SENATE RESOURCES COMMITTEE March 06, 1996 3:40 P.M. MEMBERS PRESENT Senator Loren Leman, Chairman Senator Drue Pearce, Vice Chairman Senator Steve Frank Senator Rick Halford Senator Robin Taylor Senator Georgianna Lincoln Senator Lyman Hoffman MEMBERS ABSENT All Members Present COMMITTEE CALENDAR SENATE BILL NO. 112 "An Act establishing a discovery royalty credit for the lessees of state land drilling exploratory wells and making the first discovery of oil or gas in commercial quantities." SENATE BILL NO. 199 "An Act relating to environmental audits and health and safety audits to determine compliance with certain laws, permits, and regulations; and amending Alaska Rules of Appellate Procedure 202, 402, 602, 603, 610, and 611." SENATE BILL NO. 284 "An Act relating to the four dam pool transfer fund and the power development fund." PREVIOUS SENATE COMMITTEE ACTION SB 112 - See Resources minutes dated 3/08/95, 3/10/95, 3/17/95, and 3/27/95. SB 199 - See Resources minutes dated 1/31/96. SB 284 - No previous action to consider. WITNESS REGISTER Bill Stewart, President Stewart Petroleum Company 3111 C Street Anchorage, AK 99501 POSITION STATEMENT: Supported SB 112 with changes. Ken Boyd, Director Division of Oil and Gas Department of Natural Resources 3601 C Street Anchorage, AK 99503-5948 POSITION STATEMENT: Commented on SB 112. Kathryn Thoma P.O. Box 3005 Kenai, AK 99611 POSITION STATEMENT: Supported SB 112. Mike Pauley, Staff % Senator Loren Leman State Capitol Bldg. Juneau, AK 99801-1182 POSITION STATEMENT: Staff to sponsor of SB 199. Jeff Carpenter, Industrial Hygienist Alaska Occupational Safety and Health Program 3600 C Street Anchorage, AK 99503 POSITION STATEMENT: Opposed SB 199. Paul Grossi, Director Division of Workers Compensation Department of Labor P.O. Box 25512 Juneau, AK 99802-5512 POSITION STATEMENT: Commented on SB 199. Ken Donajkowski, Audit Consultant ARCO Alaska, Inc. Representing AOGA 700 G St. Anchorage, AK 99503 POSITION STATEMENT: Supported SB 199. Pam La Bolle Alaska State Chamber of Commerce 217 2nd St. Juneau, AK 99801 POSITION STATEMENT: Supported CSSB 199. David Hutchens Alaska Rural Electric Cooperative Association 703 West Tudor Road Anchorage, AK 99503 POSITION STATEMENT: Supported SB 199. Janice Adair, Director Division of Environmental Health Department of Environmental Conservation 555 Cordova St. Anchorage, AK 99501 POSITION STATEMENT: Opposed SB 199. Stephen White, Assistant Attorney General Natural Resources Division Department of Law P.O. Box 110300 Juneau, AK 99811-0300 POSITION STATEMENT: Commented on SB 199. Mark Wheeler Alaska Environmental Lobby 419 6th Ave. Juneau, AK 99801 POSITION STATEMENT: Commented on SB 199. Nancy Weller Division of Medical Assistance Department of Health and Social Services P.O. Box 110660 Juneau, AK 99811-0660 POSITION STATEMENT: Opposed on SB 199. David Rogers Council of Alaska Producers P.O. Box 22653 Juneau, AK 99802 POSITION STATEMENT: Commented on SB 199. Randy Simmons, Development Finance Manager Alaska Industrial Development Export Authority(AIDDEA/AEA) 2360 Lord Baranof Anchorage, AK 99517 POSITION STATEMENT: Supported SB 284. Dennis Lewis P.O. Box 329 Petersburg, AK 99833 POSITION STATEMENT: Supported SB 284. Dick Olson, President Thomas Bay Power Authority P.O. Box 1318 Wrangell, AK 99929 POSITION STATEMENT: Supported SB 284. ACTION NARRATIVE TAPE 96-24, SIDE A Number 001 SB 112 DISCOVERY ROYALTY CREDIT  CHAIRMAN LEMAN called the Senate Resources Committee meeting to order at 3:40 p.m. and announced SB 112 to be up for consideration. ANNETTE KREITZER, staff to the Senate Resources Committee, explained the proposed committee substitute. She said she worked with the Division of Oil and Gas and with industry to come up with another phrase for the terms "in commercial quantities and in a geologic structure" regarding their current relevance and that is reflected in the committee substitute. The current meaning of discovery royalty connotes drilling activity, even production and the original law was instituted to encourage new development and that's reflected with the inclusion of discovery royalty in the exploration licensing program. There is a change from 10 years to primary or initial term of lease to retain the discovery aspect of the royalty reduction - that it's not a long term provision, but is meant to reward discoveries of new pools. SENATOR TAYLOR moved to adopt the committee substitute to SB 112 for purposes of discussion. There were no objections and it was so ordered. Number 100 BILL STEWART, President, Stewart Petroleum Co., said he has approximately 26 years of oil and gas industry experience in Alaska. Their company is a small Alaska based independent company in Alaska. Their primary interest within Alaska is Cook Inlet Basin and their current production averages almost 5,000 barrels per day. Total production since start-up in 1993 has exceeded 2 million barrels. Their project is small by industry standards in Alaska, although it would be sizeable almost anywhere else. Investment to date exceeds $50 million. Taxes and royalties paid thusfar to the State of Alaska total approximately $3.2 million. They employ 15 - 60 Alaskans depending on activity and they do business at all times possible with Alaskan vendors and service companies who employ Alaskans. However, the operation is on the marginal side due to its remoteness and high operating costs per barrel and chronically low oil prices in Cook Inlet. MR. STEWART said that about 60 wells have been drilled in Alaska by independents including the first well in Alaska (in 1898). He said that SB 112, if enacted, would reestablish a discovery royalty program and he thought it would result in implementation of more aggressive development schedules by the operators than otherwise would have taken place. Encouragement is needed from government with natural obstacles such as weather conditions and remoteness; the man made obstacles include a regulatory system which is improving, but is still filled with road blocks to development. The man made