics cable system being put in along the pipeline. Another deficiency was some 5,000 drawings that were out of date. Currently, those drawings have been redlined and an acceptable backlog amount has been established. Mr. Britt offered to provide the committee with the other three deficiencies at a later time. CHAIRMAN HALFORD moved to the public testimony portion of the meeting. Number 457 FLOYD HEIMBUCH informed the committee of his representation of the Kenai Peninsula Borough and his past position as Chair of the Oil Spill Prevention & Response Committee. Mr. Heimbuch was wary of the merger; alternatives should be considered. He suggested that the state should acquire ARCO facilities located in Alaska which would result in an acquisition study. He acknowledged that both the merger or an acquisition would be complex with functional and dysfunctional aspects requiring study. He believed that an acquisition would allay the two fears often expressed. One fear is regarding too much ownership by one company, and a foreign company at that. The other fear is with regard to how the permanent fund is viewed. If there was an acquisition, there would be a focus which would allow the elimination of the fear that when politicians get the money we are not safe. In conclusion, he urged the committee to consider acquisition. Number 518 CHRISTY McGRAW, Director, BACKBONE-Standing Up for Alaska's Future, noted that the organization has been working hard to help Alaskans understand the issues surrounding the merger. BACKBONE's membership is steadily increasing as is the understanding of Alaskans of these issues. She announced that over the next several weeks, BACKBONE will mount a media campaign. She informed the committee that BACKBONE published an article which referenced a recent poll by the Alaska Conservation Alliance which found that 83 percent of 300 people polled statewide believe there should be conditions placed on this merger. Wide response was received from that article which illustrates the concerns of Alaskans regarding the process moving too fast and not allowing Alaska to receive the best deal it can. She read an anonymous response to the article which agreed that Alaska could become a company state and that BP tells soft truths. MS. McGRAW said, "The world's second largest non-governmental oil company will have no heart, as evidenced by the Wall Street Journal article ... on the Amoco takeover." Furthermore, it is the nature of huge multinational corporations to hold shareholder interests first and foremost. She believed that this situation will get ugly, especially since Governor Knowles has yet to take a firm stand on protecting Alaskan's interests. She informed the committee that tomorrow and in the next few weeks, BACKBONE will run a display ad in the Anchorage Daily News which asks Governor Knowles to stand up for Alaskan's rights and best interests. Ms. McGraw identified the following as points voters should address to the Governor: Ensuring that Alaskans get maximum production and value for North Slope oil and guaranteeing the sale of our gas now. Protecting our land and marine environments and our fishing industry through their transportation practices. Eliminating a monopoly on the TAPS and getting back our Dismantling, Removal, and Restoration (DR&R)Funds. Maximizing competition and return to Alaskans on North Slope facilities, pipelines, and fields. MS. McGRAW emphasized that since the Governor seems unwilling to act, it will be up to this committee and the Attorney General. She said that BACKBONE will assist the committee. BACKBONE has formed committees which will meet in order to develop recommendations for "your transmittal to the FTC." The following issues will be examined: access, competition, the state's position, natural gas and the environment. BACKBONE will provide the committee with a full briefing in order for the committee to make the best recommendation. Ms. McGraw requested that this committee do three things. She requested that the committee appropriate a minimum of 5 [million]... TAPE 99-4, SIDE A MS. McGRAW requested that the committee make all the reports and such that it has available to BACKBONE in order for BACKBONE to make the best recommendation to the committee. In conclusion, Ms. McGraw said, "If [Governor] Tony Knowles does not act to protect Alaska's interest, BACKBONE asks that you work with us and the people of Alaska to prove we deserve better." REPRESENTATIVE WHITAKER inquired as to what raised the concern about moving too quickly. MS. McGRAW stated that there has been mention of a short time line. There has also been mention of October 1 to October 15 as the finalization of the recommendations of the FTC. It is not clear that is enough time for the FTC or Alaska to understand the issues and recommendations. As much time as necessary to gain an understanding should occur. REPRESENTATIVE WHITAKER recognized that Ms. McGraw seems to differentiate between the Governor and the Attorney General. He asked if she had a basis for that differentiation. MS. McGRAW commented that she did not have a factual basis, but there have been indications from BACKBONE's committee that the Governor may not be moving in the right direction in the opinion of some of the team or the Administration. CHAIRMAN HALFORD turned to Ms. McGraw's three requests and pointed out that this committee cannot make any appropriations until the legislature is in session. He noted that