SENATE RESOURCES COMMITTEE April 12, 1995 3:40 P.M. MEMBERS PRESENT Senator Loren Leman, Chairman Senator Robin Taylor Senator Georgianna Lincoln Senator Lyman Hoffman COMMITTEE MEMBERS ABSENT Senator Drue Pearce, Vice Chairman Senator Rick Halford Senator Steve Frank COMMITTEE CALENDAR SENATE BILL NO. 97 "An Act declaring the dragonfly as the official state insect." CS FOR HOUSE BILL NO. 239(STA) "An Act declaring the four spot skimmer dragonfly as the official state insect." Tesoro Royalty Oil Contract Briefing Confirmation Hearing: Frank Rue, Commissioner, Department of Fish and Game SENATE BILL NO. 130 "An Act relating to marine pilots and the Board of Marine Pilots; extending the termination date of the Board of Marine Pilots; and providing for an effective date." SENATE RESOLUTION NO. 2 Opposing a proposed international convention classifying coal as a hazardous and noxious material. PREVIOUS SENATE COMMITTEE ACTION SB 97 - No previous action to record. HB 239 - No previous action to record. SB 130 - See Resources minutes dated 3/20/95. See Resources Subcommittee minutes dated 3/23/95 and 4/6/95. SR 2- No previous action to record. WITNESS REGISTER Representative Irene Nicholia State Capitol Juneau, AK 99801-1182 POSITION STATEMENT: Sponsor of HB 239 Melanie Matter, 5th Grade Dana Diehl, 6th Grade Andrea Gusty, 6th Grade Rachael Boelens, 7th Grade Bruck Clift, 7thGrade Derek Aluia, 7th Grade Deidre Bush, 8th Grade Rainy Diehl, 8th Grade Ruth Bradford, Teacher Claudia Aluia, Chaperone Mary Nicoli Elementary School Aniak, AK 99557 POSITION STATEMENT: Commented on HB 239 and SB 97 Commissioner Designee, John Shively Department of Natural Resources 400 Willoughby Ave. Juneau, AK 99801-1796 POSITION STATEMENT: Commented on Tesoro Royalty Oil Contract. Kevin Banks Division of Oil and Gas Department of Natural Resources 3601 C St., Ste. 1380 Anchorage, AK 99503-5948 POSITION STATEMENT: Commented on Tesoro Royalty Oil Contract. Bernie Smith Alaska Government Affairs Tesoro Alaska P.O. Box 3369 Kenai, AK 99611 POSITION STATEMENT: Commented on Tesoro Royalty Oil Contract. Jon Tillinghast Tesoro Alaska P.O. Box 3369 Kenai, AK 99611 POSITION STATEMENT: Commented on Tesoro Royalty Oil Contract. Frank Rue, Commissioner Designee Department of Fish and Game P.O. Box 25526 Juneau, AK 99802-5526 POSITION STATEMENT: Confirmation Hearing Jeff Bush, Deputy Commissioner Department of Commerce and Economic Development P.O. Box 110800 Juneau, AK 99811-0800 POSITION STATEMENT: Supported SB 130. Richard Monkman Alaska Coastwise Pilots Association 350 N. Franklin Juneau, AK 99801 POSITION STATEMENT: Supported SB 130. Doug McPherson, President Alaska Coastwise Pilots Association P.O. box 7855 Ketchikan, AK 99901 POSITION STATEMENT: Supported SB 130. Larry Cotter Alaska Steamship Association 234 Gold Street Juneau, AK 99801 POSITION STATEMENT: Supported SB 130 with the maximum tariff amendment. Stephan Moreno Alaska Marine Pilots P.O. Box 730 Dutch Harbor, AK POSITION STATEMENT: Supported SB 130. Hans Antonson Southeast Alaska Pilots Association P.O. Box 6100 Ketchikan, AK 99901 POSITION STATEMENT: Supported SB 130 in its current form. Peter Lee Nielsen P.O.Box 22708 Juneau, AK 99801 POSITION STATEMENT: Commented on SB 130. Eric Eliassen, President Southwest Alaska Pilots Association P.O. Box 977 Homer, AK 99603 POSITION STATEMENT: Supported SB 130. ACTION NARRATIVE TAPE 95-43, SIDE A Number 001 HB 239 DRAGONFLY AS STATE INSECT SB 97 DRAGONFLY AS STATE INSECT  CHAIRMAN LEMAN called the Senate Resources Committee meeting to order at 3:40 p.m and announced that the committee would consider two bills together HB 239 and SB 97. REPRESENTATIVE IRENE NICHOLIA, sponsor of HB 239, said this bill amends Alaska Statute 44.09 to designate the four spot skimmer dragon fly as the official state insect. This suggestion was first brought to her attention by students from Aniak. Other nominations for the official state insect were the unmarked slender mosquito, morning cloak butterfly, and the bumble bee. Ballots were sent to every public school in the state. The four spot skimmer dragon fly won the nomination with an 879 vote margin. SENATOR LINCOLN invited the students to join the committee and give brief statements. They were Rainy Diehl, Deidre Bush, Derek Aluia, Bruck Clift, Rachael Boelens, Andrea Gusty, Dana Diehl, Melanie Matter, and the teacher, Ruth Bradford with the chaperone, Claudia Aluia. SENATOR LEMAN thanked them all for joining the committee. Number 281 SENATOR LINCOLN moved to pass CSHB 239(STA) from committee with individual recommendations and $0 fiscal note. There were no objections and it was so ordered. SENATOR LEMAN