Legislature(2017 - 2018)BELTZ 105 (TSBldg)

03/21/2018 01:30 PM JUDICIARY

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Heard & Held
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          SB 175-DNR: DISCLOSURE OF CONFIDENTIAL INFO                                                                       
1:48:30 PM                                                                                                                    
CHAIR COGHILL announced the consideration of SB 175.                                                                            
1:49:06 PM                                                                                                                    
ANDREW MACK, Commissioner, Department of Natural Resources,                                                                     
Anchorage, Alaska, introduced SB 175 stating the following:                                                                     
     The  department has  a longstanding  issue with  respect                                                                   
     to the  handling of information considered  confidential                                                                   
     under Alaska  law. Specifically, this issue  impedes the                                                                   
     department's  ability to effectively  audit and  collect                                                                   
     the appropriate  amount of royalty and net  profit share                                                                   
     payments due  under some leases  held under oil  and gas                                                                   
     A  material  term of  the  oil  and gas  lease  requires                                                                   
     producers   to   provide  price   information   to   the                                                                   
     department.  If this  price information  is higher  than                                                                   
     the  value used  by the  audited  company for  computing                                                                   
     royalty  or   net  profit  share  due  the   state,  the                                                                   
     department  will use  this higher  value in  determining                                                                   
     the payment due.                                                                                                           
     Because  this sales  information is  confidential -  yet                                                                   
     is used  by the  department in  determining the  royalty                                                                   
     in net profit  share values, disclosing  the information                                                                   
     to the  audited party  in limited  fashion is  necessary                                                                   
     to complete  and finalize the  audits. Some  audits have                                                                   
     been   completed    using   voluntary    confidentiality                                                                   
     agreements  entered into  by the  department, the  owner                                                                   
     of the  data, and  the audited  party. More  frequently,                                                                   
     one  or  more  of  the  parties   refuses  to  sign  the                                                                   
     agreements.  This again  is  an obstacle  to  finalizing                                                                   
     the audit.                                                                                                                 
     The   leases  in   existing  statutes   allow  for   the                                                                   
     disclosure   of  confidential   information  during   an                                                                   
     official   proceeding  or   the  investigation  of   the                                                                   
     department.  What they  don't provide  is the method  of                                                                   
     disclosure  nor any  additional  protective measures  to                                                                   
     ensure   the    limited   use   of   the    confidential                                                                   
     information.  The department  has  taken a  conservative                                                                   
     position  and has  chosen not  to disclose  confidential                                                                   
     information  over  the  objections  of  the  information                                                                   
     To be clear,  every member of the Department  of Natural                                                                   
     Resources   who  has   access  to,   uses,  or   handles                                                                   
     confidential  company information is  well aware  of the                                                                   
     restrictions  on that  information. They  are also  well                                                                   
     aware of  how to safeguard  that information and  how to                                                                   
     use it  in the normal  course of their  duties. It  is a                                                                   
     trust we  take very seriously.  In fact, I am  not aware                                                                   
     of  a single  instance  where inadvertent  or  malicious                                                                   
     release    of   company    confidential   material    or                                                                   
     information   has  occurred.  It   is  a  very   serious                                                                   
     business   to    use   and   we   do   not    take   our                                                                   
     responsibilities lightly.                                                                                                  
     What   this   bill   does   is   provide   myself,   the                                                                   
     commissioner,  with the ability  to determine  [whether]                                                                   
     disclosure  of confidential  information is required  in                                                                   
     the  official conduct  of state  business. And  if I  do                                                                   
