TESTIMONY OF

CAROL HARTGEN

Chief, Office of International Activities and Marine Minerals

Minerals Management Service

U.S. Department of the Interior

Before the

Committee on Resources

Subcommittee on Energy and Mineral Resources

House of Representatives

on

H.R. 3972--To Amend Section 8(k) of the Outer Continental Shelf Lands Act

July 21, 1998

Madam Chairwoman and Members of the Subcommittee, thank you for the opportunity to testify on the Minerals Management Service's (MMS) sand and gravel program and on H.R. 3972, a bill to amend section 8(k)(2)(B) of the Outer Continental Shelf Lands Act (OCSLA) to prohibit the Secretary of the Interior from charging fees to State and local government agencies for certain uses of sand, gravel, and shell from the OCS.

THE MMS SAND AND GRAVEL PROGRAM

Although MMS is primarily known as the agency within the Federal goverment that leases and regulates OCS oil and natural gas activities, the agency also has a vibrant non-energy minerals program. Currently, the program's major focus is on OCS sand and gravel, and MMS has cooperative partnerships with the States of New Jersey, Maryland, Delaware, Virginia, North and South Carolina, Florida, Alabama, and Louisiana to identify sand deposits in Federal waters suitable for beach nourishment. Environmental information on potential OCS sand borrow sites also is being collected by private contract, providing both the MMS, States, and localities with the information base necessary to make decisions on the possible use of these sand resources. These partnerships are a key strategy in ensuring environmental protection, safe operations, and issue resolution in marine mineral resource development and are an excellent example of Federal/State cooperation.

As you may be aware, the OCS contains abundant quantities of sand that could be used on projects in coastal States to forestall beach erosion, protect shoreline development, provide improved recreation and protect valuable wetlands resources. In 1994, Congress amended the OCS Lands Act (OCSLA) to help facilitate the use of OCS resources on these projects. The amendment, P.L. 103-426, authorized the use of non-competitive negotiated agreements for gaining access to the OCS sand, gravel, and shell resources when these resources are needed for certain public projects like beach and wetlands protection and restoration undertaken by Federal, or State, or local government agencies. Most requests for negotiated agreements have been/are expected to be for OCS sand, so even though the authority includes gravel and shell as well, the discussion below will in many cases simply reference sand.

Historically, sources of sand for projects has been the nearby State submerged lands. In some coastal areas, submerged State lands and onshore lands are becoming depleted or otherwise unsuitable. Access to OCS sand can provide suitable sand and a significant cost savings for States and local communities when compared to the price of sand from onshore sources. Additionally, removing sand from offshore--and in particular from the OCS--may be the more environmentally preferable because of the limited physical impacts to the local environments. Using OCS sand can take some pressure off other alternative sources located on valuable and fragile beach, wetland or dune systems. Also, development of sand sources farther from the shore, (i.e., from the OCS) may also avoid adverse impacts from the creation of pits and burrows near the shore which can cause erosion by altering the local current and wave regimes.

When Congress amended section 8(k) of the OCS Lands Act in 1994, it provided the necessary impetus for Federal, State and local government project planners to consider the OCS as an alternative sand supply source. Since the new law was enacted, many coastal States, local governments, and other Federal agencies have approached MMS and asked how they can get access to OCS sand.

To date, MMS has completed one MOU agreement with the Navy and three negotiated agreements with local governments (in Florida, South Carolina, and Virginia), conveying rights to approximately 4 million cubic yards of OCS sand to support publicly-beneficial shore protection projects. For the most-recent project, MMS negotiated a non-competitive lease with the City of Virginia Beach, and assessed a fee of $0.18 per cubic yard (totaling $198,000 for 1.1 million cubic yards of sand). This fee was discounted 65 percent off the estimate of value to reflect the public interest served by the project. We worked closely with the Norfolk District of the U.S. Army Corps of Engineers (USACE) and City of Virginia Beach officials on this project. This is the first agreement for which a fee for use of OCS sand was collected. Use of OCS sand is now being planned for upcoming projects in Maryland, New Jersey, and Louisiana.