announced the next order of business would be the Tesoro Royalty Oil Contract Briefing. COMMISSIONER JOHN SHIVELY said he would brief them on the royalty oil contract the state has negotiated with Tesoro for which there would be a bill introduced later in the session. He said Tesoro has had a number of contracts since 1980. The current one was extended for one year by the previous commissioner, but couldn't be extended further without a vote of the legislature. He said the Royalty Oil Board met last week and recommended unanimously the adoption of the contract. They propose roughly 40,000 barrels of oil per day. In addition they have another contract for $35,000 barrels per day with Mapco. That leaves them approximately 108,000 barrels of royalty oil that is sold for the state on the market. The contracts provide that the royalty amount can be reduced on a percentage basis that can go no higher than 30% of our total royalty oil. They have negotiated a west coast price with Exxon. In addition, there is a 75-day letter of credit to protect the state should Tesoro default on payments for the royalty oil. He believes the royalty oil sale to Tesoro has increased competition in southcentral and in Fairbanks and thought that has a positive economic impact on the state. SENATOR LEMAN asked if there were any items that were different between this contract and the one they are operating under right now. MR. SHIVELY answered that the letter of credit is longer by 15 days and it's a different pricing scheme. MR. KEVIN BANKS, Division of Oil and Gas, explained that we used a volume weighted average of all west coast placements which includes BP's west coast price. SENATOR HOFFMAN asked if any of their refined product was consumed or sold outside of the railbelt. MR. SHIVELY said he didn't know the answer to that. SENATOR LINCOLN asked what is meant, "If the state and Exxon renegotiate the royalty value under the terms of the ANS royalty settlement, Tesoro may terminate the contract, if the price is not to its liking." COMMISSIONER SHIVELY said that basically they would have to give us appropriate notice that the price was too high and they would attempt to get their oil elsewhere and we would sell that oil with the rest of our royalty oil that is currently marketed by the other producers. It allows them, if there's a major change in the price of oil, to go seek another source of oil. MR. BANKS explained that we have an arrangement with the Exxon producer - a set of reopener clauses in the agreement - should the market change or should there be some government action, like the export ban which would permit us to renegotiate a price. Tesoro, under this agreement, is not allowed to participate in that negotiation. So they have to accept a fait accompli and hope that Exxon negotiates hard with the state. Number 402 SENATOR LINCOLN asked what is meant by their local hire language. MR. BANKS responded in the agreement it says "residents." He commented that they already have a pretty stable work force; it's not like we're creating a lot of new jobs. SENATOR LINCOLN said she would like to know how many Tesoro employees are Alaska residents and how many are not. SENATOR TAYLOR commented he thought the only definition of an Alaska resident was someone who has lived here for 30 days and registered to vote. COMMISSIONER SHIVELY said the bill approving the contract should be ready sometime between the 22nd and the 24th of March. BERNIE SMITH, Manager, Government Affairs for Tesoro, and JON TILLINGHAST, Council for Tesoro, joined the committee. MR. SMITH said that the state is selling roughly 27% of all the state royalty entitlement from Prudhoe Bay to Tesoro Alaska Petroleum. The contract term would be only three-years and require at least 80% of the oil purchased to be processed at the Tesoro Nikiski Refinery. The contract requires legislative approval. MR. SMITH said that royalty oil is the principal feed stock for the Tesoro refinery. This oil would represent 80% of the refinery's crude supply. There is no other stable, long-term source of crude for the refinery in Tesoro's current one-year contract with the state that expires December 31, 1995. If the legislature is unable to act on this proposed contract before it adjourns in 1995, Tesoro would loose that much of their supply and continued operation of the refinery would be in peril. Tesoro would be obligated under the proposed contract to pay a substantial premium above the price the state receives from either the North Slope producers for royalty oil taken in value or other in-state refineries. In January 1995 this premium would have been 19 cents a barrel or $2.77 