obstacles are the tougher ones resulting in high costs. SB 112 with certain modifications would provide part of the needed encouragement for renewed industry activity in Cook Inlet Basin, at least from the independents. Much of the bill deals with leasing matters not related to discovery royalty. The language that does relate to discovery royalty, in his opinion, falls short in a couple of respects. First, reduced royalty for the primary term only is not much of a benefit. Recent leases in Cook Inlet have been issued for primary terms of seven years rather than the usual 10 and finding oil takes time. Geological studies and field work, often seasonal, integration of geological and geophysical data for prospect delineation, selection of bottom hole objective, well planning, permitting, drilling rig arrangements, acquisition of supplies, and actual drilling are among the activities involved - not to mention huge amounts of money and luck in finding oil. He didn't have a precise study at hand, but he thought that most of the discoveries in Alaska were made in the last few years of the primary term of the oil and gas lease involved or more often during the term extended by unitization. While SB 112 is a good concept, the time limitation in large part removes the benefit, he said. Second, unless the act is retroactive, the applicability provision will exclude all currently issued leases. Those leases which are most ready for development will not receive the benefit of reduced royalty. Operators can only look at future leases and lease sales which may or may not occur. At the risk of obvious self-service, it's appropriate to have an effective date that picks up west McArthur River and Sunfish, the two wells that got the second wave of exploration going - around January 1, 1991. The McArthur River development would definitely continue at a more rapid pace with quicker recovery of capital and expansion of activities there. Other activities in Cook Inlet Basin could commence earlier, like at Anchor Point. He proposed reinstatement of the original 10 year program which would apply to discoveries made after January 1, 1991 effective upon date of discovery. Previous royalty payments paid subsequent to such discovery date which exceed the five percent royalty will constitute a credit against future royalty payments. Suggested language is attached to his testimony which he is handing out. The suggested language applies only to Cook Inlet Basin as a means of revitalizing Alaska's oldest petroleum producing province. Number 260 SENATOR LINCOLN asked him to comment on the phrase "The payment of royalty under this paragraph is authorized only to the holder of the lease who first files." MR. STEWART responded that would be the operator who discovered and that mechanism is already in place, for example, they filed on their discovery well verification of a well capable of producing in commercial quantities (a finding issued from DNR). SENATOR LEMAN said it was his intent to do all he could to help encourage independents like him to explore and be successful. MR. STEWART thanked him and said he was in touch with quite a few independents who are waiting to see what is going to happen here. SENATOR TAYLOR asked what the dollar downside would be to the State of Alaska with the reduction. He asked if it was 7 1/2 percent. MR. STEWART answered yes and it would be hard to estimate without knowing the extent of the find and oil prices at the time. He said it would stimulate activity and the State would be well ahead in the long term. SENATOR FRANK asked how many leases Prudhoe Bay has. MR. STEWART answered that he didn't know that, but there are 1,700 wells involved. SENATOR FRANK said there is no chance that we would give away a royalty on a huge field, because it would require many leases only the first of which would have the reduction. MR. STEWART said that was correct. SENATOR TAYLOR noted that the language was written so that it would encompass the oil or gas within a pool and the pool is defined somewhat broadly. MR. STEWART responded that logically a pool would extend beyond the lease. He thought that a well capable of producing in commercial quantities should establish discovery. The "pool" takes years to define. SENATOR TAYLOR said they might need a redefinition of "pool" as it impacts the royalty question. MR. STEWART thought the language used in the early '60s was adequate. SENATOR LEMAN said it was his understanding that there were some challenges to the definition of discovery used in the '60s and that's part of the reason the royalty reduction was withdrawn. The other reason was that Prudhoe Bay was just discovered and the legislature thought they didn't need it. Number 370 KEN BOYD, Director, Division of Oil and Gas, said he thought the committee substitute was an improvement over the original bill, but he thought there were still several problems. The first one is "first discovery" is not properly defined and this has resulted in quite a number of law suits. There is no guidance in determining the amount and type of data you might need, the size of the pool, or any standards of productability. As a technical point, the bill seems to conflict with AS 30.05.180 (f) (4), page 3, line 7, which seems to beg the question of a discovery royalty on leases that carry royalty. The term of the lease is not clear to either mean the whole term of the lease or the primary term of the lease. The major problem he has is with the large and unintentional economic impact this bill may have. You get about $275,000 in reduction per well per year, so for a 10-year term that would be $2,700,000. Leases can have more than one well. For 10 wells there would be $27 million roughly in forgiven royalty over that period of time. The problem is that this could happen without ever adding an incremental barrel of oil because you can drill in Kuparek and have a perfectly good Kuparek producer, but then make a "discovery" in the shallow part of the well. Here there is no standard; it doesn't have to be produced or anything