BACKGROUND ON PUBLIC LAW 103-426 AND SECTION 8(k)(2) OF THE OCSLA

Section 8(k) of the OCSLA addresses leasing of any OCS mineral other than oil, gas, and sulphur. The original wording of this section required that, in all cases, the Department use a competitive bonus bidding process for conveying the mineral rights to those resources. In 1994, section 8(k) was amended by P.L. 103-426. In general, the amendment authorizes the Secretary to negotiate agreements for use of OCS sand, gravel, and shell when these resources are requested for use in certain public projects like beach and wetlands protection and restoration undertaken by Federal, State, or local government agencies.

The new authority to negotiate agreements provided an alternative process for acquiring the rights to develop OCS sand because Congress determined that the competitive bidding process was impractical when OCS resources were needed for certain public works uses. Congress did not want governmental construction costs to become prohibitive as a result of bidding competition for the resources, nor did they want a government project sponsor, or its contractor, needing OCS resources to be foreclosed from access to sand as a result of being outbid at the sale.

The amendment also provided, in section 8(k)(2)(B), that "the Secretary may assess a fee based on an assessment of the value of the resources and the public interest served by promoting development of the resources. No fee shall be assessed directly or indirectly...against an an agency of the Federal government." This valuation method allows the Secretary to determine an appropriate fee that would take into account both the value of the Federal minerals and the public benefits that could be realized from providing affordable access to OCS resources to support public projects. The "no fee" exemption for Federal agencies was included to prevent the transfer of funds from one Federal agency to another and to prevent local project sponsors from passing back to the Federal government (e.g., through a cost-sharing agreement with the USACE) the expense of fees for use of the Federal sand paid under this law.

MMS ASSESSMENT OF FEES UNDER SECTION 8(k)(2)(B):

MMS prepared internal guidelines relating to fee assessments under section 8(k)(2)(B) of the OCSLA to use when negotiating specific agreements pursuant to that section of the Act. These guidelines were shared with State and local governments, as well as Federal project sponsors, to provide information about potential fees for sand, gravel, and shell resources and how the fees will be determined so that sponsors can compare alternative sources and forecast project funding needs.

The approach for determining fees outlined in the guidelines is based upon congressional direction that fees be based on a balancing test weighing the value of the resources and the public interest served. The MMS methodology provides for determination of sand values based on references to market values and provides for discounts to reflect public interest in the fee assessment, reducing the market-based estimate of value by the same percentage amount (typically 65%) used to represent the congressionally-mandated Federal share of costs of constructing the projects. This balancing of resource value with public interest considerations provides a discount for State and local governments, resulting in a reasonable fee for the resource.

The Department's OCS Policy Committee (Committee) reviewed the guidelines and found the approach for determining fees acceptable and consistent with the OCSLA. The Committee includes representatives from coastal States, local governments, the environmental community and industry and provides advice to the Secretary on a wide range of issues associated with OCS mineral development. The Committee recommended that the guidelines be made available to the public to enhance the timely dissemination of information and to assist governmental planners.

To date, each of the three local governments mentioned earlier who requested OCS sand also requested that the fee be waived. During the early stage of the program, MMS was able to waive the fee for two projects for reasons of fairness and equity. Specifically, for these cases, project planning and budget development was well underway prior to enactment of the 1994 amendment, and MMS was concerned that imposition of a fee could delay or prevent project construction. Since that time, however, coastal States have been informed about the requirements for accessing OCS sand and MMS's policy to assess fees consistent with the 1994 amendment.

COMMENTS ON H.R. 3972

H.R. 3972 proposes to change the 1994 amendment to the OCS Lands Act to prohibit the Secretary of the Interior from charging fees to State and local government agencies. In short, H.R. 3972 would eliminate entirely the Secretary's authority to assess fees under section 8(k)(2)(B) because authorization to negotiate agreements under this section of the law pertains only to use of OCS sand, gravel, and shell to support Federal, State, or local government-sponsored projects. Non-governmental (private or commercial) requests for these OCS resources are still addressed through the competitive bidding provisions of section 8(k)(1).

The Department believes that the Secretary should be allowed to assess fees to States and local governments for the use of OCS sand, gravel, and shell resources and that there are good reasons for doing so. Therefore, we do not support H.R. 3972, and the Office of Management and Budget (OMB) advises that the bill has Pay-as-you-Go implications.