million on an annual basis. MR. SMITH said there were other economic disadvantages with other in-state refineries, because Tesoro has to actually ship their crude supply from Valdez to Nikiski where the other in-state refineries pick it up off the pipeline. They also have the advantage of putting their heavy residuals back into the pipeline and Tesoro has to actually ship it out. Number 455 JON TILLINGHAST, Council for Tesoro, explained what they mean when they say they are paying a premium over what the state gets on average for its North Slope oil (19 cents a barrel higher than the volume weighted average price). SENATOR HOFFMAN asked if any of their product was sold out of the railbelt. MR. TILLINGHAST replied, "Absolutely." They sell their product in the western part of Alaska and sometimes into Southeast. SENATOR LINCOLN asked how many of their 552 statewide employees are state residents of one year or more. MR. SMITH guessed approximately 99.9% are one-year residents or longer. Refinery people work one week on, one week off, but they are required to stay in state, he said. SENATOR LEMAN commented that he was visited earlier by the Dean of the School of Mining Engineering at the University of Alaska, Fairbanks, who told him they are producing very good petroleum and chemical engineers. MR. SMITH said they had hired one. SENATOR LEMAN said they would take the bill up when they received it and thanked everyone for their participation. SENATOR LEMAN announced an at ease at 4:25 p.m. - 4:28 p.m. Number 568 SENATOR LEMAN announced the committee would next have the confirmation hearing for Frank Rue, Commissioner, Department of Fish and Game. COMMISSIONER FRANK RUE said the mission of the department is to manage, protect, maintain, and improve our fish and wildlife resources and the habitat it depends on on a sustained yield basis for the benefit of people. He said it was important to keep in mind that the resources should be managed for people. He said his last seven years he has been the director of the Habitat Division. His management philosophy which he brought with him is respecting the employees who work for him, their professionalism, asking them to meet a high standard of professionalism, give them responsibility and involve them in decisions so that he makes a more informed decision and so they understand the policies of the commissioner's office so the employees feel they are a part of the department. In his position as commissioner he hoped to emphasize willingness and desire to find solutions to difficult problems. TAPE 95-43, SIDE B COMMISSIONER RUE thought that both Boards were looking for that kind of help and guidance from the department. SENATOR LEMAN asked for a general sketch of the status of commercial fisheries around the state. COMMISSIONER RUE said some of the most difficult issues are the king salmon in Southeast treaty negotiations and the Endangered Species Act. The effects of the Northwest hydropower and depletion on runs down there and how they affect trollers up here is another very difficult issue. He said he was not real optimistic. He thought the problems the lower 48 are having with salmon would continue to be exported up here, but we have filed an intent to sue National Marine Fisheries Service on its recovery plan. Unfortunately, if you plan to sue the federal government, you have to file an intent 60 days before you sue them and by that time the season is over. But, he said, the state is trying to send the message. COMMISSIONER RUE said we are doing a lot of scientific work to argue against some of the propositions being put forward by the lower 48 and the federal government on recovery of Snake River fall chinook. In Southcentral, Cook Inlet is a very big issue. There is a referendum starting up, because people think they did not get a fair shake from the Board of Fisheries. Another big issue is the Area M/Arctic-Yukon-Kuskokwim (AYK), he said. SENATOR LEMAN asked him about stock health. COMMISSIONER RUE said he felt our chinook stocks in Southeast are in good health. We have done a good job of managing our fisheries since statehood. We have done a good job of protecting our habitat through the Forest Practices Act. The Upper Susitna has a good rebuilding program and there will be about a 50% reduction in harvest. In the AYK area they thought they had a crisis last year, but the runs came back better than they had expected. They still need to rebuild the chum stocks. SENATOR LEMAN asked if the hatchery in Kotzebue was still operating. COMMISSIONER RUE said the Bering Sea Fisherman's Association is financing a final close out of that while trying to find other