JOINT SPECIAL COMMITTEE ON MERGERS September 24, 1999 9:05 a.m. MEMBERS PRESENT Senator Rick Halford, Chair Senator Drue Pearce Senator Johnny Ellis Representative Joe Green, Vice-Chair Representative Brian Porter Representative Beth Kerttula Representative Jim Whitaker MEMBERS ABSENT All members present OTHER LEGISLATORS PRESENT Senator Mike Miller Senator Loren Leman Senator Kim Elton Senator Georgianna Lincoln Senator Lyda Green Representative Allen Kemplen Representative John Coghill Representative Scott Ogan Representative John Harris Representative Lisa Murkowski Representative John Davies Representative Sharon Cissna Representative Bill Hudson Representative Gail Phillips Representative Beverly Masek Representative Norman Rokeberg Representative Eric Croft Representative Hal Smalley Representative Ethan Berkowitz Representative Jeannette James Representative Reggie Joule Representative Jerry Sanders Representative Gene Therriault Representative Fred Dyson Representative Gary Davis COMMITTEE CALENDAR British Petroleum-ARCO Merger Executive Session: Legislative Briefing PREVIOUS ACTION See the Joint Special Committee on Mergers minutes dated 6/11/99 and 7/28/99. WITNESS REGISTER BRUCE BOTELHO, Attorney General Department of Law PO Box 110300 Juneau, Alaska 99811-0300 Telephone: (907) 465-2133 POSITION STATEMENT: Discussed the proposed merger. FRED BONESS, Attorney Preston, Gates & Ellis 420 L Street, Suite 400 Anchorage, Alaska Telephone: (907) 276-1969 POSITION STATEMENT: As outside counsel for the committee, he provided the committee with a brief status report. ACTION NARRATIVE TAPE 99-5, SIDE A Number 001 CHAIRMAN HALFORD called the Joint Special Committee on Mergers meeting to order at 9:05 a.m. All committee members were present at the call to order. Other Senators present were Senators Miller, Leman, Elton, Lincoln, and Green. Other Representatives present were Representatives Kemplen, Coghill, Ogan, Harris, Murkowski, Davies, Cissna, Hudson, Phillips, Masek, Rokeberg, Croft, Smalley, Berkowitz, James, Joule, Sanders, Therriault, Dyson, and Davis. Number 016 BRUCE BOTELHO, Attorney General, Department of Law, noted that Assistant Attorney General Jack Griffin, Oil, Gas & Mining Section, Civil Division, Department of Law, was also present. Assistant Attorney General Griffin is the chief lawyer on the state's team regarding the merger. Attorney General Botelho commented that it seems, as indicated by the executive and legislative branches, most appropriate to do as much as possible in public session. The only reason to enter into executive session would be to specifically discuss matters which are, as specified in the Open Meetings Act, appropriate for closed session. Such matters may include discussions about confidential documents, documents which are confidential by federal or state law. Other matters appropriate for closed session may be correspondence between the state and the Federal Trade Commission (FTC). ATTORNEY GENERAL BOTELHO explained that when the acquisition by BP- Amoco was announced, the Governor requested that four cabinet officers lead a task force of the Administration in order to evaluate the merger. The task force, in addition to Attorney General Botelho, includes Commissioner Condon, Department of Revenue; Commissioner Shively, Department of Natural Resources; John Katz, Director of State/Federal Relations and Special Counsel. The task force was given the task to review the merger with regard to its impacts on the competitive environment in Alaska as well as social responsibility issues. Most of the attention was focused on the impacts the merger would have on the competitive environment in Alaska. He noted that the task force's primary vehicle for analyzing the acquisition was an anti-trust; in other words, would the merger have a likelihood of lessening competition in the relevant markets? Therefore, the task force reviewed production and transportation, with less emphasis on the marketing aspects or so called downstream issues. ATTORNEY GENERAL BOTELHO informed everyone that, from the task force's respective staff, six subgroups were formed in order to assist in the evaluation. He identified the subgroups as value issues, facilities issues, marine transportation, the Trans- Atlantic Pipeline System (TAPS), the gas project, and leasing. With respect to each area, the staff was instructed to categorize the issues that needed to be resolved. To assist in that categorization, a nationwide search was conducted in order to identify experts that would assist in analyzation of the issues as well as advocate the state's position in court or before the FTC. Foremost among those experts is David Boies who has been the lead lawyer for the United States in the Microsoft trial. Mr. Boies is one of the more prominent anti-trust lawyers in the nation. ATTORNEY GENERAL BOTELHO pointed out that the task force spent some months reviewing documents from BP and ARCO. In general, the task force has received cooperation from both companies in obtaining those records. He noted that extensive resources have been utilized for the analyzation of those records. In doing so, Alaska's task force has worked closely with the multi-state task force which has been reviewing this merger. The primary states in the multi-state task force are California, Oregon, and Washington. The work load, with regard to