else. So if you discover it on that lease, then that entire lease and all the production that comes from it is subject to a five percent royalty. In the example he's using, that comes out to $27 million. He thought a better way to do it, if you're looking for new discoveries, is to have the royalty reduction apply to the newly discovered horizon. In other words, you have incremental production that was discovered being given a five percent royalty, but not that oil that is on the lease and which is perhaps very well known. Number 440 SENATOR LEMAN noted that Mr. Stewart's suggestions only applied to Cook Inlet for discoveries made after January 1, 1991. MR. BOYD responded that it depends on what benefits you are actually achieving by it. There are royalty reductions in HB 207 ADJUSTMENTS TO OIL AND GAS ROYALTIES which gives the opportunity for royalty reductions, even prospectively, for newly discovered, delineated fields. There is also a Cook Inlet type provision that provides for three percent royalty for extending the life of a field. He hadn't thought of Cook Inlet in particular. He thought you could still run some of the numbers, although they would probably be smaller. If it comes from a lease, all you have to do is make a small discovery; it doesn't have to be producible, just something different, and then all the production from that lease gets the five percent royalty. He didn't think that was the intention of the bill. SENATOR LEMAN said that was not his intention and asked for his help with language so that that doesn't happen. MR. BOYD said he would be glad to help. SENATOR TAYLOR said he was particularly concerned with the definition of geologic structure or pool and some definition so that a mere strike of a small amount in a new area might not open up the entire field for the discovery benefit. MR. BOYD replied that with some hesitation he would be pleased to try and help, but he related a true story when years ago the then Attorney General Wilson Condon and his assistant Jeff Lowsenfeld asked themselves the same question. They went on a tour of the U.S. interviewing people and wrote a seven volume, 2,000 page tome addressing those points. He hoped those volumes could help them with the definitions. Number 490 SENATOR PEARCE said she didn't think they dealt with first discovery last year, but asked if they didn't sufficiently define pool in those discussions concerning SB 207. MR. BOYD replied that although they got a definition, he is not sure it works here. He thought it worked better in the original bill, because it begs the question if a pool is defined by the OGC is a separate entity, how big is that entity. He used the example of Kuparek where a new discovery might be found because it might be a separate little piece of Kuparek that's in a separate pool in an adjacent lease, by this definition. SENATOR FRANK asked what the difference between a pool and a field was. MR. BOYD answered a field may contain several pools, but a pool is a separate entity unto itself. KATHRYN THOMAS, Kenai Peninsula businesswoman, said her small construction and trucking business is located there. The majority of their revenue is earned from the oil and gas industry in Kenai. Because of their age, many of the producing wells in their area are not very profitable. This has resulted in Cook Inlet wells being shut in. The loss of steady good paying jobs and the accompanying buying power is felt throughout her community as evidenced by the empty store fronts and slack economy. They have not been able to stimulate a commitment for additional exploration investment. SB 112 provides this opportunity. MS. THOMAS said a discovery royalty in the Cook Inlet Basin would be one of the most exciting prospects they have had to offer resource developers in many years. Exploration work provides high paying jobs and relies heavily on the support services that her community's small businesses can provide. She said this bill has been discussed with North Peninsula Chamber members and Kenai Chamber members, with Mayor Williams of Kenai and Mayor Gilman of the Kenai Peninsula Borough. The key components of the bill's merits show a value to the stimulation of the Kenai Peninsula economy that everyone agrees on. SENATOR LEMAN said they would work on this draft and have it before the committee soon. SB 199 ENVIRONMENTAL & HEALTH/SAFETY AUDITS  SENATOR LEMAN announced SB 199 to be up next for consideration. SENATOR TAYLOR moved to adopt the committee substitute to SB 199 for purposes of discussion. There were no objections and it was so ordered. MIKE PAULEY, Staff to Senator Leman, said the committee substitute incorporates some of the changes suggested by administration witnesses. A number of technical changes were made that tightened the privilege and immunity provisions. TAPE 96-24, SIDE B JEFF CARPENTER, Anchorage Industrial Hygienist with Alaska Occupational Safety and Health Program, said they believe this bill will adversely affect the enforcement activities of the Alaska Occupational Safety and Health Program by restricting their access to documents relevant to an employers compliance with their regulations. The committee substitute defines non-privileged documents as documents required by a regulatory agency to be maintained while the AOSHP only requires certain regulations information found in audits not specifically required by regulations to establish employer knowledge of an unsafe condition and be the basis for a willful citation. If this information were to be considered part of an audit report, it could be withheld from an inspector. Additionally, employers would be immune from the penalties if they voluntarily disclose an audit report. Alaska statutes establish penalties for violations of our standards and makes no provisions for immunities from penalties, but they can be reduced by as much as 97.5 percent as provided for in their compliance manual. PAUL GROSSI, Division of Workers Compensation, said they support any legislation that makes the work place safer. They have some concerns