one thought has been to ask the Administration, whether money would be needed if an antitrust action is to be filed. With regard to the requests about information and access to information, he agreed with Ms. McGraw's desire to have the information public, but he also agreed, in part, with the companies not wanting the business plan to be public. He commented that this is the strangest process with which he has been involved. Either way confidentiality poses barriers. Number 038 STEVE CONN, Executive Director, Alaska Public Interest Research Group (AKPIRG), was next to testify. He informed the committee that AKPIRG is also a member of BACKBONE. This merger seems to be the most significant public policy question in Alaska's history. It appears that Alaska's highest concern, when becoming a state, was sovereignty and the drafters of the Alaska Constitution understood that "at the crux of political sovereignty was economic sovereignty. An ability to guide one's destiny through some level of control of one's natural resources." That ability lives within a larger world, inhabited by multi-national companies and guided by market's out of the state's control. At that time and to this day, the leverage advocated has been competition and a true free market. The component most important to true sovereignty is the presence or absence of economic sovereignty. In other words, if one does not guide economic sovereignty then one is guided. Mr. Conn stressed that he stands with the committee in its ability to be a true state's person. MR. CONN did not believe the FTC can be looked to for support of Alaska's economic sovereignty. Furthermore, he believed it unlikely for the FTC to side with Alaska in this issue that ultimately defines Alaska's destiny rather than the world's. If anyone is to protect Alaska's economic future, it is to be the legislature. Mr. Conn endorsed the position of BACKBONE in that the initiative falls to the legislature for funds sufficient and a serious antitrust action which would press for the release of documents necessary for an honest evaluation of Alaska's situation. He suggested that currently, a multinational oil company is working its will on Alaska's body politic before a merger has occurred which is a bad sign for Alaska's future. This is an attempt to achieve backdoor tax protection for BP. Mr. Conn encouraged the committee to determine to what degree BP, directly or indirectly, is underwriting the campaign in favor of the vote. In his opinion, the committee is entitled to information and to ask BP how it is spending its political dollar on Alaska's political landscape. He hoped the issue of how BP will perform as a corporate citizen will be reviewed along side of the issues discussed today. He stressed the need to focus on the fact that the members' roles as political leaders and guiding forces is part of the consideration of the merger. Alaska is at a cross roads. Number 0161 JIM SYKES, Oilwatch Alaska, commented that Mr. Conn raised some very valid points. He believed the reason for this meeting surrounds whether Alaska can control BP or BP will control Alaska. He hoped the committee had received Oilwatch Alaska's report entitled, "The Big Squeeze" which demonstrates how competition has been eliminated on the North Slope. Historically, those things which the oil industry has promised the legislature would increase competition, has virtually eliminated competition. He informed the committee that after speaking with the FTC, he learned that only about one percent of the FTC's cases ever go to court. Therefore, if Alaska wants to affect this process and the decision of what is best for Alaska, it must happen soon and the state must take the lead. In review of the mergers considered by the FTC, there have not been many that the FTC has not approved. When the FTC finds difficulty with a merger, the parties are approached in order to negotiate the problems. Going to court is a last resort. Therefore, Mr. Sykes supported BACKBONE's request for a $5 million appropriation. If the Governor calls a special session, Mr. Sykes suggested that while there the legislature should call its own special session in order to consider this merger. Mr. Sykes understood that the companies may want to wrap up the merger in September or early October. MR. SYKES pointed out that currently Alaska's leasing, royalty and tax system is based on competition. There is much evidence that this merger will eliminate competition and he offered to provide the committee with that information. Mr. Sykes stressed, "The state cannot react soon enough to deal with a company that has entrenched itself as the controller of our source of oil and the majority of our leases and the control of our oil transportation system over land and marine. The state cannot soon enough deal with changing the structure to a noncompetitive environment, but you could do some things during a special session." He suggested the consideration of emergency powers to deal with a noncompetitive environment. One such power might be to return to separate accounting to consider how much BP spends and makes in Alaska and tax them separately from their worldwide profits. There could also be consideration of public ownership of TAPS. Mr. Sykes encouraged taking back the leases in excess of the amount which BP would legally be allowed to hold were a merger to occur. The state must empower itself to determine which leases to take and not