When Congress amended section 8(k) in 1994 to authorize negotiated agreements for governmental use of OCS resources, the legislative history of P.L. 103-426 contains clear indications that Congress considered the issue of fees. During House floor consideration of the pending legislation, Representative Gerry Studds, Chairman of the Committee on Merchant Marine and Fisheries stated the following:

"The bill accomplishes two important things. First, it makes OCS hard minerals available for public projects without requiring...a competitive lease sale. Under current law, these resources could only be made available to State and local governments through such a lease sale which is too costly and too cumbersome. However, the minerals are not to be given away (emphasis added). The bill authorizes fees to be charged based on the value of the resources and the public interest."

In part, the Department supported the 1994 amendment because it was sound economic and public policy to realize some financial return both when Federal sand, gravel and shell resources are leased competitively (under section 8(k)(1) for private or commercial use), or leased through the negotiated agreement authority under section 8(k)(2) for use in public projects. The Department is still of that opinion. In addition--

• The Department seeks to obtain "fair value" for the use of all Federal minerals consistent with mineral leasing law (onshore and offshore), and the public expects no less. OCS sand, gravel, and shell are part of the Nation's endowment of valuable mineral resources. Thus, sand from the OCS and the value associated with it belong to all States--not coastal States alone.

• As is true for private projects, public projects should accurately account for all costs--including sand value--and benefits so that informed decisions can be made. A reasonable fee for the resources, consistent with values seen in the general market, will help to ensure that the timing of investments in OCS sand recovery is market-based and that the Nation receives a fair return for the development of these resources.

• Most coastal States have developed beach management programs for the purpose of defining their needs and raising funds to ensure the continued viability of this important revenue-generating asset. For example, tourism surcharges (e.g., hotel "bed taxes") have been used as a partial source for beach management funding and is justified because those most frequently using the beach are contributing directly to beach repair and maintenance. Bond issues and property taxes are also used to fund beach projects. It is reasonable to expect that some State and local tax revenues should fund the costs of protecting the beaches, including some payment for the use of Federal sand for project construction.

• With the fee exemption provided by H.R. 3972, nationally-owned sand resources would be provided to coastal States to support construction of shore protection and restoration projects, even if Congress has not approved Federal involvement and funding for project construction. For projects that do include Federal participation, congressional authorization requires sharing of the costs of construction with State and local project sponsors (usually at least 35% is the non-Federal share of construction costs). Thus, for cost-shared projects, use of OCS sand under H.R. 3972 means that the Federal government would be absorbing a greater proportionate share of the project costs (through an in-kind contribution of the sand) than the congressionally-mandated Federal share.

Also, many publicly-sponsored beach projects can contain design components that provide incidental sand nourishment for privately-owned beachfront property. The USACE is prohibited from using Federal money to protect or nourish private property. Governmental project plans will account for any incidental components by requiring that private beachfront property owners provide public access or reimburse the local sponsor for their proportionate share of project costs (and the non-Federal cost share, including the MMS fee, would be increased accordingly). With the changes proposed by H.R. 3972, it would be virtually impossible for MMS to ensure that any private property owners pay for Federal sand that it receives as part of a government-sponsored project.

• In recent years, coastal States and localities needs for OCS sand for beach nourishment and coastal restoration have increased. MMS believes this trend will continue and even accelerate, as resources within State waters are depleted. Due to Federal budget limitations, we also are seeing a trend where State and local communities assume an increasing financial responsibility for projects to protect their beaches and tourism industry, and this is a trend supported by the Administration.

CONCLUSION

In conclusion, we believe that it is important to continue to provide the Secretary with the authority to assess a fee for OCS sand, gravel, and shell resources that are used by a State or locality for a beach protection or renourishment project. In most cases, this fee will represent only a small fraction of the total cost of that project. More importantly, however, the fee represents the Federal government's commitment to provide a fair return to the Nation for the use of the public's resources.

Madam Chairwoman, this concludes my prepared remarks. However, I will be pleased to answer any questions Members of the Subcommittee may have.