with the present legislation. They think it could negatively impact the Division fiscally and negatively impact employees, cause delay and burden of cases, and negatively impact employers by adding additional litigation expenses. Their concern has to do with the restrictive privilege and the broad definition of audits themselves. They are concerned that a lot of information that may be contained in audits may be germane to a workers compensation case. It may be difficult because of the restricted privilege to obtain that information; it is difficult to determine the impact completely. SENATOR LEMAN commented that he met with Commissioner Cashen (DOL) early in the session and he and Mr. Perkins agreed conceptually with this approach of self audits. They are trying to encourage businesses and people to come into compliance with environmental and health and safety laws and regulations. He asked why they had not come back with suggestions for making the bill work. MR. GROSSI replied that he had submitted his suggestions and perhaps they hadn't received them, yet. He asked if they intended to make information restrictive to the workers compensation process. He said the Department did not want to punish anyone who is making the work place safer. SENATOR LEMAN asked him how it is different from application of some existing privilege like the attorney client privilege, the doctor patient privilege, or work product privilege that they have to deal with also. MR. GROSSI replied that information, as far as the actual events, is open for discovery right now. SENATOR LEMAN replied that the privilege does not extend to all information; the underlying facts are not privileged. Number 495 KEN DONAJKOWSKI, AOGA, supported the intent of SB 199. The majority of their members currently conduct self audits as a means of ensuring compliance and that is why they see value in this legislation. There is more awareness now of health, safety, and environmental issues in the work place and in communities. Interpretation of the regulations, in an effort to achieve compliance, has become correspondingly more difficult. Self auditing serves to identify areas of inadvertent non-compliance, allowing for corrective action. This legislation also furthers the climate of cooperation between industry and state agencies and appropriately places the emphasis on voluntary compliance. This bill encourages companies who do not currently conduct self audits to do so and encourages those who do to continue. The ultimate goal of improving worker health and safety and minimizing environmental impacts. Number 468 PAM LA BOLLE, President, Alaska State Chamber of Commerce, supported CSSB 199. It provides businesses with an opportunity to conduct self audits in a effort to assure they are in compliance with environmental health and safety laws. This creates an incentive for businesses who find they have inadvertently been out of compliance to voluntarily correct their actions and strive to operate in the acceptable and prescribed manner. The issue of disclosure and privileged information and the presumption of immunity are important when voluntarily disclosing evidence of a selfincriminating nature. Number 444 DAVID HUTCHENS, Executive Director, Alaska Rural Electric Cooperative Association, supported SB 199. They think it is very important that businesses be encouraged to find out what their problems are in complying with the regulatory environment and take corrective action. As it is today, if results of self audits can be discovered for regulatory purposes for penalty impositions, they are afraid there are entirely too many businesses that don't want to know what kind of problems they may have and if they don't know, obviously corrective action is not being taken. SENATOR LEMAN asked if he had any specific concerns that he could suggest changes for. MR. HUTCHENS replied that the language in the committee substitute addressed his concerns. Number 420 JANICE ADAIR, Department of Environmental Conservation, testified that they do agree with the concept behind this bill. Conducting self audits is an important way to insure compliance with environmental laws. They appreciate the changes made to the committee substitute, but they still have some concerns. The definition of environmental health and safety law has not been clarified. The more traditional environmental programs within DEC such as air and water quality and contaminated sites they would expect to fall within the scope of SB 199. Less clear for their agency are the impacts on the other programs within DEC that are primarily public health related, such as seafood processing, other kinds of food commodity processing, sanitation, public facilities, and drinking water. How the audits are done and who may conduct them and the scope of the audit remains problematic. Environmental audits are still a relatively new management tool undertaken only by the most sophisticated companies. This is the reason behind the shop sweep program they discussed with the committee in another hearing. Even though they recognize there are no generally accepted standards for audit, the department does not want to adopt regulations that dictate how audits ought to be done. They believe a more cooperative method is better to develop guidelines with a particular industries or sectors. This becomes even more critical if there is a privilege or an immunity associated with the audit. It has to be a creditable exercise. The proposed cs allows the audit to be done by an employee even if that employee has no ability to carry out the audit recommendations. They think the audit needs to be done by someone who knows what's going on; knows how the facility operates, how it should operate, what the rules are, and someone who can or works for someone who can commit the company to whatever corrective action may be necessary. The definition of audit report hasn't changed. A particular concern is the inclusion of the corrected action plan as a part of that report. In order to receive the immunity a facility has