allow BP the choice of which leases it wishes to keep. CHAIRMAN HALFORD asked, "On the day before the merger occurs, don't they have the constitutional right to give us back what they choose." MR. SYKES agreed that appears to be the case and continued with his testimony. He stressed the need for the state to analyze the profitability which has not been performed in some time. Over the past few years, oil and gas lifting costs have been cut by more than 50 percent resulting in increasing corporate profits while the state receives the same royalty. Alaska is not sharing in the technological developments making oil more profitable in Alaska. Mr. Sykes pointed out, "If you consider, in 1998 dollars, the 100 or so billion dollars of net profit that has been made by the oil industry in Alaska, approximately half of that has been made by BP." Furthermore, two years ago Alaska was probably 45 percent of BP's profitability, of their worldwide corporation. When the BP- Amoco merger occurred, Alaska fell to about 33 percent of BP's profitability. Although one would think the acquisition of ARCO would increase Alaska's emphasis, ARCO has other holdings in the world. This merger would actually place Alaska at about 25 percent of the worldwide holdings. Therefore, when a corporation attempts to perform the best for its worldwide shareholders, that corporation will review the worldwide view. Sir John Browne said just that on television last week; that operations in marginal places will be cut. That is a warning for Alaska which could become "a backwater of oil development." This is comparable to the warning given to the constitutional convention. "When a single entity has large sectors of public land under lease or under their control, then we are at their mercy." Mr. Sykes noted that consideration may need to be given to other things such as the fact that other oil producing regions automatically own 51 percent of anything a corporation does in their area. He also expressed the need to review the option of contracting out the extraction and distribution of oil. A potential problem with the merger is that even if there was competition in the future, the competition may not be able to enter the West Coast market to refine or distribute the down stream products from Alaska because one entity controlling the oil supply and the transportation also owns a large sector of the refining and distribution on the West Coast. With regard to the issue of confidentiality, Mr. Sykes understood from the FTC that the state is free to release information. Although he understood the information being gathered is being done upon agreement of confidentiality, the state does have the authority to ask the parties to release it to the public. In conclusion, Mr. Sykes encouraged the appropriation and filing of a lawsuit in the state or federal court. Number 278 HAROLD HEINZE, 30 year Alaskan resident, informed the committee that he was President of ARCO Alaska and ARCO Transportation Company in the 1980s. In the early 1990s, Mr. Heinze was the Commissioner of Natural Resources for Governor Hickel. Currently, Mr. Heinze is a consultant. He specified that he was present as a private citizen offering his opinion of what the legislature should do regarding the proposed merger. Firstly, Mr. Heinze did not like the loss of ARCO in the Alaskan oil industry, but felt it best for the merger to move forward. The State of Alaska has an opportunity to enhance the future of future North Slope oil development. "The small reduction of competitive momentum in Alaska is more than offset by the greatly strengthened competitive position of Alaska in the international oil industry." Mr. Heinze did not believe that a confrontational relationship with a major segment of the Alaskan economy serves anyone. Furthermore, there is a danger that some will use merger conditions to construct barriers to oil development which is and will continue to be in the best interest of Alaskans. MR. HEINZE acknowledged that there are issues related to the state's interest. However, the threats are limited in number and manageable through existing mechanisms and agencies. Clearly, Alaska loses when an economic oil field development project is either delayed or not undertaken. If that became an issue, Mr. Heinze believed that the Alaska Oil & Gas Conservation Commission has authority legally to spotlight and correct such an abuse. He said that if true abuses occurred, the public opinion reaction would be strong. Furthermore, he believed BP-Amoco realizes that its best interest aligns with Alaskan public interest. MR. HEINZE recalled that the Alaska Constitution assigns resource development policy to the legislature. Therefore, it is appropriate for this committee to define and highlight Alaska's development expectations and communicate those directly and publicly to BP's executive management in Alaska and London. Resulting from that effort will be a definition of ways to ensure the vision remains before all Alaskans and is publicly accountable. REPRESENTATIVE WHITAKER inquired as to what happens if in meeting with BP it is found that BP disagrees with what the legislature believes to be in the best interest of Alaska. MR. HEINZE said that he did not foresee such a scenario. If Alaska defines what is in its best interest, then that can be communicated to BP and become the rules in Alaska. Number 350 VIC FISCHER noted that he appeared before the committee at its last