     find disclosure  is necessary, provide a tool  for me to                                                                   
     use to safeguard that information.                                                                                         
     This bill  is about protecting company  information, not                                                                   
     about  disclosing  it in  some  haphazard manner.  As  I                                                                   
     mentioned earlier,  DNR takes our responsibilities  with                                                                   
     respect  to this  kind  of information  very  seriously.                                                                   
     This bill gives  the commissioner and the  Department of                                                                   
     Natural  Resources  a  tool   to  describe  in  specific                                                                   
     detail how that  information is to be used,  who gets to                                                                   
     see it,  what it is to be  used for, and how  to dispose                                                                   
     of it  if necessary. These  are the things we  think are                                                                   
     important in the conduct of our official duties.                                                                           
     I'd  like  to   add,  what  we're  proposing   here  Mr.                                                                   
     Chairman  is not something  new. It  is very similar  to                                                                   
     the  process the Department  of Revenue  uses when  they                                                                   
     have to determine tax issues.                                                                                              
1:53:24 PM                                                                                                                    
CHAIR COGHILL listed the individuals available to answer                                                                        
1:54:33 PM                                                                                                                    
ED  KING, Special  Assistant to  the  Commissioner, Department  of                                                              
Natural Resources  (DNR), Juneau, Alaska, delivered  the following                                                              
sectional analysis for SB 175:                                                                                                  
Section  1  adds  to  the  commissioner's   authorities  under  AS                                                              
38.05.020(b). Paragraph  (15) allows the commissioner  to disclose                                                              
confidential  information  under  a  protective  order  during  an                                                              
official proceeding  such as a lease  on an appeal or  request for                                                              
consideration.  This  statute  would   mirror  the  Department  of                                                              
Revenue statute  AS 43.55.040. It  lays out the process  for which                                                              
confidential  information  can be  disclosed to  a  party that  is                                                              
under audit  when another  party's information  was used  to asses                                                              
that audit value.                                                                                                               
He  explained  that what  occasionally  happens  is a  lease  term                                                              
requires a lessee  to pay royalty based on the  highest price that                                                              
is within  the field.  For example,  if a  lessee sells  their oil                                                              
for $50,  they would pay  DNR royalty based  on that $50  sale. If                                                              
another  lessee within  that same  lease sold  their share  of the                                                              
oil for  $60, they  would pay  DNR based  on $60.  DNR would  then                                                              
audit the  first company saying  it owed additional  royalty based                                                              
on  the second  lessee  who got  more  value.  Because that  sales                                                              
information is confidential,  DNR would need to figure  out how to                                                              
disclose  that confidential  data through  the audited party.  The                                                              
current statute,  AS 38.05.036(f), gives the  department authority                                                              
to disclose that  information during an audit or  during an appeal                                                              
of an  audit. What the  statute does not  do is provide  a process                                                              
to disclose  that information.  When the  party whose  information                                                              
is  to be  disclosed  objects to  the disclosure,  the  department                                                              
does  not have  statutory  process  to protect  that  information.                                                              
What SB  175 seeks to  do is provide  that process  for disclosure                                                              
through a protective order.                                                                                                     
Sections  2  and  3  are conforming  language  to  adopt  the  new                                                              
section into AS 38.05.020.                                                                                                      
COMMISSIONER  MACK  advised  that  the department  has  about  $40                                                              
million in  outstanding appeals  that are potentially  impacted by                                                              
this  legislation. Embedded  in  the department's  thinking is  to                                                              
get  the most  and best  value for  the sales  contracts within  a                                                              
unit  while  protecting  the  confidential  data of  each  of  the                                                              
working interest owners.  He was unaware of anyone  who has broken                                                              