to voluntarily disclose any violations discovered as a part of the audit. To be considered voluntary, the disclosure has to be made promptly, the violation must be corrected, and the facility must cooperate with the agency in connection with an investigation of the issues identified in the disclosure. They interpret this to mean working with the agency on a corrective action plan. Under the privileged section, they can't ask for the audit and the corrective action plan is a part of the audit. It may disclosed to them, but it remains confidential. The report of the violation is not confidential and they are concerned this will undercut the public's confidence that the facility and the agency are dealing with the corrections adequately. Another important consideration is how the federal courts have defined the critical self analysis privilege. Ms. Sansone testified about the Reichhold Chemicals vs. Textron decision, but one of the things they didn't talk about very much in the court's ruling was the privilege applied only for retroactive analyses. It did not apply for prospective analyses of the company's actions. The court was very clear that the evaluations of potential environmental risks of a proposed course of action made in advance of the decision to adopt that course of action are not protected by a privilege. By the terms of the proposed legislation, as in the original, the privilege is not limited to critical self analysis of past actions. A facility operator could undertake an audit, find that a certain course of action might result in environmental damage, go ahead and take that course of action, yet benefit from the privilege. They believe that protecting criminal actions through a privilege or through an immunity is bad public policy. The bill seems to recognize that criminal actions should not be protected in that it says among other stipulations the immunity doesn't apply if the person intentionally or knowingly committed or was responsible for the action that lead to the violation. Therefore, it seems to recognize that those elements generally looked for in a criminal case (a certain state of mind) would exclude the person from the benefits of the immunity. But that's contradicted in other sections of the bill. In the first section that establishes the privilege, it states the privilege applies in criminal proceedings. Therefore, the audit would not be discoverable even if it could demonstrate criminal intent. The section that establishes the immunity states that it is also available for criminal penalties. It goes on to apparently exclude those elements looked for to decide criminal action. They also believe that establishing a privilege for environmental audits is unnecessary. All testimony has been such that an immunity would encourage people to disclose and they have concurred in the past that immunity is not problematic for them, but they do have problems with the privilege. They currently, as policy, offer people immunity from civil and administrative actions in certain circumstances. They think a privilege that creates a secret would only serve to increase public skepticism of both the industries operating in Alaska and how the agency deals with them. The question of whether or not the critical self analysis privilege should apply is best decided by the courts which can take the specifics of each case into account. A state established privilege would do nothing to protect industries from potential action on the part of federal agencies such as EPA. In fact, it's probable that privilege would lead to increased federal enforcement. EPA has already testified that this legislation could negatively impact the State's ability to retain its delegation of federal programs such as the Clean Air Program, drinking water, or solid waste. In order for the State to receive program delegation, we have to have the ability to enforce the provisions of the program. They understand EPA's concern is with the mandatory immunity provisions for all criminal, civil, and administrative actions. Loosing delegation would result not only in the loss of funding for the variety of programs delegated from EPA, but it would also result in increased federal enforcement and dual requirements, both in state and federal rules that regulate the public. The legislation continues the idea that a disclosure is not voluntary if it is required solely by a specific provision of an enforcement order or decree, but it does not mention leases, contracts, permits, statutes, or regulations. There are different standards for harm determining if a closure is voluntary as opposed to whether or not the immunity applies. In some cases you must find substantial harm and injury. In other cases you have to find substantial injury and harm. The provision on the circumvention by regulation being prohibited they believe is unnecessary. The Administrative Procedures Act does state that a regulation adopted is not valid or affective unless consistent with statute. Number 283 STEVE WHITE, Assistant Attorney General, noted that Ms. Marie Sansone, Assistant Attorney General, had testified earlier regarding their concerns. MR. WHITE said that all the changes in the committee substitute were positive ones. Many of them addressed the comments made by Ms. Sansone. The Department of Law still has some concerns not addressed by the committee substitute. Those are set out in Ms. Sansone's letter which he highlighted. He said one of her remaining concerns with the bill is how the privilege would work in a federal court action. She describes that on page 3 of her memo. On page 4 and 5 she discusses the wide breadth of the proposed privileges. As they are aware, the privilege would govern laws administered by many agencies, not just DEC. On page 5 and 6 she talks about the conduct of the audits. It's uncertain who in the company would have the authority to initiate an audit and who would have the authority, then, to initiate and oversee corrective actions. They have a concern dealing with the definition of an audit report. An