funding. It is one of the more difficult hatcheries to convert to a private non-profit, because it's not an easy cost recovery fishery. SENATOR LINCOLN asked what he was doing to ensure that we have accurate data on which to make good decisions. She also asked if he was afraid to try something innovative, but if it doesn't work, move on so we can have a healthy resource for future generations. COMMISSIONER RUE said no organization is beyond improvement. He thought we should be looking for innovative ways of getting data, particularly with budgets going down. In terms of management, he thought the Board just made an interesting management decision on Round Island with a subsistence hunt of walrus. SENATOR LINCOLN asked what he was going to do different under his leadership than what has and has not been done in the past. COMMISSIONER RUE thought a lot of good things had been done in previous administrations. What we need to do in fisheries, though, is to make sure our area managers, the people closest to the fishery, are given a lot of responsibility to make decisions. He said he would not be intervening in management decisions which are more appropriately made at the area level. SENATOR HOFFMAN said that could be carried one step farther in that the fishermen might know more about what's going on in the fishery than some of the people in the department. COMMISSIONER RUE agreed they need to learn to work with people in the regions. SENATOR TAYLOR asked to what he attributed the significant increase in deer population on Prince of Wales Island. COMMISSIONER RUE attributed it to mild winters and early successional stages based on logging. SENATOR TAYLOR asked why his division has fought and denied that that existed. He commented that every report he has read from his division predicts that the deer populations will crash in decades to come, because of the harvesting of timber. COMMISSIONER RUE said research shows that if you have early successional stages of shrubs next to old growth forest and low snow, you can get more deer use of the clear cut area. The forage is not as nutritious; the deer don't do as well; and, if there is deep snow, you'll have poor deer survival. You then have to look at when those early successional stages close over and you lose the forage. That's when you get a second growth forest that's managed for timber over the long term and the deer numbers decline, especially in hard winters. SENATOR TAYLOR asked if he had any evidence of that. COMMISSIONER RUE said they have seen experiments on thinning where you can extend the shrub stage a little bit. Eventually you will get a canopy closure. SENATOR TAYLOR said they have intensively harvested timber on Prince of Wales Island for 30 years and during that entire time they have had an ever-expanding deer population on the areas managed by the U.S. Forest Service and private land owners. On areas managed by the state or where no management has occurred, they have seen cyclic decline so serious in the deer population, that his department ceased harvest of all deer in the islands that surround his communities for seven years. It did no predator control in that time, either, he added. COMMISSIONER RUE said he was sure he could go through the record and find things the Department of Fish and Game, or a particular division, didn't do well. Overall, however, they come up with solutions for thousands of issues a year. It doesn't mean that people are happy about all of them. SENATOR LEMAN asked COMMISSIONER RUE if they could reschedule another time to continue the briefing, because the committee needed to act on a number of bills, COMMISSIONER RUE agreed. SR 2 OPPOSE COAL AS HAZARDOUS/NOXIOUS SUBSTNCE  SENATOR LEMAN announced SR 2 to be up for consideration. No one was available to testify on it, so SENATOR LEMAN said they would reschedule it. SB 130 MARINE PILOTS  SENATOR LEMAN announced SB 130 to be up for consideration. SENATOR LEMAN announced an at ease from 5:10 p.m. - 5:15 p.m. JEFF BUSH, Deputy Commissioner, Department of Commerce and Economic Development, said he was a member of the Marine Pilots Board and supported SB 130 in its current form. He didn't have any recommended changes. He said their position on maximum tariffs is that they take no position on it. He thought there might be some anti-trust concerns if there is no maximum tariff, but he had meant with the association's attorneys and they felt confident there were no anti-trust problems. RICHARD MONKMAN, Alaska Coastwise Pilots Association, said he was available for questions. He supported Mr. Bush's comments about the maximum tariffs saying it did not affect his client in Southeast. DOUG