the analyzation of the documents, has been divided up on the basis of upstream issues and downstream issues. The upstream issues would be primarily of concern to Alaska, and therefore the downstream issues were primarily left to the west coast states. Following those reviews and extensive internal debate, the Governor announced his formal conditions on Alaska's acquiescence in BP-Amoco's acquisition of ARCO. Number 116 ATTORNEY GENERAL BOTELHO specified the Governor's conditions. First, BP would be required to divest sufficient North Slope production and leases to guarantee another oil company operator in production and exploration. The notion was to have another operator who would exercise independent control over a portion of the North Slope in order to maintain a competitive environment there. Secondly, there was the condition to have open access to oil production and transportation facilities. He explained that the desire was to avoid any company having a strangle hold on access to facilities on the North Slope itself as well as transportation, TAPS and marine transportation. Thirdly, the Governor identified his condition of a reduction of the existing tariff on TAPS. Attorney General Botelho noted that high tariffs are a disincentive for new entrants, competitors, into the market because of the higher cost of operating in Alaska. Part of the higher costs relate to the transportation of oil from distant areas to distant markets. Fourthly, the Governor specified the need for access to Alaska's natural gas resources for development. ATTORNEY GENERAL BOTELHO informed the committee that the following social responsibility issues were also identified by the Governor: (1) BP's continued commitment to hire locally and use Alaska businesses. (2) BP's environmental policy. (a)Conversion to the "Millennium" class tankers in order to comply with the Oil Pollution Act of 1990 (OPA 90). (b) Commitment to an assessment and clean up of contaminated sites on the North Slope. (c) Continued commitment and plan dealing with erosion issues on feeder pipelines. (3) Continued and increased commitment to important civic and community causes. ATTORNEY GENERAL BOTELHO pointed out that although the aforementioned conditions are broad, there was a fairly extensive list of demands to implement each condition. Those were presented to BP shortly after the Governor's presentation to the Anchorage Chamber of Commerce. Last week, there was a second meeting with BP officials in order to receive initial responses. During a meeting between the Governor and Dick Olver, there was the decision not to have any ongoing discussions during this special legislative session. Therefore, dialogue is expected to resume next week. Returning to the meeting between the Governor and Mr. Olver, Attorney General Botelho said that the Governor stressed the need for the public to have viable input before there is a deal. Mr. Olver acquiesced on that point. Therefore, there will be a process which looks to the state in negotiating with BP. Attorney General Botelho said that there is only the expectation, over the next few weeks, that there would be a determination as to whether an agreement can be reached. If a draft agreement can be reached, there would be an extensive effort to get the tentatively agreed upon terms to the public via a variety of media. There would be a series of town hall meetings around the state. He indicated that teleconferencing would probably also be used to reach more remote areas of the state. [NOTE: The ending of the meeting, during which the meeting was recessed to the call of the chair was inadvertently taped over a small portion of Attorney General Botelho's comments. The tape over is less than one minute.] ATTORNEY GENERAL BOTELHO said, "...to the Chief Executive of British Petroleum - Amoco, Sir John Browne, for final resolution." Attorney General Botelho believed that before the final step is taken, the Governor intends to consult with the legislative leadership of this committee. ATTORNEY GENERAL BOTELHO reiterated that the task force is working as a state team as well as with the multi-state task force. Furthermore, there is daily contact with the FTC in the sharing of information and views. The FTC has not yet committed to a final schedule. Originally, BP-Amoco and ARCO expected that there would be approval before the end of this year. Attorney General Botelho sensed that the FTC is now aiming for November. In conclusion, Attorney General Botelho stated: Again, the Governor, ..., would want me to underscore that we do not have a deal. That if we're unable to reach an agreement which he believes is in the state interest, that we are prepared to use any and all forums; that is both in court and before the FTC to achieve results which we believe will create the kind of competitive environment that will maximize the developments of our North Slope resources. Number 266 CHAIRMAN HALFORD inquired as to when the FTC could expect a state position from the Administration. ATTORNEY GENERAL BOTELHO reiterated that there is daily contact [with the FTC]. The FTC knows the nature of the terms with respect to the competitive issues. However, the Alaska hire issue and the environmental issues aren't issues "on the FTC table." The FTC knows what the state is seeking. The state is informing the FTC with regard to what information has been