audit report covers a lot of information and maybe some of the information was not intended, but in any event, it would cover the raw data, federal surveys and maps that might be discovered, as well as the conclusions and observations from the audit. It would cover post-audit activities on not just the audit themselves, but remedial activities and comments and reports and observations on those. Most privileges are an escape valve, so to speak, because if privilege protects information from disclosure, quite often there are provisions that allow information to be disclosed in case of exceptional necessity or extraordinary hardship. This relief valve is not present for the privilege. Page 7 through 9 discussed the breadth of the privilege which can be asserted against the State or by the State or between any third parties. It can be applied in any kind of lawsuit no matter what the issue is. It obviously can be applied at all stages of criminal proceeding. The bill creates an immunity that is very broad. Number 220 MARK WHEELER, Alaska Environmental Lobby, said they support efforts by industry to comply with environmental regulations. In order to make SB 199 effective they believe it needs some changes. Environmental audits should not be privileged because it invites secrecy instead of the openness need to build public trust in industry's ability to self police. Furthermore a privilege would invite defendants to claim as audit material evidence DEC needs to establish a violation or determine who is responsible. Non-compliance which results in economic gain should not be tolerated. DEC should seek to recover such economic gain. While filing for immunity a self audit must have a number of additional requirements. It must secure before notice of a citizen suit the filing of a complaint by a third party and before the reporting of a violation to DEC by a whistle blower employee. The responsible party must correct any violation discovered under the self audit within 60 days, certify in writing the corrections have been made, and take appropriate measures to remedy any environmental or human harm due to the violation. A violation discovered by a self audit must not have presented an imminent and substantial endangerment to public health or the environment. The regulated entity must agree in writing to take steps to prevent the recurrence of violation discovered under the self audit and any violation discovered in the self audit must not have occurred previously within the past three years at the same facility. SENATOR LEMAN noted that the bill does cover some of his concerns and the committee would take his recommendations and make sure the bill had been tightened adequately. Number 212 NANCY WELLER, Division of Medical Assistance, said the Commissioner sent them a letter asking for a possible exclusion from this bill. The Division of Medical Assistance performs two functions which guarantee the safety of all Alaskans when they are receiving health care services in facilities in the State. That's licensing of health care facilities under State law and certifying health care facilities which allows them to build the medicare or medicaid program for services they receive. The certification is performed under a contract with the federal health care financing administration under a very broad and vague federal law. They don't have regulations that govern that function; they operate with policy and procedure manuals that are issued by the medicaid program. They do encourage self audits of the health care facilities and want them to correct their deficiencies before they are discovered by the survey teams. They work with them very carefully so they know what they are looking for when they certify the facilities. They think it's very important for the safety of all Alaskans and especially for the expenditure of public funds that they don't give any of the facilities the ability to hide anything from the survey teams. They have had some problems in the past with records being hidden. SENATOR LEMAN asked what the requirements for reporting are now for these facilities. He said that would not be privileged information. MS. WELLER answered that all information in the facilities is available to the surveyors. Not only do they look at the physical plant, they go through all of their records. She said they have no State regulations that cover this function because it is done under contract with the Health Care Financing Administration and it's not done under federal regulations, but under procedure manuals. Number 156 DAVID ROGERS, Council of Alaska Producers, supported the intent of SB 199. Unfortunately, he hadn't had time to review the committee substitute, but would get back to the committee with any suggestions. Number 143 GERON BRUCE, ADF&G, said they support the idea of encouraging voluntary compliance and disclosure. Some ADF&G programs would be adversely affected under SB 199. Their program for protecting anadromous fish streams which has been a law in the State since statehood began has worked very effectively. It has been their philosophy to work up front with operators to make sure their plans and projects are able to go forward on schedule while protecting anadromous fish habitat. They have a very high rate of issuance for permits that are requested and they have a very low violation rate. They are concerned an unintended consequence of this legislation would be to encourage some people to withhold information they might otherwise disclose because they might perceive it would be in their interests to hold it back in case they did have an audit done. They are concerned it would dampen the spirit of cooperation they actually have in implementing Title 16 right now. The other concern they have deals with State hatcheries that are contracted out to private non-profit regional aquaculture associations. Those hatcheries, although they are operated by private entities, are still State property. If there should ever come a time when one of those facilities wanted to return one of those