MCPHERSON, President, Alaska Coastwise Pilots Association, supported SB 130 in its current form. He didn't see where the protection of a maximum tariff is required. The track record of the state's involvement in maximum tariffs tends to be very involved and somewhat costly. There is the question of whether it is in the public's best interest to be involved. LARRY COTTER, Alaska Steamship Association, supported a maximum tariff. The law requires use of pilots and that sets up a situation where they use pilots and it is absolutely critical that they develop a relationship with the pilots that allows for the commerce to flow freely and on time. He thought the proposed amendment limiting the maximum tariff to only areas where there is one association should be applied to all areas regardless of the number of associations that are in that area. The role of the state is to ensure that commerce flows. That is best accomplished by having some state oversite regarding the maximum tariff that can be charged by any association. TAPE 95-44, SIDE A Number 001 He noted that people who live in Juneau have discovered that two airlines can operate a monopoly almost as effectively as one company. Maximum tariff language has been in existence for the last four years and there have been no problems with it. STEPHAN MORENO, Alaska Marine Pilots, said they support the bill as it is. In the western region things have stabilized without the maximum tariff. He couldn't think of an example of where anyone has charged an exorbitant amount for a particular pilot move. HANS ANTONSON, Southeast Alaska Pilots Association, supported SB 130 as it came out of the subcommittee and said they don't have a problem with the maximum tariff in a region that doesn't have competition, but not in an area that has competition where market factors are working. Number 115 PETER LEE NIELSEN, representing himself, said he works for Alaska Coastwise Pilots. In 1991 when the legislature provided for competition in marine piloting he thought it was good for Alaska and marine piloting. Having observed first hand the management dynamics of both SEPA as a guild and ACP as an aggressive competitor, he thought there were advantages to both methods. However, competition has sharply divided and alienated southeast pilots as a peer group, resulting in litigious actions costing individuals and the Board of Marine Pilots considerable effort, time, and expense, increased pilot license fees, raised concerns and questions about pilot training, qualifications, and marine safety issues. As a result, he thought the guild system provided for stability, better trained pilots, and more qualified pilots, and keeps safety of lives, vessels, and our shorelines and wildlife foremost. A true guild system of pilotage cannot exist in a competitive market place, MR. NIELSEN said. Competition drives tariffs. A maximum tariff pushes competing pilot associations into difficult, and at times, last minute tariff negotiations with their principals in order for them to stay in business and ensure employment for their members. It's common knowledge that the low bidder in tariff and contract negotiations usually gets the business. Therefore, industry is in a favorable position. A state-fixed tariff periodically visited by an appointed rate review commission would bring structure and stability to a chaotic situation. SENATOR LEMAN asked him to explain the guild system. MR. NIELSEN explained it's the historical system of pilotage where people join together to benefit themselves and it's become accepted that it also benefits an area. When it first started there was pure competition. His great-great-grandfather was one of those in Norway who lost his life doing that. Later, because competition disrupted commerce, pilots banded together for their own safety, for their countries' commerce in a peer-guild system. Members of the guild join together for the betterment of pilotage, the skills and safety concerns of the state, and environmental concerns. SENATOR LEMAN asked if he knew of an area where there was a true guild system. MR. NIELSEN said there are true guild systems in the United States, one is in Florida. Number 237 ERIC ELIASSEN, President, Southwest Alaska Pilots Association, said this bill incorporates the recommendations of the Alaska State Pilots Alliance draft. In Southcentral they would accept the maximum tariff amendment as opposed to fixed tariffs. He said they could go either way and they were willing to go with arbitration in those regions that did have competition. SENATOR LEMAN said they would hold the bill until next Wednesday and adjourned the meeting at 5:40 p.m.