meeting during which he indicated the need to provide the public with information. He believed Alaskans are being bombarded by soft ads intended "to lull Alaskans to sleep." That is of concern. Mr. Fischer expressed tremendous respect for BP who has done a phenomenal job developing the North Slope, as has ARCO. He suggested the committee lean on the Governor and the executive branch to publicly present the committee with the conclusions and the public interest aspects of the various task forces studying the proposed merger. The information that should be provided to the public has nothing to do with confidentiality. CHAIRMAN HALFORD stated that Mr. Fischer's suggestion was good. Furthermore, the conclusions of the task forces are not the confidential data upon which they are based. REPRESENTATIVE WHITAKER commented that the committee has subpoena powers in that regard. Number 400 BARBARA WILLIAMS, Alaska Injured Workers Alliance, commented that this merger will affect Alaska's children who receive a permanent fund. As affected persons, children should have a say in this merger. Or the child's parent should have a say on behalf of their child. Ms. Williams did not believe the permanent fund should be "monkeyed" with. Ms. Williams, as a representative of injured workers, expressed the need to receive a public commitment from BP ARCO to continue their level of contributions to community services. If the merger occurs, she believed there would be less available to give to communities. She said, "We want to see that these funds and these contributions remain high and continue for smaller organizations, such as myself, that provide free services to people that have worked in the oil fields." She also expressed the need to protect workers and to make sure that this merger is not driven by a political agenda. Ms. Williams explained that when people are chemically injured, they must be flown outside the state. If no one knows what is wrong with these chemically injured persons, they are not able to seek medical treatment. She informed the committee that currently she has a list of five that may die without proper medical care. Alaska Injured Workers Alliance provides free services to get those people to the medical care needed. MS. WILLIAMS stated that the Alaska Injured Workers Alliance is a nonprofit, grass roots organization that needs support from entities such as BP and ARCO. She noted that the alliance works with the Community Action Groups on Toxics and the Conservation Foundation in order to provide communities with awareness about toxins. Those working in the oil industry are often exposed to many things. Furthermore, oil industry workers are often encouraged not to report on the job injuries due to bonus packages available. Ms. Williams explained that the alliance receives many people who cannot obtain legal services to litigate their claims because there are 10 attorneys statewide for 30,000 statewide claims. Therefore, the alliance is the only source of support for these workers. Ms. Williams asked if it would be appropriate, at this time, to ask BP if it will commit to a continued level of giving. CHAIRMAN HALFORD noted that BP is not present to answer, but he believed there is a statement from BP or BP ARCO that said the giving would continue to the level of the combination of the two entities in the past. MS. WILLIAMS commented that the alliance has not seen any giving from them. Number 496 NICK BEGICH echoed comments regarding the merger being one of the most important issues facing Alaska. Mr. Begich believed there are the following two types of oil companies, the multinational oil companies and the government oil companies. He also noted that Alaska can be equated to a third world company in many aspects. Third world companies often reach a point at which the question arises as to whether it is time for them to produce their own oil. They question if they are receiving a fair deal from a company that really represents its stockholders' interests first. He believed that there has already been debate with London regarding past tax questions. Alaska has given up billions to our partners when most prudent businessmen would have been looking for new partners. MR. BEGICH turned to the question, "What would happen if Alaska bought the assets of ARCO?" He pointed out that those assets can be defined as well as segregated from the international and other Lower 48 interests by the offer made by BP. Alaska could receive 12.5 percent plus about 40 percent of what ARCO Alaska would have passing through the pipeline. Furthermore, the transportation fees would offset the expenditure of buying the Alaskan assets. Given that the value has been defined, Mr. Begich did not believe it would be many years before the transportation costs would sum the cost of the acquisition. He alluded to the possibility of accomplishing that through the Alaska Industrial Development Fund or placing an option on the ballot. Then discussion would move from decreasing permanent funds to the future of the permanent fund over 10 years with 52 percent of North Slope oil moving through that pipeline. The discussion could then turn to Alaskan hire. Furthermore, competition between private and public could occur. Mr. Begich stressed that if this were costed out, there would be distinct advantages and the revenue stream for the state would increase. He pointed out that in many politically unrest countries, there are