facilities to the State, if there was some activity they conducted that was illegal or environmentally damaging, if they returned one of those audits before they return the property, they believe they could shift the cost of any cleanup to the State. This concerns the Department. SENATOR LEMAN asked him if he thought that would be covered under the fraudulent protection provision in the bill. MR. BRUCE said he thought it might be difficult to prove the person's intention for performing the audit. SENATOR LEMAN noted that the privilege applies only if they immediately do the fix. SENATOR HALFORD said he didn't see how that worked because basically they are protected from their own information, but not from their prior acts. SENATOR LEMAN said it was his intention to keep working on the bill and asked interested parties to submit language that would fix their concerns. SB 284 FOUR DAM POOL & POWER DEVELOPMENT FUND  SENATOR LEMAN announced SB 284 to be up for consideration. TAPE 96-25, SIDE A Number 001 RANDY SIMMONS, Development Finance Manager for Alaska Industrial Development Export Authority, said that the Four Dam Pool is made up of four hydroelectric projects and the State currently owns these facilities and they are operated through a long term power sales agreement by the utilities. Under the agreement the State(AEA) has obligations for uninsured facility failures and for substandard facility performance. Under that same agreement the utilities have the obligations to operate the hydro-projects and to also pay an annual debt service that is roughly $8 - $11 million per year. That debt service is allocated by AS42.45.050 three different ways. Forty percent of it goes to PCE and the rural electrification funds; forty percent goes to the Southeast intertie grant program; and twenty percent to DCRA's power project fund. The bill addresses specific State responsibilities for repairs to two of the projects. Those projects are the Tyee Project and the Terror Lake Project. Right now their best estimate for the Tyee repairs to the transmission line is $17 million. It is imperative that the Tyee transmission line be repaired as soon as possible. There have been three occasions when that line has been out of operation. This bill also addresses approximately $3.5 million worth of repairs that are needed to the Terror Lake tunnel. They are now in engineering to come up with the final numbers and that should be completed within the next several months. Last session they understood they had these obligations and worked out an agreement with the utilities where they would use their self help right under the power sales agreement to withhold some of that $8 - $11 million to start the repairs. That agreement fell through in the last days of the session and the utilities sued the State for full self help. They were able to reach agreement with the utilities to withhold $4 million out of the amount of money that comes into the debt service to start the engineering on the repairs. Their proposal is that AEA will issue up to $25 million worth of bonds to make the repairs. The bond term could be no more than 25 years and the debt service payments must begin by July 1, 1998. They don't know what the length of the bonds would be or whether they would defer the full two years. To float those bonds, AEA has two requirements that need to be met. The first requirement is that the utilities had to waive their self help rights for the amount of debt service that has to be paid on these bonds. Their self help rights come from the power sales agreement that basically allows them to withhold their debt service to the State if the State is not fulfilling its obligations. The first agreement is in place. SENATOR HALFORD asked what was the legal case to withhold the money. MR. SIMMONS answered that it was provision 5(d) of the power sales agreement. SENATOR HALFORD asked if the State contracted away its authority to collect the money which is required by statute? MR. SIMMONS replied that the State contracted away, if they didn't uphold their obligations that they were signing to under the agreement, that the utilities could withhold that debt service to fulfill the State's obligations. SENATOR HALFORD commented that wasn't a part of the statute and he wanted to know what was the legal trail of that obligation. MR. SIMMONS said that the State had fulfilled its first requirement. They have reached agreement with the utilities to limit their self help rights. Under that agreement they have agreed with the utilities that they would not bond for any longer than 25 years and that the amount will not be more than $25 million. They have also agreed that before the State makes a decision as to the final length or term of the bonds, they would consult with them. The bill before them today takes care of the second requirement by making a revenue stream available to pay for the debt service on the bonds. The bill also clarifies that AEA may use the money in the power development fund for repairing the projects. The benefits they see for floating the bonds is that the State will meet its obligations on the power sales agreement; and if the bonds are issued this year and payments aren't made until July 1, 1998, that's basically a two year deferral which will allow the State to come up with a long term solution to financing the projects without affecting PCE or the Southeast intertie or the power development fund in that two year period. If the State has to start making payments, MR. SIMMONS said, on July 1, 1998 depending on what the length and size of the bond is, the payments could run anywhere from $3 - $5 million. If the payments are $3 million, the amount of money that will be withheld from PCE and the Southeast intertie will be roughly $1.2 million per year each and about $600,000 from the power project fund. The reason the Administration is introducing this bill is they figure there are three alternatives to financing these repairs: one is a general fund appropriation which they don't think is a great idea; two is