exchanged. The state is aware of the dialogue between the FTC and BP-Amoco. With regard to the official state position, Attorney General Botelho indicated that if a draft agreement is reached, it would be shared with the FTC simultaneous [with the public process] if not slightly before the public process. If a final agreement is reached the state will meet with the FTC to share that. Furthermore, if no agreements are reached that will also be shared with the FTC. Attorney General Botelho noted that a formal presentation to the FTC in mid October to early November is within their [FTC's] time frame. REPRESENTATIVE PORTER commented that the Governor or the legislature has the ability to "just say no" to the deal. If no agreement is reached, what options are left? ATTORNEY GENERAL BOTELHO answered that the state, on its own, has the ability to file a lawsuit in state superior court under the state anti-trust law in order to block the portion of the merger which affects Alaska. The state may also file a lawsuit in federal district court under federal anti-trust law. An anti-trust case under federal law may only be brought in federal courts. He reiterated that the state can make its views known to the FTC, who regards the state executive, in particular the attorney general's office, as a sister law enforcement agency. While the state couldn't enter as a party or litigate before the FTC, the purpose would be to explain the state's concerns from an anti-competitive standpoint. He noted that, theoretically, there could be congressional action. However, such would be highly unusual. Number 321 REPRESENTATIVE GREEN returned to the mid-October to early November time frame and inquired as to the reasons for that time frame. ATTORNEY GENERAL BOTELHO commented that the Exxon Mobil merger may play a slight role with regard to timing, but stressed that the FTC is actively working the BP-ARCO merger. He noted the FTC has two different staffs which may indicate some sharing and may have caused a slight delay. Attorney General Botelho, parenthetically, noted that the state is also involved in the multi-state task force regarding the Exxon Mobil merger and the potential impacts to Alaska. REPRESENTATIVE GREEN inquired as to what would happen if the legislature and the state do not agree. ATTORNEY GENERAL BOTELHO specified that the responsibility for anti-trust enforcement is an executive branch action. Of course, the goal is to make certain that the state and the legislature aren't at odds. He pointed out that certain powers rest exclusively with each branch of government. For example, the legislature has the power to tax. SENATOR PEARCE commented that she was struck by the fact that almost all of the Governor's conditions, Alaska's interests, are in direct competition with downstream interests. Therefore, she inquired as to Alaska's role in the multi-state task force. What is the multi-state task force expected to achieve in relation to the FTC? Furthermore, has Alaska made any promises to other states that would be adverse to Alaska's interest as a part of that process? ATTORNEY GENERAL BOTELHO acknowledged that there are nominal issues of divergence between the upstream, Alaska, and the downstream states. Obviously, the primary concerns for California, Washington and Oregon are low gas prices and much gas. On the other hand, Alaska would like to receive as high a well-head price as possible. Therefore, there is at least a theoretical divergence of interest. However, he believed that many of the interests are the same such as the interest to maintain low transportation costs. He explained that Alaska's tax structure and royalty structure is based on a net-back value which means that there is a price at the distance refinery gate from which the transportation costs are subtracted out to arrive at the well-head value. That works as a direct revenue advantage to the state. However, the overriding concern has been the competitive issue in that new entrants would be deterred if they face higher transportation costs, marine transportation costs, and TAPS. He said that Alaska has a congruence of interest with the downstream states in looking at those costs or barriers to entry in Alaska. Attorney General Botelho stated that there hasn't been a commitment to downstream states which would be adverse to Alaska's interests. ATTORNEY GENERAL BOTELHO commented that the members of the multi- state task force work together to gather information. He indicated that the states may ultimately take a joint position with the FTC or each state would seek anti-trust remedies in their respective state courts. He noted that, theoretically, states could move to federal court in each respective state. Most often, state attorney generals utilize their own state courts to resolve anti-trust issues. In response to Senator Pearce, Attorney General Botelho agreed that at this point he didn't know whether the multi-state task force will provide one submission to the FTC or whether each state will provide their own submission to the FTC. He indicated that the multi-state task force is still in the fact-finding and analyzation stage, and therefore it is still too early to know. Number 402 REPRESENTATIVE WHITAKER commented that some believe the filing of an anti-trust suit at this time would strengthen the state's bargaining position. He inquired as to the reasoning