commitments of billions of dollars and in many instances, up to 50 percent royalties. Yet, Alaska is a safe place. What will happen when 70 percent of Alaska's resources are controlled by one entity? Will Alaska's resources sit in reserve? Will places be developed that are easy to exploit in terms of environmental protections? Perhaps, Alaska is in a position to produce its own resources and maybe this is the time to consider such. Mr. Begich stated that coming to the table arguing over the crumbs left, in terms of handouts, is not the position Alaskans should be in negotiating the fundamental resources. He echoed earlier comments regarding the intent of the Alaska Constitution. He stressed, "The idea that we're going to rely on the Federal Trade Commission, the federal government, to cut a good deal for Alaskans when they already diminishing the deal they made with us under statehood, in terms of our royalty shares to open up ANWR or to open up the Navel Petroleum Reserve; I think is a ridiculous assumption that we're going to be protected by the federal government. It's up to Alaskans, it's up to you, elected officers representing this state, to make sure that we get the best for Alaskans. Look at an acquisition as an alternative." TAPE 99-4, SIDE B Number 001 RICHARD FINEBERG noted that he testified before the committee on June 11, 1999, regarding the need for the state to consider acquisition of TAPS as a condition of the proposed merger. He noted that his premise has been reinforced by data developed since that testimony. The premise was that unless the pipeline is operated by an entity that does not have production interests on the North Slope, the state cannot expect other companies besides BP to make significant contributions to future North Slope development. Mr. Fineberg maintained that recommendation based on four pieces of information that have emerged since the last meeting. First, through a committee member's request, he has learned that the pipeline tariffs in 1998 and 1999 illustrate very little of the competition promised by the 1997 amended capacity settlement agreement. Furthermore, that information does not illustrate the benefit of reduced tariffs on the order of those achievable through state acquisition of the pipeline. He referred the committee to Table 2 of his June 11, 1999, testimony as well as his July 21, 1999, memorandum to Chairman Halford. Mr. Fineberg noted that he had reviewed updates of the previous analysis of collections under the 1985 TAPS settlement agreement for the dismantling of the pipeline. He informed the committee that he concluded that the $1.535 billion collected through 1998 has an imputed value today of $4.5 to $4.9 billion versus expected dismantling costs on the same basis of $2.3 billion. "In other words, the TAPS owners have made a tremendous killing on an environmental requirement portrayed in the 1985 settlement as a nonprofit item." The basis for the numbers are in the June 24, 1999, report. He said, "In view of the disparity between DR&R collections and me and the recent charges by six mid-level Alyeska employees that senior executives on the pipeline are actively squelching whistle-blowers and are receiving no relief from state and federal monitors, environmental and public interest groups have called for independent audit of the pipeline in connection with the merger." He noted that was item 3 of the new report. MR. FINEBERG informed the committee of a rumor, from good sources, that BP is negotiating this week in Houston to sell 72 percent of the pipeline to an independent buyer in order to guarantee lower future tariffs. He recalled that BP and ARCO spent three months perfecting their takeover plan before informing the state of the plan. He said, "I would like to know if the state is a party to or monitoring these negotiations if they are taking place." He expressed concern with DR&R regarding lease renewal and the request for low tariffs. Mr. Fineberg encouraged careful research. He noted the 1999 reports of Professor James Smith of SMU and his colleague to the National Bureau of Economic Research which refused the assertion that the Alaska Oil and Gas Conservation Commission (AOGCC) has sufficient authority to protect Alaska's interests. Furthermore, the FTC has made it clear that Alaska's situation is unique and the FTC may not have the statutory authority to deal with those. In conclusion, Mr. Fineberg urged the committee to take immediate action in order to ensure that Alaska's interests are protected. Number 071 TOM LAKOSH provided the committee with some charts. He noted that he reviewed this issue from a different light. BP has exerted its monopolistic control and created the current budget crisis. With regard to vapor recovery, that has occurred on two berths while two berths remain uncontrolled. BP's pump at Alyeska and its other shippers promised that they would be able to ship 1.1 million barrels per day at the controlled berths and an exemption would be given at the two other berths in order to meet the Department of Revenue projections for 1998, 1999, and 2000. The 1998 allowance was 275,000 barrels per day. The 1999 allowance 205,000 barrels per day. The 2000 allowance was over 100,000 barrels per day. As it turns out, only about 1.03 million barrels per day, controlled and uncontrolled, have been loaded. He pointed out that they have refused to lower it at the uncontrolled berths. "Initially, this might seem to be