floating bonds; and three is letting the utilities come in for their full self help rights and try to withhold the full $11 million payment this year and next year which would basically withhold close to $9 million in those two years from the Southeast intertie and PCE. Number 160 DENNIS LEWIS, Power and Light Superintendent in Petersburg, Chairman of the Four Dam Pool Project Management Committee, and Commissioner on the Thomas Bay Power Authority (Tyee Project), said he was here on behalf of all the purchasing utilities of the Four Dam Pool. On January 25, 1996 they signed an agreement with the State supporting their efforts in this bonding which would take care of the immediate repairs for the Tyee and the Terror Lake Project. Number 199 DICK OLSON, President, Thomas Bay Power Authority, said they have an obligation to make sure this facility continues to operate. He said it is evident that there will be a catastrophic failure in the not too distant future. They support the concept AIDA presented to the Committee. SENATOR TAYLOR asked when the Thomas Bay Power Authority start requesting the State to do repairs to the Tyee line. MR. OLSON answered about 10 years ago. SENATOR TAYLOR asked how much money the Four Dam Pool had collectively paid back to the State since they signed the power sales agreement. MR. OLSON replied $100 million. SENATOR TAYLOR noted that they now needed $30 million and he asked what had happened to the $100 million that should have gone for repairs. MR. OLSON said he couldn't answer that. SENATOR TAYLOR said it got squandered away on the Alaska Energy Authority that have 50 some employees at very high rates of pay, on PCE costs to the bush; it was used for general fund obligations and a whole lot of things, but not for their obligation which the State signed up with you to take on, and they had to exercise self help last year to even get their attention. MR. OLSON replied that was correct. SENATOR TAYLOR asked why 25 years for a bond reimbursement was considered short term. MR. SIMMONS replied there is nothing in the agreement saying the bond term will be 25 years; it says up to 25 years. There is also a provision that will consult with the utilities prior to issuing any bonds. The 25 year period was to give maximum flexibility to the State because they don't know what the final amount of dollars is going to be. At that point in time they were in divestiture discussions with the utilities. SENATOR TAYLOR asked if they had any veto power over the length of term they came up with. MR. SIMMONS replied that the money they are using isn't their money. It comes to the State first and then gets appropriated back out. If the utilities were not to accept these bonds long term, the cost would be a little bit higher. The only affect to the utilities is that their self help rights are limited for a little bit longer for the additional cost of financing. SENATOR TAYLOR noted if they exercise self help, they could cash the entire repair projects out in a little over three years. He asked what the cost to the subscribers was going to be if the payment time were stretched out. MR. SIMMONS replied that they don't pay a penny more, because this is a payment they have already made and it comes into the State treasury. The only thing that happens is that the utilities limit their self help right. They can't use the portion of their self help right that's going to pay for these bonds to use after this other repair. If the legislature fails to make the statutory change and they cannot come up with another way to make the repairs, at that point in time they will have a self help right that they can exercise. SENATOR LEMAN said his counsel would be to bond for considerably fewer than 25 years. SENATOR TAYLOR said from the State's general fund perspective or from the cost to the subscribers in the utilities, since they would not be receiving back 40/40/20, it will be diminished by the cost of that indebtedness. MR. SIMMONS agreed and said the real effect would be the longer the bond, the higher the cost will be and it's that differential that will affect it. He said now they have no intent to bond for 25 years. SENATOR TAYLOR noted that even with 6% bonds that would double the amount of the indebtedness every twelve years. That's close to $50 million that will have to be paid for $25 million worth of repairs that are necessary today. That's to say nothing of the repair bill that might accrue during the next 12 years. Why should we want to do that when we can cash these people out by utilizing that income stream in a little over two years. SENATOR TAYLOR wanted to know what happened in divestiture. MR. SIMMONS replied that they came to the critical point where they were going to talk about price. They had jointly funded a risk assessment by HARSA who gave them their information a month ago. The State proposed a price the utilities thought was very excessive. The utilities threw out some numbers the State thought was way too low. They mutually agreed to step away from the table and to hopefully reconvene later, but no time was set. SENATOR TAYLOR asked if the agreement was premised on the fact that there would be good faith negotiations toward divestiture? MR. SIMMONS replied yes and he thought there were good faith negotiations, but there wasn't agreement on the value of the projects. Number 334 SENATOR HOFFMAN followed up with a question about paying it off early from the revenue stream asking if there would basically be fewer dollars in allocation under the formula. MR. SIMMONS replied that was correct. In the short term they are hurt quicker, in the long term they are hurt more. SENATOR TAYLOR asked when they could expect their next meeting on divestiture. MR. SIMMONS replied that they didn't have plans for the near future. Number 359 MR. LEWIS noted that he had given a letter from all the purchasers to their offices and hoped they would review that to understand this issue better. SENATOR LEMAN thanked everyone for their participation and adjourned the meeting at 5:35 p.m.