behind why such a suit hasn't been filed. ATTORNEY GENERAL BOTELHO responded that one doesn't file until one fully has the case. If one files, he/she has to be prepared to litigate, which is a major commitment of time and resources. He pointed out that most anti-trust cases never go to trial, but rather are resolved by negotiation. That is the case at the federal level as well as the state level. Attorney General Botelho said that no state has filed a case yet because there have been overtures of settlement, and furthermore for a state to bring an anti-trust case would require more work. He noted that BP is aware that the state is prepared to exercise such action at the appropriate time. REPRESENTATIVE WHITAKER asked if, given the proposed takeover, the state has a strong anti-trust suit, in light of the current state and/or federal statutes. ATTORNEY GENERAL BOTELHO replied, "My judgement is that we do." SENATOR ELLIS recalled the mention of a two to three week period for public comment for which many have said is too abbreviated for an issue of this magnitude. Is there a reason for such a short time frame? He requested that there be consideration of extending that time frame if it becomes obvious that would serve the state's interests. ATTORNEY GENERAL BOTELHO acknowledged that it is a delicate balance. He expressed concern that the state is working against a clock, the FTC itself, for which it has little control. He said that the time frame has been structured in order to work on a fairly parallel track with the FTC. He indicated that there is a high level of confidence that the FTC isn't expected to take action before early November after which the process could move quickly. SENATOR ELLIS inquired as to when the details of the public process would be provided. ATTORNEY GENERAL BOTELHO responded that the answer to Senator Ellis' question would be dictated by two things. First, the speed at which the state engages. He believed it to be counterproductive to announce when the meetings will be held because that presupposes that there will be a draft deal. Attorney General Botelho said that there would be as much notice given as possible in as many forms as possible. CHAIRMAN HALFORD encouraged the consideration of the legislative process to be part of the public process. REPRESENTATIVE GREEN noted that there was a significant delay in the receipt of some records to the legislative oversight committee. He asked, "Is there any bias that could be established, if in order to try and meet the FTC time schedule, there is one position taken. They're [FTC] operating on that basis and doing their thing. Does that adversely affect any of the state's options, if we are behind that." ATTORNEY GENERAL BOTELHO identified a possible adverse consequence as the FTC deciding to allow the merger to proceed without change, without change that affects Alaska. He believed it substantially lessens the state's leverage which is of concern. Although it doesn't preclude the state from going to state court, he suggested that a state court would take note of the FTC's judgement as to whether there are FTC problems or not. Attorney General Botelho specified that he was speculating about many things. REPRESENTATIVE GREEN asked if the Administration feels it will be adequately prepared by mid-October or early November. ATTORNEY GENERAL BOTELHO said, with regard to whether the Administration would be prepared to proceed to trial, that the Administration would be ready in terms of preliminary proceedings. However, in terms of long-term protracted litigation, he didn't feel prepared. He indicated that the FTC is probably in the same position. If there is litigation, it will be a multi-month or multi-year time frame. Number 497 REPRESENTATIVE CROFT said that he believed that at least three of the Governor's conditions were already required by state statute or federal law. Those conditions are the divestiture of acreage, the OPA 90 double hull "Millennium" class tankers, and the cleanup of contaminated sites. How is it a concession to request the companies to comply with state or federal law? ATTORNEY GENERAL BOTELHO explained that the divestiture of acreage sought by the Governor isn't simply the divestiture of excess acreage. The Governor seeks to have a major role in determining which acreage to divest. The Governor has also said that he would not only be reviewing state acreage, but also National Petroleum Reserve-Alaska (NPR-A) acreage which is not subject to state law requirements. Therefore, the divestiture condition seeks in excess of what the state law requires. With regard to contaminated sites, BP has a responsibility to its sites but not to anyone else's sites. The Governor is looking to BP to take the lead role with regard to all contaminated sites. He then turned to OPA 90 for which there is a specific schedule. He informed the committee that the Governor's condition has an accelerated schedule. REPRESENTATIVE WHITAKER expressed concern with regard to divestiture. He indicated the need to ensure that divestiture not mean divestiture of control. He was concerned that through unit operating agreements, control would be maintained. Furthermore, he expressed concern that a partial divestiture of ownership in a particular acreage would still allow for effective control beyond unit operating agreements. He asked Attorney General