the obligation of  confidentiality but the fact that  there is the                                                              
possibility  of  criminal  prosecution   catches  the  eye  of  an                                                              
employee who  is trying to  do their job  and trying  to establish                                                              
what is  the royalty  for that unit.  What SB 175  seeks to  do is                                                              
allow  DNR  to   show  working  interests  when   another  working                                                              
interest has negotiated a higher price contract on that unit.                                                                   
1:59:59 PM                                                                                                                    
CHAIR COGHILL  summarized that competitors  are worried  that some                                                              
of their internal workings would be disclosed.                                                                                  
COMMISSIONER MACK  said DNR's primary objective is  to ensure that                                                              
the state is  treated fairly. He referenced Mr.  King's example of                                                              
sales  contracts on  the same  unit for  $50 and  $60. The  entity                                                              
that negotiated  the $50 sales  contract will  be able to  look at                                                              
the higher  priced contract,  but the particulars  of what  is and                                                              
is not  disclosed in the protective  order would be  very focused.                                                              
He  noted that  DNR  has the  option  of going  to  the court  and                                                              
asking for a protective  order but it's a little  cumbersome to do                                                              
so in each case.                                                                                                                
MR. KING  added that  the information that  would be  disclosed is                                                              
what is  used in an  audit. The information  is several  years old                                                              
so the  ability  for a company  to use  it to  gain a  competitive                                                              
advantage is  very limited. The  protective order can  also impose                                                              
limitations  on who can  see that  information. It's necessary  to                                                              
have the  flexibility to  construct the  protective orders  to fit                                                              
each situation.  What  is lacking  is a process.  He also  pointed                                                              
out  that the  higher  of provision  that DNR  is  enforcing is  a                                                              
lease  term to which  the lessee  agreed. The  department  has the                                                              
statutory  authority  to  prosecute   those  terms,  complete  the                                                              
audit,  and get  the  money that's  due to  the  state but  what's                                                              
lacking is a process.  SB 175 provides that process,  which is the                                                              
same as the one the Department of Revenue has.                                                                                  
CHAIR  COGHILL  asked  where  the industry  feels  they  might  be                                                              
MR.  KING   suggested  the  industry   answer  that   because  the                                                              
department doesn't see this as a problem.                                                                                       
CHAIR COGHILL said he understands the department's perspective.                                                                 
COMMISSIONER   MACK   said  the   department   holds   a  lot   of                                                              
confidential   information   and   has  a   stellar   record   for                                                              
maintaining confidentiality.                                                                                                    
CHAIR COGHILL commented  that there is a notice  provision for all                                                              
parties. He asked if this is new.                                                                                               
MR.  KING said  there is  a process  in  place to  do a  voluntary                                                              
confidentiality  agreement  similar  to a  protective  order.  The                                                              
problem  arises  in  those  cases  where  the  other  party  won't                                                              
consent to the confidentiality agreement.                                                                                       
COMMISSIONER  MACK advised  that many royalty  issues are  settled                                                              
without this being an issue.                                                                                                    
2:06:02 PM                                                                                                                    
CHAIR COGHILL  stated that he would  hold SB 175 in  committee for                                                              
future consideration.                                                                                                           

Document Name Date/Time Subjects
SB 175 - Transmittal Letter.pdf SJUD 3/21/2018 1:30:00 PM
SB 175
SB 175 - Version A.pdf SJUD 3/21/2018 1:30:00 PM
SB 175
SB184 - Version O.PDF SJUD 3/21/2018 1:30:00 PM
SB 184
SB 184 - Sectional Analysis ver O.PDF SJUD 3/21/2018 1:30:00 PM
SB 184
SB 184 - Sponsor Statement.pdf SJUD 3/21/2018 1:30:00 PM
SB 184
SB 184 - Supporting Document - Drug Policy Press Release.pdf SJUD 3/21/2018 1:30:00 PM
SB 184
SB 184 - Supporting Document - Leg Research Report.pdf SJUD 3/21/2018 1:30:00 PM
SB 184
SB 150 - Transmittal Letter.pdf SJUD 3/21/2018 1:30:00 PM
SB 150
SB 150 - Version A.PDF SJUD 3/21/2018 1:30:00 PM
SB 150
SB 150 - Supporting Document - Sample Pretrial Report.pdf SJUD 3/21/2018 1:30:00 PM
SB 150
SB 150 - Sectional Summary (ver. A).pdf SJUD 3/21/2018 1:30:00 PM
SB 150
SB 150 - Supporting Document - Pretrial Changes in Alaska.pdf SJUD 3/21/2018 1:30:00 PM
SB 150
SB 150 - Supporting Document - Pretrial Release Highlights.pdf SJUD 3/21/2018 1:30:00 PM
SB 150