an altruistic reason to prevent air pollution. But, in fact, if that were the case they'd put the controls on berth 3 and have control loading at three berths instead. So what essentially has been happening here is that BP has been controlling the West Coast market supply by refusing to load their tankers, by not replacing the tankers that have been retired. And as a matter of fact, they refuse to service Alaska with tankers that were not yet required to be retired under OPA 90 [Oil Pollution Act of 1990]." He indicated that BP's further monopolistic control is an antitrust action which must be prohibited by law. He referred the committee to the tanker retirement schedule for 1998 through 2008. There is a southern, northern, western, and eastern line which has disappeared. From information provided by DEC and RCAC, those tankers were taken from the fleet in order to avoid having to bring in extra spill response equipment to meet the response planning standards for these large tankers. These three or four vessels that were scheduled for retirement this year have been taken out of service, which does not allow Alaska to ship its oil. For that reason, there is a budget shortfall. Those tankers were not replaced and plans with NASCO to build "Cape" class tankers were cancelled one week before the announcement merger. Sources in ARCO say that cancellation of the building of the "Millennium" tankers would have probably occurred if it would not cost more to cancel than continue. He believed the plans for the "Millennium" tankers are being scrapped. Therefore, there are two forms of antitrust, anti-competitive action. First, the quantity of tankers to meet the free trade requirement is not being produced. Second, innovation and quality competition is being stifled. This is a situation in which BP knows it must have the tankers. He referred to information which laid out the year of tanker replacement and what Mr. Lakosh considered the "Millennium" equivalent and the minimum amount of construction schedules that must be produced which results in about 20 tankers. Mr. Lakosh proposed the building of 14 tankers by 2007 because of possible reduction in through put; that is merely an estimate. MR. LAKOSH emphasized the need for this committee, as he had requested from the Governor, to request information regarding the construction schedule for tankers. The request to the Governor was passed off to Mr. Dietrick in DEC. He pointed out that it takes at least two years once construction begins, but yards must be lined up or nothing will be shipped. Past practices indicate that they have total control of the state's budget and economy. BP has yet to provide any information and refused to provide any information unless secrecy was promised. Mr. Lakosh stated that the response from Mr. Dietrick was comparable to a BP advertisement in the paper. He noted that Mr. Britt has heard his appeal and Representative Kerttula was their counsel when Mr. Lakosh attempted to enforce the DNR lease with regards to the Valdez marine terminal contingency plan submitted in August of 1993. Still, outstanding conditions of appeal on what has not been approved since August of 1993 remain. Mr. Britt and the commissioner have refused to enforce the lease. Therefore, forfeiture of the lease under Article VIII Section 8 should be discussed versus the blessing of the merger. He hoped that the committee would review Mr. Fischer's analysis of Article VIII. How can ARCO be put out of business when it was the only company that made efforts to protect Alaska's natural resources with the design and construction of the "Millennium" class tankers. If ARCO Marine was maintained, there would be at least 10 "Millennium" class tankers. Now, there will only be three "Millennium" class tankers and no "Cape" class tankers because BP no longer needs to compete with ARCO on the West Coast for green customers. He reiterated the need to have a specific tanker construction schedule as well as the data regarding the turnaround time for those tankers. He stressed the need for the committee to not only review the consequences of the merger, but also what would continue even if the merger did not occur with regard to BP's manipulation of the through put on the pipeline. This is a continuous debate to achieve the types of protection Alaska is guaranteed under law. BP's efforts have prohibited the use of the best available technology throughout the line. For example, DNR and the Bureau of Land Management (BLM) had a requirement for annual contingency plan reviews in the lease and the grant; such has not been seen for seven years. Therefore, the lease renewal must be closely reviewed. Number 239 REPRESENTATIVE PORTER asked if the lack of tanker space has decreased the amount of oil that has went to market. MR. LAKOSH stressed that the pipeline and production has to be slowed because of the tanks that were not completed. Therefore, the tanks fill and they are refusing to go to the berth to load the tankers. For every day that production is slowed, Alaska has that many less dollars to spend. Furthermore, such actions raise gasoline prices. CHAIRMAN HALFORD asked if anyone else wished to testify. There being no one, he closed the public testimony. He announced that another meeting would be scheduled in August. ADJOURNMENT There being no further business before the committee, the Joint Special Committee on Mergers meeting was adjourned at an unspecified time.