Botelho to comment on the state's position thus far. ATTORNEY GENERAL BOTELHO acknowledged that he was well aware of that issue, but believed further discussion of that issue should be held in executive session. SENATOR PEARCE posed a situation in which an agreement is signed and the merger proceeds. What happens if, a year later, there isn't a second operator on the North Slope. ATTORNEY GENERAL BOTELHO answered that there are ways to structure merger approvals in order to satisfy conditions that could have consequences later. SENATOR PEARCE interjected that the participants wouldn't become two companies again. ATTORNEY GENERAL BOTELHO agreed with Senator Pearce's assessment. However, in other circumstances an agreement may require a trustee to be appointed if a company obligated to divest an asset hasn't been able to do so within the requisite time. Perhaps, there is no taker at the prices offered. He indicated that the trustee would have complete latitude to sell at whatever price to bring in a player. He clarified that he wasn't suggesting such would apply in this case, but such would be a typical mechanism to deal with such a problem. Obviously, if there is difficulty in obtaining another operator, then it would suggest that there are other problems with the competitive environment. REPRESENTATIVE KEMPLEN informed everyone that he recently received a partial list from BACKBONE regarding concerns with the merger. How is the Administration addressing BACKBONE's concerns during the negotiations with BP? ATTORNEY GENERAL BOTELHO said that he hadn't seen BACKBONE's list of concerns and couldn't comment to that end. He noted that Commissioner Shively is present as are other members of the Governor's team, if there are questions for them. Attorney General Botelho offered to review the list and speak to it. CHAIRMAN HALFORD requested that Attorney General Botelho come back to this list. He also requested the attorney general specify whether a question or certain information would require executive session under the law. SENATOR LINCOLN expressed interest in the Administration's view with regard to career ladders. She asked if there are specific numbers to be reached by a specified time. ATTORNEY GENERAL BOTELHO replied that he would be prepared to respond to that in executive session. He did note that BP hasn't received the Administration's negotiating position yet. REPRESENTATIVE GREEN turned to the Governor's condition with regard to providing BP with open access to facilities and pipelines. He asked if there would be any criteria which would establish what that might be. ATTORNEY GENERAL BOTELHO commented that the Administration is well aware of that concern and intends to address it. He clarified that the job of the negotiating team is to reach a draft agreement that would be legally enforceable, not simply a statement of principle. He noted the importance of potential entrants into Alaska or those present who may be interested in expanding. The role would be to evaluate whether there are open markets, which counter the anti- competitive aspects of the merger. SENATOR LEMAN inquired as to the Administration's position with regard to the tariff on the pipeline. Does the Administration view that as settled back in 1985 or is that on the table? TAPE 99-5, SIDE B ATTORNEY GENERAL BOTELHO stated that the Governor has made it clear that one of the task force's objectives is to lower tariffs, however that doesn't necessarily mean the reopening of the settlement reached in 1985. He reiterated the concern surrounding the impacts of high tariffs on new entrants. There are different ways in which to deal with that issue. CHAIRMAN HALFORD announced that the committee would address the BACKBONE list in some way today, and therefore requested that the attorney general review that list. ATTORNEY GENERAL BOTELHO agreed to do so, but noted that Commissioner Shively or Mr. Griffin may have to address that. Number 575 FRED BONESS, Preston, Gates & Ellis, noted that he is one of the committee's outside counsel. He announced that he would provide the committee with a brief status report beginning with a discussion of the committee's process. Mr. Boness believed that what this committee has undertaken is relatively unique and rare for legislatures. This committee has engaged in an investigation similar to that undertaken by attorney generals. He acknowledged that in other states with mergers, legislatures have had investigation committees. However, this committee has gone beyond that. He indicated that the FTC's initial reluctance to deal with legislators or representatives of the legislature seems to illustrate the rarity of this committee. That has clearly changed and the FTC is very interested in this committee's views as well as the legislature's views as a whole. One of the vehicles which enabled the committee to move beyond what is standard for legislatures is the committee's access to exactly the same documents that the FTC and the state attorney general have. That itself was rare and required extensive negotiations with BP and ARCO. Mr. Boness pointed out that these are very sensitive documents which are divided into the following two categories: confidential and highly confidential. The highly confidential documents are only available to committee members and staff. Having reviewed those documents, he said that these are the type of documents that no company or businessman would expect to be made available in the public. He noted that some of these documents are very helpful in analyzing the state's position, in relation to the anti-trust review that the attorney general, the FTC, and the state are undertaking. MR. BONESS pointed out that additionally, this committee has engaged in a number of other activities. For example, the committee has interviewed state experts with the approval and cooperation of the attorney general. The committee has also received briefings from the Governor and his team on many occasions. The committee has also met with the FTC's staff on many occasions. Furthermore, the committee has retained its own independent economic experts and legal consultants. The committee has received briefings from other in-state specialists as well as briefings from ARCO and BP personnel, attorneys and experts. The committee has received information in various public forums. MR. BONESS turned to the public policy consequences resulting from the process the committee has engaged in with respect to the proposed merger. He believed the proposed merger has opened up a public debate and focused attention on the oil and gas industry in Alaska such that hasn't occurred since prior to the construction of TAPS in the 1970s. The committee is reviewing the state's relationship with the oil industry and the global relationship between the state and oil and gas production in the world. This is being done in a fashion that he believed hasn't occurred since the 1970s. Citizen organizations, the Administration, and the legislature have all asked and sought answers to questions such as the following: what has been and should be the role of competition in Alaska, what are the benefits and costs of having both multinational players and small producers in Alaska, what is the future of oil and gas development in Alaska? The legislature's participation has caused BP to provide more information in the public arena with regard to its future plans and expectations. He believed [the process] will not end until the legislature, the Administration, and the Alaskan public are satisfied with the rules governing the relationship between the state and the oil industry in today's conditions. Although resolution of the merger is a short-term issue, it is likely that the merger has triggered long- term questions which go beyond the merger. MR. BONESS addressed a few of the substantive conclusions which he believed could be made even before review of the documents is complete. Mr. Boness said, "I believe it is fair to say that the merger as proposed offers few direct benefits to the state." Those benefits to the state identified by BP-Amoco could be achieved by means other than the proposed merger. The notion that the merger could rationalize production activities on the North Slope could be accomplished without a merger. The companies could achieve such independently by acting in their own self interest. Perhaps, such could also be accomplished by the state taking a more forceful role in assessing that it happens. Furthermore, the process of this rationalization was already under way before the merger. That is illustrated by BP's reorganization of its own tanker fleet to operate more efficiently which occurred before the merger was announced. The process initiated by BP before the merger could easily continue. Number 491 MR. BONESS said there are a number of adverse consequences of the merger. Although those adverse consequences can be identified, assessing the seriousness of those consequences is difficult. For example, there will be one less bidder in future oil and gas lease sales on the North Slope. There will also be one less TAPS carrier as well. Furthermore, there will be concentrated ownership of production facilities, concentrated ownership of the marine tanker situation, centralized technological development, and centralized decision-making with regard to natural gas commercialization. MR. BONESS informed the committee that the vast majority of the rules that govern the relationship between the state and the industry, especially those with respect to North Slope producers, are governed by settlement agreements or other contractual relationships, not statutes and regulations. He identified other contractual relationships as the right-of-way lease for TAPS, the TAPS settlement methodology agreement, the TAPS capacity agreement, royalty settlement agreements, lease agreements and unit agreements. The state is a party to all of those agreements. Mr. Boness said that this situation reduces the number of levers available to the legislature to set policy. Furthermore, this situation demands from the legislature creative, well thought out decisions with respect to the options available to the legislature. Number 474 MR. BONESS addressed what remains to be done with respect to the merger. Both the Governor and the FTC have invited the legislature's advice and input, although the time frame seems to be short. The Governor has established a number of conditions which he has said must be met before he will agree to the merger. Fundamentally, the Governor's conditions seek to ameliorate the adverse consequences of the merger and to gain certain future benefits for the state since the state has some bargaining power. Mr. Boness said that the legislature has two options with regard to the advice the legislature may choose to give to the Governor and the FTC. The legislature could tell both the Governor and the FTC that this merger should be opposed and if there are any legal grounds to do so, that would be in the state's best interest. The legislature could also accept the merger as proposed or make recommendations to modify the conditions. MR. BONESS commented that whether the merger occurs or not, it is not likely the process initiated by the merger will end with the consummation or abandonment of the merger. The state's oil and gas industry will enter a new phase shortly. He pointed out that the TAPS right-of-way lease will be up for renewal in a few short years and may provide a mechanism for adjustment of relationships between the state and the oil industry. He also pointed out that the TAPS settlement methodology must be renegotiated between 2006 and 2008. If the TAPS settlement methodology isn't resolved by 2008, the settlement methodology terminates. Furthermore, state budget issues, including taxation policy, loom as a major issue of the future. Mr. Boness said, "The attention focused upon the industry and the public awareness gained from that attention provides an ideal stepping stone for these broader issues, if you choose to pursue them." REPRESENTATIVE WHITAKER recalled Mr. Boness' comments regarding time being short with regard to the legislature's two options. He inquired as to Mr. Boness' perception of that time frame. MR. BONESS responded that the legislature is not likely to be an entity to bring a lawsuit. If a lawsuit is to be filed, it would be incumbent upon the legislature to persuade the attorney general to do so. Therefore, Mr. Boness viewed the attorney general as controlling the time frame with respect to that portion of the decision. The FTC may or may not be moving as fast as indicated by the attorney general. "I think to the extent that the FTC and the judgement of this committee's advisors is that the FTC is not moving as fast as the attorney general indicated. Your time table, particularly with respect to conditions or persuading the FTC to bring a lawsuit may not be quite as short as the attorney general indicated." He pointed out that the FTC is more accustomed to working with a state attorney general than with a legislature. Although the FTC is now eager to have the legislature's input, the legislature wouldn't want to be in conflict with the attorney general since he is establishing the time table. Mr. Boness understood Attorney General Botelho to be setting a time frame of the next two to three weeks. CHAIRMAN HALFORD inquired as to the difference a one cent change in the tariff would make for the state. MR. BONESS answered that a one cent change amounts to about $900,000. A one dollar change amounts to about $90 million annually. He explained that Alaska receives revenues from royalty and from taxes. One aspect of the tax is a severance tax which ties into the tariff. He posed a situation in which the price of oil in California is $15 from which the cost of the tanker and the tariff would be subtracted. In the case of royalties, an agreed upon field cost is subtracted which results in the net-back price. The net-back price, the price on which one pays a royalty, is typically 12.5 percent. If the full severance tax is being paid, the net-back price would be 15 percent or less if the economic limit factor (ELF) kicks in which reduces the severance tax. Therefore, every dollar increase in the tariff reduces the pump station one value and thus reduces the royalty and severance tax payments to the state. REPRESENTATIVE KERTTULA understood Mr. Boness to mean that the higher the tariff or the higher the transportation costs, the more money the state loses in its taxes. MR. BONESS agreed, but noted the state would also see a loss in royalties as well. Number 395 REPRESENTATIVE PHILLIPS inquired as to the effect on the FTC if all the other states agreed to the merger, save Alaska. MR. BONESS said that one would have to know what the other states are telling the FTC with regard to why the merger would be acceptable in comparison to what Alaska tells the FTC is the problem. "The underlying analysis is an anti-trust analysis; is the combination of ARCO and BP likely to result in the lessening of competition which is adverse to the public interest." If Alaska was able to persuade the FTC that there are areas of competition in Alaska which are being lessened and have serious public consequences, the FTC may proceed to negotiate resolution of those or file a lawsuit. SENATOR ELTON surmised from Attorney General Botelho's testimony that the FTC is fully in charge of the time table. After hearing Mr. Boness' testimony, Senator Elton surmised that the attorney general may be in more control than he originally believed. MR. BONESS emphasized that at the moment, BP and ARCO are in charge of the time table. He explained that under the federal process there is an initial filing, after which the FTC requests more information. That request from the FTC is referred to as a second request. Under the law, the companies provide the information requested which is the information the committee has access to. He stressed that under the law, the next time table doesn't begin until the companies have substantially complied with providing information per the second request. After the second request is complete, he believed the FTC has 20 days to decide whether to permit the merger or file a lawsuit. He believed that, as a practical matter, the FTC typically negotiates a time frame with the company upon completion of the second request. REPRESENTATIVE ROKEBERG asked if the company can request a unilateral lowering of the tariff which he assumed would correspond with the Alaska Regulatory Commission on the feeder pipeline. How does that happen? MR. BONESS, in response to Representative Rokeberg, explained that when the pipeline began operation in June 1977, the parties knew there would be disputes over the tariff. At the time, the Alaska Pipeline Commission(Federal Power Commission) regulated intra-state tariffs. There was a legal framework for establishing those tariffs. Litigation and disputes occurred for many years. In 1984 or 1985, the parties entered into the TAPS settlement methodology which is referred to as TSM. The TSM is a contract litigation settlement agreement which was adopted and approved by the Federal Energy Regulatory Commission (FERC) and the Alaska Pipeline Commission. He explained that the TSM establishes its own methodology for setting tariffs on TAPS. He recalled that Attorney General Botelho said there were negotiations to have lower tariffs which didn't necessarily mean reopening the TSM. Mr. Boness believed that one effective way to lower tariffs is to reopen the TSM agreement. SENATOR PEARCE asked if the FTC has free reign in their requirements. Are there some guidelines? For instance, could the FTC require divestiture of all ships? MR. BONESS said that the FTC does have much latitude. The requirements imposed by the FTC have to be related to the harms they see. Therefore, Senator Pearce's reference to divestiture of ships would be a good example to the extent that the FTC sees a substantial concentration and a problem in the maritime aspect of transporting ANS oil. The FTC could require the divestiture of some or all of the ships. REPRESENTATIVE KERTTULA emphasized, as pointed out by the attorney general, that the FTC is going to handle anti-competitive issues. There are a range of issues of interest to Alaska which may be at odds with other states. MR. BONESS agreed, however the discussion has substantially expanded beyond the anti-trust consideration. He attributed that expansion in the discussion to this committee and the public debate. The resulting discussion has been a public debate regarding the policies and relationships between the state and the industry in the future. CHAIRMAN HALFORD announced that the next scheduled witness is John Williams who will provide the committee with a status report in executive session. He asked for a motion to proceed to executive session. Chairman Halford clarified that there will be two levels of executive session. One executive session will be available to all members of the legislature and doesn't require the confidentiality agreement. The second question is regarding executive session on information that is from the confidential documents and will require the confidentiality agreement. Chairman Halford specified that the intent is to go with the minimal level of closure in each level. Therefore, the executive session without the confidentiality agreement would be first and under which Mr. Williams could speak. Chairman Halford specified that Mr. Williams is head of the Washington contract firm which is working on the merger for the committee. REPRESENTATIVE WHITAKER informed the committee that he had concern that in signing the confidentiality agreement he would somehow be compromised. He requested that Mr. Boness provide an explanation of that concern. REPRESENTATIVE KERTTULA spoke to the confidentiality agreement. She said that none of the legislators who have signed the confidentiality agreement have lost any ability to talk, have meetings, or present information to the public. "In fact, all that we've done is, for the first time, given the state the ability to have access to the documents ... that really pertain to the business workings of the companies that the attorney general and the FTC have." She noted that upon negotiations for the confidential documents, it was discovered that Congress doesn't have access to these confidential documents. These documents provide a fundamental understanding of the situation. She pointed out that there is no need to sign a confidentiality agreement for this first level of information because no confidential documents will be discussed. Representative Kerttula said if, at the next level, one signs a confidentiality agreement, then the person can't discuss the confidential information. MR. BONESS added that, as a practical matter, most of the documents are being reviewed by legislative staff. He indicated that legislators will probably review a small number of documents. Therefore, the agreement shouldn't be a difficulty for legislators and is a tremendous help to staff in order to formulate conclusions. Number 232 REPRESENTATIVE GREEN moved that the committee stand in recess for the purpose of executive session. There being no objection, it was so ordered and the committee went into executive session at 10:30 a.m. CHAIRMAN HALFORD called the committee back to order in open session and recessed the meeting to the call of the chair at 1:45 p.m.